I live in California and own out-of-state rental properties. I’ve been investing in out of state rental properties in Arizona since 2011. With Arizona housing market going up, the low rent to value ratio made me decide it was time to invest elsewhere. After reading through many posts on BP, and through a local meetup where I met many like-minded investors, I started investing in Huntsville, Alabama mid 2019.

In Nov’19, I sold a rental property in Arizona for $380,000. The property was purchased for $240,000. The property appreciated $140,000 since purchase and the cashflow was close to break even. I decided to do a 1031 exchange, and purchased 3 properties with that money. Below is the story on 1 out of the 3 properties I purchased.

The Deal:

My realtor found the listing on MLS. It was in the Madison school district, a well desired location. The property was a 3/2.5 single family home (with bonus room in attic that could be used as a bedroom) 2400 sq ft. Comparables were around $240,000. The property was being sold AS IS for $195,000.

My realtor walked through and we reviewed the itemized repair list. Based on list price, repair cost and ARV. We made the full list price offer for the property, and offer was accepted.

During the grace period, I had my general contractor, and my home inspector conduct the walk through, so repair cost was as accurate as can be.

I contacted my property management to pull rental comps and the house can rent for $1.895. To no surprise, Zillow rental estimates were way off.

In summary, walking into the deal:

$195,000 (Sell Price) + $20,000 (Repair Price) = $215,000.

Expected Rent $1,895/month. (Zillow estimated $1500/month)

The property did not meet the 1% rule (i.e. $1895 x 100 was less than $195k), but it was close enough in my books, and the CoCROI met my criteria, which will be shared later.

The Financing:

Proceeds from 1031 exchange were used as the down payment, and I used cash for repairs and holding cost.

It was my first time doing a 1031 exchange and thanks to all the knowledge from BP members, this was a very smooth process. Initially, I was really worried about the 45 day period on finding the 3 properties I wanted to purchase, but I was able to find this property within the first week of the 45 days.

The Rehab and Renting:

The property closed the week before Thanksgiving, I called my GC to get started. Unfortunately, there were some delays with his previous project, and in addition to Thanksgiving, Christmas, and the New Year holidays, work did not start until January 2nd. So the property sat idle for the entire month of December.

I have never met my GC, but was highly recommended by one of my team members in AL. I was able to communicate with him through many text messages every few days or so, to track progress, and had a total of 1 phone call since work started to discuss additional things I wanted done after work started.

The rehab took 5 weeks, as we had agreed on from the start, and everything came out great.

Keys were passed over to my property manager and the property was listed for rent at $1,895. Getting it rented out was a struggle. The property was not listed on Zillow as Zillow started charging for rental listings, and my property management firm did not want to pay for that. After a few back and forths with my property management, it was finally listed on Zillow. Shortly after, Covid19 happened, then my property manager left the property management firm during the stay-at-home order. The series of issues translated to the property being listed for 40 days with minimal showings. Once AL started re-opening from Covid19, we reduced the rent price to $1,850, with a first month $500 move in incentive discount. Within 3 days, we found a renter.

The Result

Purchase price: $195,000

Rehab: $21,000

Rent: $1,850

Cashflow: $499/month (with assumptions baked in, mgmt. fee, expenditure etc)

CoCROI: 8.59% (Based on downpayment and rehab cost)

CoCROI:28.4% (Excluding downpayment since that was proceeds from 1031)

Rental Property Calculator Report

Lessons Learned

1. Don’t trust Zillow rental or sale comps. I’ve known that for years, but I always look at it still. I can’t help it, but it’s just so convenient to look at and make assumptions that it’s somewhat accurate, but it just never is. Go with your team that you trust, and can get you the info fast so you can make decisions.

2. Avoid buying during the end of year holiday season or agree with the GC prior to starting when it needs to be done by, I just didn’t like having the property sit idle for whole month of December.
3. Analyze rental properties regularly, if a housing market is hot and the rent to value is no longer attractive, figure out how to move that money elsewhere to have better cash flow.
4. 1031 exchange can be stressful, but 45 days is longer than I thought. i.e. I started looking before the start of the 45 day period, and having a good realtor really helps smooth things out.
5. Have cash reserve for holding cost due to unforeseen issues, such as GC delayed due to other projects, Covid 19, etc.

Pictures of Before and After