Need a Push to Take the First Step? The Story of my First Deal

I wanted to write a detailed blog about my first deal from start to finish. It contains all of my lessons learned and an outline of the costs and process I went through. I hope this inspires someone else who is nervous about taking the leap into investing.

A little background on myself and the deal we made. I somehow had an idea about investing and was researching the avenues I could have taken. At this point I was in the navy for about 3 years as a submariner stationed in Pearl Harbor HI. I knew I didn't want to spend the rest of my life working like this, but I also knew I didn't want to spend the rest of my life poor. Not having many options I started looking into investing and business ownership since I wasn't bad with money. Real estate seemed to fit everything I was looking for. Passive, scale-able, and limited barriers to entry. During my underways and deployments I would listen to every hour of podcast from bigger pockets and listen to every book on tape I could. I started to recognize the patterns of people’s success and realized people in a worse position than I was were able to pull it off. Real estate was perfect for me.

I soon discovered my first obstacle that I am sure many of you have faced. My wife, Amanda. I have a habit of picking things up and putting them down before they are finished. I started up a few small business as a kid and dropped them right before the real work started. She was naturally cautious as most people would be if there significant other had the idea of risking everything they have for something as misunderstood as real estate. Especially as a young millennial scarred by the 2008 real estate bust. I didn't let her discourage me. I kept reading and listening and talking about real estate for over a year and a half before she felt comfortable with my knowledge and dedication to carry out this task. Even though she was okay with my venture there were things she wasn't okay with, like living in the same building as our tenants. There were two points to why we needed to house hack. Being in the military I wasn't going to be at my next duty station for long enough to justify buying a single family residence. Because of this we would be living next to someone in an apartment any way so why not be in a situation where you can pick your neighbor. The second being we couldn't afford two houses. Making the house hack was the only logical method.

Figuring out what we wanted.

I had received orders to Groton Ct and reported in December 2018. This was a perfect place for us, Amanda could get her graduate degree and I had a plethora of affordable multifamily houses to choose from with a strong rental market. We hit the ground running to find our house.

With the knowledge of 200 podcasts I knew what I was looking for. A duplex with some value add potential. Something ugly with good bones. C+ or a B- neighborhood. No single bedroom units. With tenant paid utilities. I decided to use the house hack BRRRR method. I had about 40 grand for this deal including down payment and repairs. I didn't want many projects that I couldn't handle myself. The plan was to utilize as much sweat equity as possible to reduce error in estimating repair costs as well as to better understand what is required to do common jobs. Spending more than 65 thousand per unit and 20 thousand on repairs per unit was the absolute max I could spend. I secured terms for a mortgage at 5% down, 4% interest 1 point, 7/1 Arm maxing out at 9%.

Finding what we wanted.

We were looking primarily in the two larger cities in my county. New London, and Norwich. There were tons of duplexes in these towns. New London was a significantly more desirable town. The houses in Norwich were significantly cheaper than New London and with only a 200 dollar difference in average rents we started in Norwich. We worked with an experienced VA realtor. She was good and knowledgeable but we soon realized that we wouldn't be able to secure a VA loan since we were looking at houses that weren't well maintained. The draw back was that she wasn't used to showing the kinds of properties we were interested in. Although she had some rentals of her own they were a class above what we were looking for so meeting eye to eye was a little difficult. Starting in Norwich we looked at every multifamily house on the MLS. Every house was either in a bad part of town, too expensive, falling apart, or had a bad floor plan. After exhausting all of the homes in Norwich we promptly moved on to New London. We experienced all of the same issues. Some deals could have worked, but we didn't have the confidence in those houses that we should have. We looked at over 80 properties in a 3 week period. None fit our requirements. Our realtor suggested a small town just north of Norwich that had a few properties for sale but it was a little further from work than we liked and we were uncomfortable with the low population. Being our only choice was to either wait for something new to come on the market or to look at this new town we decided there was no harm in looking. This town was only a few square blocks lined with nearly identical duplexes built in the 1850's. Every duplex had two driveways, separate utilities, 3 bedrooms and 1.5 baths. Having more than one bath in this part of the country is rare since most houses were built before electricity. There were cobble stone streets and a large park nestled right next to a beautiful river. We soon realized this was the perfect place for a hard working low income family to raise their kids. What sold us on this idea was the towns skate park had no graffiti on it. Have you ever heard of such a thing?

