Second Deal - Duplex Short Term Financed, Rehabbed, Rented, Done!

Aloha BP,

Last year in December 2017, I bought my first out-of-state investment property in Michigan from Hawaii.  Since then, I partnered up with a friend and quickly purchased a distressed duplex near my first property in late March 2018. I decided to post my experience (the good, the bad and the ugly) to keep track of my progression to FI.  It was, and continues to be, a great learning experience for me as a new long distance real estate investor.  

THE WHOLESALE:

The way I found this duplex was by way of another BP member who had been willing to wholesale the property to us.  At first I thought, "Great!  I've heard of wholesaling, it's kind of like paying a finder's fee!  Simple!"  Before going too far, I wanted to see what purchase price we could get the seller to agree to.  

My particular market allows me to see City inspection reports of the property and what has not been corrected plus any outstanding tax payments, special assessments, fines, and water/sewer utility bills.  I found that the seller was actually 3 years behind in property tax payments and appeared to be on the verge of losing the home to the City.  

After quickly running an analysis, I told the wholesaler, I could only offer $10,000 for the duplex anticipating about $30k in rehab.  I felt extremely ashamed, but that's what my numbers said would work and other pros on BP always say "If you're not ashamed of your offer, you're offering too much!"  I fully expected the seller to say "get the hell outta here with your ridiculous offer!"  The answer to my surprise....

"I think I could do that"...

What the heck?!  Who sells a duplex for $10k?!

JOINT VENTURE AGREEMENT:

After asking my realtor to help, she said that due to Michigan law, she couldn't represent us unless the wholesaler closed first and then sold to us, but the problem was that the wholesaler was tapped out of funds.  Panic setting in again - "NO!!!  What do we do now?!"  I wasn't about to try to navigate the process alone for the first time from 4,000 miles away.  

Luckily, the wholesaler suggested we do a Joint Venture Agreement (JVA) between our two LLCs and agree to pay a fee to him before dissolving the JVA.  Genius!   So we ended up going through with the JVA and my realtor represented us in getting the deal done.  We settled upon $9,400 purchase price and we paid for the sales commission and the back taxes on behalf of the seller.  Remember earlier when I said the seller was going to lose the home to the City due to unpaid property taxes?  If we didn't close on the day we did, the seller would have lost the home completely and then we'd all lose.

FINANCING:

While this was occurring, my partner and I were telling our friends about our plan and asked if anyone was interested in jumping in to help fund the rehab for an interest gain.  We did have home equity and personal lines of credit available to us that could have funded the entire rehab, but we wanted our friends to benefit from the interest only payments rather than just the bank.  We put together the promissory note and secured mortgage paperwork for our private money investor and had money in the bank to fund the rehab.  We later repaid the principal amount with interest in full much earlier than the loan term due date.  

REHAB:

Prior to closing on the deal, we knew that we needed help in rehabbing the property, but we didn't know any contractors who we could trust.  Earlier in March 2018, Brandon Turner, Scott Trench and Rich Carey were in Kailua, Oahu and were hosting a BP Meetup at Starbucks which I attended.  I was fortunate enough to speak with Rich Carey on how he asked his PM to act as the supervisor for an additional fee.  That way he could have a company he could trust, be the boots on ground managing the contractor, making sure things were done on time and payment was delivered properly.  I took this valuable tip and followed in suit, offering my PM a 5% fee which seemed fair and she accepted.  The rehab was originally scheduled to take a month for the following scope of work:

• Majority of windows to be fully replaced 25 total
• Full exterior painting
• Minor roof repair
• Ceiling replacement where roof leaked
• Full flooring replacement
• Storm doors
• Replacement of stove and refrigerator
• Bathroom exhaust fan replacement
• Water heater replacement
• Minimal Cabinet replacement
• Electrical upgrades

Overall, we spent $28,000 on the initial rehab which was slightly less than anticipated including the PM's fee.  But the rehab took longer than expected.  We started rehab at the beginning of April, expecting to finish by mid-May.  This turned into completion in late June - a month late, but due to unforeseen circumstances.

