How I Obtained First Investment Property (SFH)

Question

Investment Info: Single-family residence buy & hold investment in Peoria. Purchase price: $280,000 Cash invested: $30,000 The goal of this purchase was to replace my landlord, get started with real estate investing, and build up equity with a smaller single-family home (SFH) purchased in the Phoenix-Metro area. Asking Price - $275K (Current Market Value) Offered Price - $280K Total Due at Closing - $18K Cost of Upgrades - $12K Total Investment - $30K What made you interested in investing in this type of deal? The item with the highest weight in my decision was to obtain an SFH in a similar neighborhood to what our ideal future tenant would be seeking to rent in. The BRRRR strategy. We also wanted to upgrade our own living situation away from the city of Phoenix toward a nice, clean, quiet suburb. My goal was to find the neighborhoods in my price range that will help me build equity as fast as possible while being comfortable in the meantime. How did you find this deal and how did you negotiate it? I got busy looking for ideal areas - considering growth rates, crime rates, school district quality, business development, public access, health care facilities, etc. This resulted in a few different potential cities and neighborhoods. The list of potential properties was constructed using popular websites and real estate agents. This list was then prioritized after physically visiting each area. Our agent helped us contact the seller and we offered $5K over the asking price. How did you finance this deal? A partnership was used to obtain the deal with a 50/50 equity and cashflow split agreement after all of her costs of acquisition were paid back in full from the first refinance. My partner obtained pre-approval for a conventional mortgage with 3% down and had the closing costs ready in her account before we contacted anyone else. She agreed to use a portion of her 401K to diversify into real estate. How did you add value to the deal? I leveraged my knowledge, skills, and experience while risking my time and manual labor. My partner offered her capital after hearing out my strategy and building trust with me. I looked up the data for known upgrade valuations in my market over the last year (2019 owner-reported data). Selected the upgrades that had the most ROI with the least investment needed that I could do myself. Performed all of the upgrades within 60 days, wasting no time. What was the outcome? 16-months later, we had acquired $120K of equity in the property (not considering upgrades). We originally agreed to refi at 1-year, but decided to wait a little longer based on our market growing so fast. All costs of acquiring the unit and upgrades were paid off, then we split the rest 50/50, paid off our personal debts in full which happened to both be around $25K each leaving us some extra cash, excellent credit ratings, lower monthly housing costs, and wiggle room for any repairs. Lessons learned? Challenges? Having an understanding of macroeconomics and wealth cycles was critical to our seemingly "lucky" timing. We already have enough equity again to buy a second property using a HELOC. We are sitting on that cash now and waiting for the right opportunity to go shopping within the next 12-months. The biggest challenge was getting my partner to clearly see that real estate would solve several of her issues, increase her lifestyle, and increase her savings - if done correctly. Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others? Yes, Brittany Axelson from Lake Pleasant Real Estate.

Anthony Williams · Answer

[Data-Driven Decisions]Where to get data?Redfin, Zillow, OpenDoor, ReMax, MLS, AcreValue, USDA, Lenders, Realtors, etc.FRED (The FED), Macroeconomic Data and History is also available in plenty of other placesCost Vs. Value Reports (use several and verify data sources and methodologies used)Your ideal renters and other investors (talk to these people, find where they are or who knows them, and ask questions)When you are using OPM, your intuition, family, and what the neighbors say is not enough.

Anthony Williams · Answer

Hi @Matt Browning No repairs were needed at the time of purchase, but some items were very outdated (house built in 1996 - contemporary southwest style - think brass everything and faded pinks, off white ceramics, and oranges). The walls were what I call puke yellow, orange spanish floor tiles, faded pink countertops, brass everything. When you walk in, the vibe feels dark due to the interior wall paint, closed off, and generally like it belongs to an elderly person. This is how all the houses feel in most of these 1990s neighborhoods, though some have really nice wood floors which helps.As a renter, when you are shopping around, looking at available rentals, they all look the same. Then you walk into a space that feels light, open, modernized, and larger, the 1,283 sq ft. starts to feel like a 1,600 sq ft. home, but at the lower price range. You feel like the landlord actually cares about the property and will not be lazy when it comes time to repair or fix things, as they haven't even upgraded one single item in over 25 years. Millennials with new families and more importantly good paying jobs, do not want to live in their grandmother's house. However, they want to find a "value" rental. I am seeking to give my ideal renters what they want so they hopefully become sticky. Great looking and feeling without the ridiculous rent prices for new homes. We updated the look and feel to a more modern contemporary (non-southwest) design found in newer homes built in the surrounding area. Higher contrasts with neutral colors, fancy-looking fixtures and lighting, a deeper sink with a more spacious feel is what we were going for (the house is only 1,283 sq ft.). The $12K included screws, mortar, buckets, rags, gas, rental trucks, laminate, epoxy, tools, wood, backer board, tile, sinks, fixtures, and every little thing. Some of which we can reuse again, like tools and supplies. We decided on a deeper more squared-off kitchen sink, a modern faucet (spring with hose), bright matte white interior paint all over the house and garage, The countertops are now carrera marble laminate formica with a deep layer of high-gloss clear resin coating, matte black faucets and bathroom handles, while all other knobs, dishes, stoppers, and 'house earrings" are brushed nickel. The old bathroom plastic walls were removed and now have marble tile walls. We focused on the kitchen and bathrooms, but also replaced the ceiling fans with black/nickel modrn fans. We installed custom recessed lighting in the kitchen, hallways, and bathrooms, and got rid of the track lighting. The main kitchen chandelier is also LED and modern versus the old brass. New modrn mirrors were added to the bathrooms with the touch control and different lighting temperatures along with built-in defog. Attracting the right renters while beating the competition in look and feel for the size was the main goal. We did this effectively I believe while keeping costs down to a minimum, but still changing enough to significantly alter the look and feel. We will be charging the same rent as the others nearby at the highest level for the size. I don't really want an immediate ROI on these upgrades, we want great low-maintenance renters who actually like their home and want to stay in it while also being able to charge max market rates for our square footage without overcharging. We did not pursue getting the upgrades calculated in at all on the first refi. We had one of those appraisers who sucked and it wasn't even worth trying to talk about it with him and as he kept ignoring us. So, we had a few options.. Request a new appraiser, walk away, OR when we refi next, as inflation keeps raging, lets get it calculated then. We chose to go with the inflation route as we had plenty of equity already to accomplish our goal and we could turn his bad appraisal into our advantage if we were patient.

Matt Browning · Answer

Great summary! Thanks for sharing @Anthony WilliamsI do have one question, though. You listed your $12k as upgrades rather than rehab. What upgrades did you make? Did you feel like the upgrades were reflected in your new appraisal?

Anthony Williams · Answer

Thank you @Dmitriy Fomichenko, I appreciate it.

Dmitriy Fomichenko · Answer

Congrats on this investment @Anthony Williams !