First (Future Rental) Property Purchased!

[Clay Monroe]

My wife and I (23 and 25) have been listening to audios, podcasts, reading books, etc. for the past couple of years while getting into a position to buy a property with the intention of building an empire. We lived in an RV for 3 years and finally decided that it was time to stop thinking about all of the options and reasons why we should wait and just jumped on the process. We called and spoke to a mortgage provider who connected us with a local real estate agent. 

Our original plan was to find a duplex/small multifamily with minor(ish) maintenance items to house-hack. After talking with the realtor, she informed us that San Antonio, Texas is not much of a duplex market unless we wanted to look in some pretty... not very nice places. In hind sight I'm sure with some more patience we could have found something to meet our needs, seeing as how we didn't really have much of an idea what our needs were, but at the end of the day we decided to look at single-family homes. After looking around for a couple of months we found 1967 3br/2ba 1200sqft home with very nice curb appeal in a quiet neighborhood and decided to make an offer. The asking price was 125,000, which from looking at the comps in the area was a fair price. Most other homes in the area are listing for 150,000-165,000 and rents were listed from 1200/mo-1400/mo. We went ahead and offered around asking price. 

The due diligence process is something people talk a lot about but even after taking in a lot of information about the process from audios and books, etc., it still seemed like we had no clue what we were doing once the process actually started. Our realtor was great and, her being a rental property investor herself, she was able to walk us through the major inspection items and get us in contact with inspectors, contractors, and engineers to tell us what we were getting into. During due diligence we found out good things like the fact roof was old, but still in decent condition, the central heat and air were well maintained, the exterior was well taken care of, and so on. There were also some major items that needed to be addressed.

The foundation was unlevel on one side by up to 8"(!!!!), there was essentially no grounding from the electrical panel, not to mention the whole house (including the bathrooms and kitchen) had carpet. If there was going to be a deal breaker for us it would have been the foundation. We brought the information to the seller and told them of the situation and let them know that if we were going to move forward with the purchase we would need to have some concessions for the foundation at the very least.

After some back and forth the seller agreed to pay for the foundation repair ($15,000) as well as contributing $4000 towards our closing costs. We used an FHA loan so our total out of pocket to take possession of the property was in the neighborhood of $5500 including the home inspections for the total purchase price of 125,000. I was pretty surprised by that figure. I had thought it would be much more than that to get started in real estate investing. So for anyone wanting to get started, you might think you need a lot more cash up front to start. In our case, we (mostly our great realtor) were able to negotiate closing costs as a concession, as well as a major repair item.

Once we took possession of the property we moved in and began the foundation repair process. For the record, I do not recommend living in a slab on grade house while a major foundation repair is going on. It was not great. There were something like 14 holes broken out inside the house and another 20 or so holes dug around the perimeter house. Piles of dirt 5 ft high and just as wide in pretty much every room and concrete dust everywhere else. In the process of breaking out the holes the foundation repair crew managed to find pretty much every pipe the house had. A/c freon lines, water pipes, sewage pipes, etc. In their estimation, damaging the pipes was part of the risk we took by having the process done so all repairs were at our expense. For a couple of days my wife an I essentially lived in a tent with electricity. No a/c, no water, no sewage. Then came the actual lifting of the house.

Once again, in hindsight it seems obvious, but we didn't think about this going into the purchase. When they lift the house, the sewage pipes that run under the slab do not get lifted with it. We knew that once the house was moved it was part of the process to have a hydrostatic pressure test done on the sewage system to verify that all was good, but for some reason I thought that was just a formality. I was definitely wearing some rose colored glasses. When the plumber came out to do the hydrostatic test he opened a clean out and immediately grabbed his scope (a camera on the end of a flexible line to look inside the pipes).

All of the sewage pipes in the house were cast iron so the likelihood of them breaking when the house was lifted was essentially 1000%, but besides that they were pitted and corroded to the point that he said he wouldn't even bother finding the breaks. The whole house would need the sewage re-plumbed. Yayyyy.... $12,000 and 2 weeks later the sewage lines were rerouted to the exterior and ran around the perimeter to rejoin the main line that runs to the city sewer system. 

The plumbers were great and did a lot of extra work for us at no additional cost to put the kitchen and the master bath in service at the end of each day, and the foreman of the foundation repair company identified where the break was in the main water supply line and repaired that free of charge because he "needed the water running anyway to mix the concrete." As far as the quality of work and customer service of the two companies goes, we were very satisfied. It may just be industry standard for them to have done the extra work they did, but I could definitely see all of the repairs being made much worse and much more expensive by people who cared less. 

The next pressing issue we felt we needed to tackle right away was the lack of grounding on our electrical service. The existing ground rod was corroded to the point that it was not even worth reattaching the ground wire to, which looked to have been disconnected for a very long time. We called and received a quote from a large and reputable service company. The service technician also identified that the big main wire (I'm not an electrician) coming from the exterior main panel to the interior sub-panel was some old cloth jacketed wire that doesn't meet current code. The interior panel, at some point had been updated to current standards so I felt like if we were in for a penny, we were in for a pound. We had them install ground rods for the copper water lines as well as a ground rod for the main/sub-panel, in addition to replacing the cloth jacketed wire. All in all that ran us about $2600.

That brings us up to today. It has been about 2 months since closing on this property, and if I had to describe our experience so far I would say it has been educational. All of the podcasts and audiobooks in the world would not have been nearly as valuable to our journey than just rolling up our sleeves and diving into this. We definitely did not have a thorough enough due diligence checklist and until we finish renovations and refinance out of the MIP, which hopefully shouldn't take too much longer (1 more year?), I do not expect positive cashflow by renting this property out. That being said, I think by the end of the renovation process we should be in the black as far as equity is concerned.

My wife and I look at this as an excellent learning experience and look forward to taking these lessons into future deals. Here are the major points I think would help people starting out:

1. It really isn't that expensive to get started, even when you aren't working with creative financing options (partnerships, owner financing, hard money, etc.) We used an FHA loan with %3.5 down. 

2. Use home inspections to negotiate seller concessions. Seller contributions to closing costs freed up some money to be able to work through these repair items.

3. Try to avoid foundation repairs... There are a lot of extra costs to completing a foundation repair aside from the very expensive work of moving a house.

4. Consider having a plumber inspect the condition of your pipes as a part of due diligence. Hindsight is 20/20 and we should have known that in a 1960s house the pipes would be cast iron, but having that on the table may have led to additional concessions to make this deal work better.

5. I know now why people are always aiming for their investment property to be 1980s or newer. Older houses have more wear and tear, but aside from that, the construction materials are substandard and will eventually need to be replaced.

6. We did not look for the cheapest contractors available and probably could have gotten some of the work done cheaper, but I feel like because we went with well regarded companies, the work was done quickly, the people were courteous, and they worked with us to maintain service in the house throughout the repairs since we were living there.

7. Learn as much as you can, but eventually you need to just jump in and learn by doing. We have had a lot of unexpected expenses that we wish we hadn't, but this is the first real step we have taken towards our goals and we are glad we did. 

In case it wasn't obvious, I will just clarify here. We made a lot of mistakes, didn't do thorough enough due diligence, and therefore could not make an accurate analysis of this property. I'm posting this as more of a cautionary tale than anything, but at the end of the day we are glad we made the first step towards our goal. Even if we end up losing a little money by the end of this, the education we have received by making the jump will be paying dividends through the rest of our journey. 

I hope this is helpful to someone and if anyone has any tips for us, we would be happy to hear them.

Thanks.