First Rental Property Deal

[Matthew Petroff]

Hello everyone,

In November 2018 I bought my first rental property.

Characteristics:

• Purchase Price: $160,000.00
• Down Payment: $40,000.00
• Gross Monthly Rent (at time of purchase): $2780.00/mo
• Current Cashflow: $800.00/mo

I did this with a partner since it was my first deal, so we each put down $20k.

HOW WE DID IT

Here is the basic process we went though to get the place:

1. 1. Decided on goals for the property, purchase criteria, exit strategy, responsibilities for each of us (SUPER IMPORTANT)
2. 2. Identified all buildings that met the criteria in the neighborhood we were searching
3. 3. Contacted as many owners as we could
4. 4. Followed up with an interested owner
5. 5. Settled on a price
6. 6. Went through inspection process
7. 7. Finalized the deal/closed

More details on each below:

Step 1: Goals/Purchase Criteria/Exit Strategy/Responsibilities

• GOAL: Invest in a multifamily building that we can buy and hold for cash flow
• CRITERIA:

• Neighborhood: Pleasant Ridge, Cincinnati
• Purchase Price: <$200,000.00
• Financing: Conventional, non-owner occupied (25% down)
• Number of units: 4
• Cash on cash ROI: 20%

• EXIT STRATEGY: Hold for at least 7 years, sell if it makes sense
• UNIQUE RESPONSIBLITIES:
• Me:
• Find the deal, do the legwork
• Coordinate inspections
• Set up bank account
• Go through the closing process
• My partner:
• Property management (collect rent, find tenants, fix stuff, etc.)
• Set up LLC
• Coordinate Financing

I cannot stress enough how important this step is, especially if you have a partner. You need to identify what you want to buy, what neighborhood(s) you like, and make sure you and your partner know who’s doing what and have the same end goal.

Step 2: Identified buildings that could meet our criteria

The main filters we used here were 4-unit buildings in Pleasant Ridge, Cincinnati. We went to the county auditor site and exported a CSV file with all apartment buildings that had at least 4 units in Pleasant Ridge. There were about 180 buildings in the neighborhood with at least 4 units.

Step 3: Contacted Owners

The auditor site included the owner name and mailing address for each building. We literally sat down and searched google trying to find a phone number connected to those names/addresses. If we found one, we added it to the list until we had done a search for each one.

Once we had the numbers, we picked up the phone and called each one. We would alternate who called each time.

Here are the responses we would get:

1. Number was invalid
2. No answer. In this case we left a message. Name, number, asked them to call if they were interested in selling
3. Someone would answer. We would say hello, tell them we are investors looking at Pleasant Ridge, and ask them if they would consider selling their building. Their responses were:

• “Why are you calling me??!!”
• “Thanks, but we’re not interested”
• “Let me take your number, I’ll get back to you”

A couple of months later I got a voicemail from an owner interested in selling.

Step 4: Followed Up

I spoke with the owner and got some basic information from him:

1. Asking price
2. Current rent
3. Condition of the building

We set up a time to do a walkthrough.

Step 5: Settled on a Price

After seeing the condition of the building and running the numbers we started talking sale price. At first the owner wouldn’t go below $180k, we wanted to pay $140k. Negotiations stalled.

I followed up a couple months later to see if he would be willing to go lower. We settled on $160k.

Next, we secured financing and set up the appraisal with the bank.

Step 6: Inspection

Instead of hiring a general house inspector, we hired four specialists for what we felt were the most important items. Basically, these are the items that cost the most to fix/replace:

Plumber: $250 for full inspection

Boiler Inspector: $150 for full inspection

Roofer: $250/ea, $500 total

Structural Engineer: $300

So now we knew the exact condition of each of the most important parts of the house. We could use this information for price negotiation and future planning with the building.

Step 7: Finalized the deal/Closed

We went back and forth for a while. We tried to get the owner to come down in price, but he wouldn’t budge. Decided that this was ok because we felt the building was about $40k under market value at $160k.

We didn’t want to push too hard and make the owner back out.

After finalizing the deal, we sent all the final information to the bank met up with the owner and signed all the closing paperwork.

LESSONS LEARNED

Decide criteria early and stick to it. If you stay disciplined and buy right, you drastically reduce your risk of losing. Buying an undervalued property will give you some room for error should some unforeseen obstacle come up in the future.

Don’t be afraid to cold call. We never would have found this deal without being willing to pick up the phone and potentially piss someone off. It’s not as bad as you think.

Know what the building is worth. If I had to do this over again, I probably would have not gone back and forth with the owner too much after the inspection because he was not a super motivated seller, and it was a good deal at $160k. No need to risk the deal to try and save $3k on the sale price.

Hire experts to inspect specific things. General inspectors are not the best. This is a lesson learned by my partner who had already done some deals. He ended up fighting a huge plumbing issue in another building because the general house inspector didn’t catch it. By paying an extra few hundred dollars we had way more information on the key parts of the building and were able to avoid big surprises.

It’s not as scary as you think. Think about the worst-case scenario. It’s is not that bad. If this didn’t work out, we could’ve put the place on the market for $190k to $200k and easily broken even because we bought an undervalued place.

Thanks for reading everyone. Hope you get some value from this. Feel free to reply with any questions or feedback for me.