First home and first investment property combo

[Mike Johnston]

Investment Info:

Single-family residence buy & hold investment in Ypsilanti.

Purchase price: $114,000
Cash invested: $4,500
Sale price: $142,000

Lived in the home for first 2 years and then lease optioned it to another family on a 3 year lease term with an option to purchase at the end of the term. Took a $5000 deposit, rented for $850/mo for 36 months and then credited the deposit and $150/mo ($10,400 total) at closing for down payment assistance. We purchased the home with an 80/10/10, 5 year fixed rate ARM at 6.25% with $11,400 down. Our monthly payment was $530/mo for P&I and we paid taxes and insurance annually of around $2300.

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

Needed to purchase first home and move out of our apartment. Newly married and newly licensed as a Realtor and I scrubbed the MLS daily lookng for something with potential equity. Our original plan was to buy low and sell high, but renting it proved to be a much better strategy for us in the long run.

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

Local MLS listing that had been on the market over 180 days and had a couple price drops. Comps in the area and on the same street showed the value was there and we went in with an offer that was 20% below list price. With a few rounds of counters, we settled at $8k below list price and the Sellers agreed to put on a new roof.

How did you finance this deal?

We leveraged an Adjustable Rate Mortgage that had a fixed rate for the first 5 years and then adjusted after that. We didn't initially intend to have the house for 5 years, so the ARM products had appeal because of the lower interest rates. This was an 80/10/10 product meaning there was a 80% 1st mortgage and a 10% 2nd mortgage and we had to come to closing with 10% for our down payment.

How did you add value to the deal?

We added value to the deal while we lived in it the first 2 years by making small cosmetic upgrades to the kitchen, baths and landscaping. We invested $4500 and believe those improvements added $6-7k in value and made the home more marketable.

What was the outcome?

We eventually sold the home to a great family that just needed a little help and believe we structured a win-win deal. The family had foreclosed on another home in the past and couldn't get a mortgage, so by structuring a 3 year lease option, they rented from us but treated the home like it was their own because they had skin in the game ($5k deposit and paying slightly above market rent rate). They exercised their option to purchase and we assisted with their down payment and they got approved.

Lessons learned? Challenges?

You don't have to squeeze every deal for evey potential dollar of profit. Structuring win-win deals is in the best interest of both sides and in the long run, my clients/tenants/investors keep coming back and also refer me to their network. The only real challenge with this deal was getting over the Sellers remorse. Sometimes I wish we still owned every property we've ever purchased, even though it's nice to realize a large sum of cash at closing. Buy and Hold is our preferred strategy now.

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

Yes