Marbury, MD - 10 Homes for $40k, Major Rehab, Rent and Hold

[Ben S.]

I just closed on a crazy deal. This is a 5 acre property with 10 single family homes, each about 850 sqft, 30 minutes from DC, and is a complete dump! Piles of trash on the sides of the road, two of the homes have busted in doors and windows and have been vacant for years. None of the homes have been maintained for a very long time. 

I had been following this property for about a year since it was listed on MLS, and then on Loopnet, by the owner as she was in foreclosure. It was first listed for $249k, then started dropping all the way down to $99k. It finally went to a sheriffs auction, where the bank with the mortgage was the only bidder. I started talking directly with the bank (which I found by calling local banks to ask for a loan, and when I hit this bank they told me they held the mortgage on it) to try to work out a deal as I thought they would make me a personal loan or a loan on one of my existing properties, and they were very interested as they didn't want to own the property. I shared a brief overview of my finances, including that I had $40,000 cash, and they came back the next day and said they would sell it for the $40k cash! This was a small bank and were very easy to work with. Although they lost money on the deal, they were happy to have the property off their books, and excited to see someone who wanted to buy and rehab it (though they probably think I'm a bit crazy, which is probably true :)

A bit of background for myself: I grew up working with my dad, who was a contractor, building new homes, additions, and doing major rehabs (flips and house hacks). He did almost all of his own work, and so I learned every aspect of residential construction. After high school I got into IT, and did that for a number of years, finally flipping my first home 4 years ago. It was profitable, and left me with some cash, which I lost most of trying to start a real estate business as a realtor (that sucked). So I went back to an IT job, which was very profitable fortunately. I bought a house hack 3 years ago, and then 1 year ago purchase a rehab property with two homes on 15 acres. I had intended to move in to these homes (one for my mom, one for my family), but decided neither was big enough for my family. I've slowly been rehabbing them, and will have them as my first rentals in a couple weeks. My dad has recently moved away from construction as he has been collecting rental properties (following the BRRR strategy), and currently has about 12. I also recently moved from an IT job to a facilities program management job, which I think will provide even more experience as I manage these rental properties. Over the years i've taken tons of financial risks, some of which have been good, and some which have been terrible. It's all provided tremendous learning experience though, which I hope will result in a great deal of success in my current endeavors.

My steps to making money on this deal are:

1. Finalize liability insurance. Yes, I should have had this 100% in place at closing, but it's been a bit difficult to get insurance on a tenant filled dump. I'm not announcing anything to the tenants until I have insurance in place. What I have found is expensive and does not provide any coverage for the structures. This is more risk than I was hoping (such as if the tenants torch the place before they leave), but it doesn't seem I have any other options. Let me know if you have any better suggestions for this.

2. Give 60 days notice to the current tenants living in 8 of the homes. The Sargent who worked with everyone during the auction was willing to talk to me and provided tons of great advice (he has lived his whole life in the area). Although Maryland only requires 30 days notice, he suggested giving 60 days notice since some of the tenants have lived in the homes for over 15 years now. He said this would likely make for a smooth eviction process with the judge since I am showing move concern for the tenants. That's fine since I am just finishing up my first two rentals and also trying to buy a new house and sell my current house (which is a house hack I can pull profit from).

3. In 60 to 90 days I will begin construction. I plan to start with the exteriors of the homes and property. Once it looks nice from the outside, I can fix up a couple interiors at a time, and immediately rent those when finished while moving on to the next couple, until they are all completed. If I can get enough rehab money I can get a big enough crew to complete everything quickly and all at once. I've spoken with one contractor, but also may be my own GC and do a lot of my own work (though i have a full time job and large family, so this may be a terrible idea). I am also not sure if I will get an equity loan on the homes I have and manage the money myself, or get a rehab loan and have all the work go directly through a GC. Lots of options here. I'm open to suggests and additional lending options.

4. Hopefully about 120-150 days after purchase I can start renting out the first units. Based on area rents they should go for $1200 each (yes, rents are crazy high here). Considering that I will have about $500/month in taxes/insurance, and at least a few hundred grand invested before I get a penny back, this money will be significant. 

5. My goal is to have all the units rented out in 6-8 months. I'll probably rent them myself initially so i can be picky about my first tenants here, though I may change my mind and hire this out. Since I am replacing everything in the rehab, my capex and repairs will be fairly low. I'm also renting them all at about the same time, so hopefully I won't have vacancies for a bit. 

I'm excited about this opportunity for myself, but also as my kids get older so I can teach them this process and get them started on building up their own business as young as possible. Please share any advice and suggestions you have, and i'll keep regular updates until this project is complete.

[Daniel O.]

@Ben S.. Wow!  I'm not sure if its a good wow or a bad wow. Maybe just a wow! 

I'm sure you have probably already thought of all or most of these things, but let me share a handful of ideas that I had as I read through your posting.

One thing you might consider is offering tenants a month to month lease, assuming they can pass some sort of screening. Even if most can't, you might get a couple who can and who can pay rent while you are working on other properties. This looks like a cash-flow headache, so having a little coming in while you begin the rehabs will help.  

Start the rehabs with the empty place first because they are only going to drag down your potential rents and deter prospective tenants. 

By the same logic, get that trash picked up and keep after it. You remember Alice's Restaurant? Nothing attracts garbage like a pile of garbage. You want people passing by to notice that the area is starting to look better, as that will also help up what you can get for rent.

You might think about buying things like appliances in bulk. Talk to Bray and Scarf and several of the other local places and see what kind of discount they are willing to give you on 10 stoves. They might even be willing to phase the delivery so you don't have to store things before you are ready to install.  Take this approach with everything you are buying, both to save money, but also because standardization now will really help you with maintenance and repairs down the road. Same paint, same stove, same flooring, etc.

If you have a roofer you like, you might consider asking him what kind of discount he would give you if you could give him 10 houses to do that are all right together and all need to be done. He could buy enough shingles to get them at a discount, and he would save on having to deal with moving a crew around etc. Better still, ask a couple of roofers what kind of discount they would give you for this work. Depending on how you phase things, you might also be able to keep a couple of other crews busy on a more or less ongoing basis until the work is done.  But you will need someone to oversee them. Is your Dad ready to come out of retirement?

You might also consider approaching the county about getting a reduction in your property taxes. No idea what you are paying now, but you could make the case that you are really doing the county and the local area a favor. What if you could talk them into giving you a tax abatement for a couple of years? Again, I'm sure others can advise better than I can on this. Even if it is unlikely to succeed, you don't get if you don't ask.

I strongly encourage you to create an LLC for this project and put these properties under the LLCs ownership. There are enough uncertainties and moving parts on this that you should consider segregating these "assets" from your other assets in case things don't work out as planned and you have creditors or a lawsuit chasing you. I'm sure folks here can advise with more expertise than I can, but talking to a lawyer might not be a bad idea.

Good luck!  Please keep us posted as the story unfolds.