There were two houses for sale here. The first was vacant on one side with a family of five on the other. It needed a lot of love and the asking price was a little high at 145 thousand. We met and enjoyed the family that lived there. The tenant showed us the flower bed they just planted and the equipment he used to maintain the yard. The perfect unicorn tenant that has pride in ownership. The rent was a few hundred below market value but since they had three small kids with lots of personal items that they would unlikely move coupled with their pride of ownership we decided it was a good move to place an offer. We submitted an offer for 140 thousand. The owner reached out and accepted the offer but only after the eviction that they filled was complete. It turns out those unicorn tenants weren't paying rent. I pulled the knife out of my back and revoked our offer. Lesson number one don't trust an existing tenant.

After we got over that heart break we booked an appointment to see the second house in that town. We were hesitant because it was a foreclosure and was on the market for about a year. But we liked the town and what did we have to lose? This house was nearly identical. It was in a better part of town and needed about the same amount of work. It was fully vacant so no worries about inherited tenants and was 20 thousand dollars cheaper. We loved it. We decided to sleep on it. Low and behold that night HUD reduced its asking price by ten thousand dollars. We submitted a full offer for 115 thousand. The initial appraisal was for 145 thousand so we are already ahead of the game. Renovated comps were going for 180 thousand. There was one issue with the inspection. The heating pipes had burst making the property uninhabitable by the banks standards. We worked with the bank to put in escrow 150% of the quoted cost of the pipe repair. This totaled 7500 dollars. We proceeded to close in March 2019. The seller paid all closing costs.

Fixing it.

We did a full cosmetic rehab plus new furnaces and heating pipe repair. This included new matching floating plank in all rooms that don't regularly get wet. Painted cabinets, new counters, and stainless steel appliances. New toilets and grout-able peel and stick tile in the bathrooms. Matching paint throughout. As well as new vinyl siding. The plan was to do both units in tandem until our unit was livable and then focus on the rental unit until it was move in ready then finish our unit. It took about 3 months to prepare our rental. We spent approximately 10,400 on the furnaces, 5000 on fixing the pipes, 3000 on appliances, 3500 on floors, 1000 on paint, and 5000 on other miscellaneous repairs and tools. We took a second mortgage to pay for the siding. 20000 dollars at 7% over 20 years. My PITI was about 1200 a month this included flood insurance, my biggest fixed expense.

The siding contractor went above and beyond and exceeded my expectations. After pulling permits it came to light that my house was declared historical by the state sometime after closing and that a new building code was written regarding the exterior of my now historic house. We had to meet this inspector and argue about how my siding choice was in compliance with the building code. The stipulation was that all exterior changes had to be similar to your neighbors. You can imagine the differences in siding people have chosen over the course of 150 years. No two houses are the same. I think my house set the new standard. I feel as if we overpaid my plumber to fix the pipes. He was unresponsive and only spent about 16 working hours on the job. We should have written a contract for an hourly rate to fix the pipes instead of a handshake agreement on the worst case scenario cost flat rate we submitted to the bank. The only other construction hiccup was the sub-floors in the upstairs hall way were so uneven that using floating plank was not a viable option so we carpeted up the stairs and over the hallway. Everyone always says something will go wrong during construction but everything seemed to go off without much of a hitch. I don't know if it was because it was a simple job, or that I did it mostly myself, or that we were lucky. I think it had to do with how prepared I was and that the plan was one step shy of a full gut. If you plan to replace everything you really remove the possibility of things going wrong.

We was almost done with construction when we started to move forward with making a lease. We contacted the same attorney we used to close and to be honest was very upset at their performance. We asked if they had experience with leases and they said yes. They charged 500 dollars. We discussed what we would like in our lease. We decided on a standard lease with a rules addendum so we could easily adjust the rules without changing the lease. This was great, except this process took over a month to accomplish. They were very unprofessional. The attorney finally got back to me two weeks after the proposed deadline. Confronting the issue. We were given the week apology of "Sorry me and my paralegal were both on vacation for a whole week at the same exact time". Why was the law office playing musical phones with me all week if they knew you were on vacation? Ironic the most unprofessional encounter we had during this whole process was from those that are expected to be the most professional. We should have looked for a new attorney when they passed the deadline with no explanation.

Renting it.