After we got through the first storm, we had more issues come up that included:

• Electrical panel replacement
• Miscellaneous repairs from the City inspection
• Additional deck painting
• Additional window replacement
• Additional wall repairs

These all tallied up to another roughly $6,000 in repair costs which put us at $34,000 in total repairs.

Below are a couple of before and after photos of the place:

Before: 

After:

MARKETING & LEASING:

Finally after we got through those repairs, we were on to marketing.  As soon as we finished the rehab, we needed to switch property managers due to an emergency.  We found a large firm that helped us by marketing our property on their website.  The good news was that the property manager took on more management so I could be hands off.  The bad news was that they didn't guide me enough in making recommendations.  Basically what happened was, I got greedy and asked them to list the property for higher than my proforma thinking I would still snag a renter.  And then my property sat...and sat...and sat.  So in desperation I dropped the price back to what I ran in the proforma, and then offered a discount on the first month's rent to get someone in there right away before I lost anymore money to vacancy.  That was a good lesson...just like that old saying "Pigs get fat, hogs get slaughtered."  What I didn't like was that my PM did not advise me that my request was not a wise choice, they basically said "ok whatever you want" and let me be a dummy.  It was late August 2018 before finally getting both units occupied.

To top that off, we found out that while the unit was vacant, someone decided to dump their car bumper and a bunch of trash on my lot.  Just my luck, while we're trying to get a renter in there, the City inspector comes along and see's the trash (which isn't even mine) and writes a fine for $50 and reschedules a follow up inspection in a week to make sure its taken care of.  Since I live in Hawaii, it took a week for that letter to cross the Pacific Ocean. By the time I was aware of the issue, the inspector already reinspected the place and because I didn't take any action they already hired a cleanup crew on my behalf (how nice!) and billed me another whopping $270 to remove a car bumper, a plastic bin, and a tree branch....WHAT THE HELL....apparently in my city, if you have a vacant home, it becomes a beacon signal saying "Dump Trash Here!"

RENT:

Finally, after being vacant for nearly 2 months (we only budgeted for a month of vacancy after the place had been fully renovated), we got both units occupied, upper unit at $575/mo and lower units at $650/mo for a total of $1225/mo in gross rent.  

PROPERTY MANAGEMENT:

It's been about a month since we got this place rented and there are some coordination issues that are starting to surface.  I guess this is where the pros keep saying to manage the Property Manager.  For instance, I recently realized that they did not pay the water bill since July and I was assessed a $4 penalty fee for late payment.  There seems to have been a miscommunication between myself and the PM where they thought I was handling the payments myself.  Of course it's not a major penalty, but still, it's something that could have been avoided.  Either way, we accepted responsibility for this, and took it as a learning lesson to be more clear in giving direction.

PROFORMA ANALYSIS:

The anticipated monthly numbers look like this:

• Gross Rent = $1225
• Taxes = $64
• Insurance = $69
• Inspections = $33
• Lawn/Snow = $50
• Trash Removal = $30
• First Month's PM Charge = $82 (80% of first month's rent, split into monthly payments)
• Typical PM Charge = $123 (10%)
• Water/Sewer Utility = $23
• Vacancy Reserve = $102 (8.33% = 1 month vacant)
• Repair Reserve = $61 (5%)
• Cap Ex Reserve = $123 (10%)
• Debt = $0
• ANTICIPATED NET MONTHLY CASHFLOW = $465/MO (split 50/50 with my partner)
• Cost of purchase, closing, repairs, interest = $49,000
• Cash on Cash ROI = 11.4%

After the first year is complete, I'm hoping the renters renew their leases so that the vacancy and PM's first month charge doesn't cut into the cashflow.  Year 2 is hoping to get around $625/mo in cashflow.  Time will tell how these numbers work out and I plan to write a follow up post next year.  

I'm now on to finding my next buy and hold property and hope to reel it in before the end of 2018.