Putnam Road Single Family Rental and 1031

[Jean Armendariz-Kerr]

Investment Info:

Single-family residence buy & hold investment in Madison.

Purchase price: $176,000
Cash invested: $40,000
Sale price: $270,000

Single family home as residence and then held as an income generating investment and updated to sell. Sold and did a 1031 to purchase a commercial property.

What made you interested in investing in this type of deal?

The goal was to leverage purchasing an owner-occupied property to take advantage of the lower down payment and lower interest rate and then to hold it indefinitely. Lived there personally for 3 years and then rented it out leaving the equity in place.

How did you find this deal and how did you negotiate it?

Am an agent - so targeted properties that an entry level buyer - or aspirational renter would want to live in. That also is my ideal clientele professionally and several went on to purchase properties through me.

How did you finance this deal?

5 year ARM due to 6% average interest rate advantage at the time. During the foreclosure crisis the rate adjusted down to 2.85% so we let it ride until rates climbed above 3.5%

How did you add value to the deal?

Used it as owner-occupant, then rented it out. Tenant paid all utilities and did all lawn and snow removal. Several tenants turned into purchasers for additional income. One tenant did significant improvements at their expense (landscape concrete edging and replaced all flooring after their pet damaged it).

What was the outcome?

When we were ready to turn it, we did a refresh on the trim, had it painted and a kitchen remodel done with new cabinets and counters. I added a subway tile backsplash. Sold it afterward for around $35,000 more than our projection had been prior to the refresh - spent $15,000 on the refresh. Did a 1031 and used the funds to purchase a commercial property.

Lessons learned? Challenges?

Lesson learned - this was our first rental and we got burned by our first tenant (signed a lease and then never showed up so we had to go back through the leasing), the takeaway was to ALWAYS follow the procedure and never make decisions based upon a personal emotion.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Am an agent so handled the purchase and sale ourselves. Definitely work with a title company who has familiarity with 1031 exchanges as well as a CPA familiar with real estate 1031 rules. We ended up with $10k of boot we had to pay tax on because we paid the contractor at closing and it was considered a cash out from the 1031.