Next stop was to find a tenant and market my property. I think this is the scariest part for many. It was for me. This was the moment of truth where all of our hard work and sacrifice was going to be put to the test. If we can't find a tenant that's our fault. If we find a bad tenant that's our fault. If we can't get enough rent that's our fault. If no one likes the unit that's our fault. First we outlined what our ideal tenant looked like which was basically someone like my wife and I. A young couple, no kids, no pets, good income, 700+ credit scores. But let’s be real... that is a unicorn and although we lived in the property so we didn't have to follow HUD discrimination laws we chose to do things as if we didn't live there and follow all of HUD’s guidelines. Our personal guidelines were no more than two people to a bedroom, two small pets, credit score of 600+, house hold income 3 x the rent, no evictions or bankruptcies, and no criminal history.

After having all of my documents covered and our application process finalized we were ready to set rent and list it. We decided to set rent high. It was August, peak rental season, and newly renovated. Being uncommon in the area. We decided the most rent we could get was 1250 a month. The highest listing in the area at that time was 1200. We figured if we didn't get any bites we could lower the rent in two weeks and try again. We didn't want to be stuck thinking we could have charged more for an entire year only to raise rents on someone by 100 a month and then they leave. We also knew that people like us, the person we were targeting didn't care too much about price. They were financially responsible, knew what they could afford and were okay with paying a little more for something they liked and knew that a new apartment would have less issues than a used apartment.

We advertised everywhere we could think of. Craigslist, Trulia, Cozy, Zillow, and some others. We even paid 11 dollars to have our add be featured on Facebook. Amanda thought Facebook was a bad idea because that where tire kickers live and lazy people look for houses. There was only one way to know and I was using this opportunity as a case study. In our listing we established two open houses for two hours long. One was late on a weekday, the other early afternoon on the weekend. We didn't want to set up individual appointments and get stood up. We bought a camera and took as many good photos as we could. Not professional quality but better than my competition. We received a few phone calls. Which was the goal. We also received a few texts. Which was fine. Most of the correspondence was through Facebook messenger. We received over 50 messages on Facebook, all asking the same thing. "Is this still available" even though we put the open house dates in the description no one read it and pushed the quick response button. We had a copy paste reply available saying when my open house was. That was the extent of those conversations for the most part unless someone asked if we accepted section 8. The reply was always yes, but the house hold income standard was 3x the monthly rent. Many people got upset about this standard. In our market you would not be able to qualify for our income standard and be on section 8. This was a part of my strategy. We don't personally have anything against the program or the people in it. We didn't want to open ourselves up to more government regulations and take on that strategy on my first deal.

Both open houses had a similar turn out. Approximately six groups came each day. Always in the first hour. All of our future open houses will be one hour long. Four groups followed through with the application process. All adults filled an application on paper. The individuals then texted or emailed me a copy of their application. From there we sent an email through Rentprep where they enter the applicable information for their background checks. We don't want cash we don't want social security numbers. We don't want anything messy. We also don't want to do work for someone that is not serious about renting from me. The more work the perspective tenant does the more it becomes obvious they are serious. We stated to all of the applicants the first qualified person to submit their background check and meets our standards has the first opportunity to rent. There was one applicant that stood out and was secretly rooting for. A newlywed couple in their mid 20's they had no kids, one cat, and they were both college educated. He was in the Army reserves, she had perfect credit and they made more than my wife and I. Luck would have it my unicorn tenants were the first to submit their background checks and gave me a full 50% refundable deposit to hold and were ready to sign in two weeks, August first.

We set up online payments using Cozy.co. They pay all of their own utilities. The only inconvenience with utilities is that although the water meters are separate, my town will not allow the tenant to place the water in their name. If the water goes un-payed for 2 billing cycles the property goes into foreclosure. Water is billed quarterly so we set up a bill in Cozy every month for 40 dollars and then charge the difference when we get the quarterly bill. We set everything up to be done electronically for ease and the ability to scale.

It had been nine months since my tenants have moved in and have not had any complaints. They pay every month. They don't ask for anything besides a small dog and payed a 1250 dollar non-refundable pet deposit for it. We expect they will be more likely to stay because of it. They are both working from home during this quarantine so there pay is unaffected and my rent keeps coming.

Ironically we replaced the old but still functioning boilers to ensure we wouldn't have issues for at least a decade. Our tenant’s boiler has failed 3 times since install and mine has failed once. The installer has walked me through some trouble shooting to get them back on but the reason for failure is still unknown. He is coming to install new heating zones pro-bonno. Maybe that's where the issue lies.

Refinancing it.

The final step of this project was to refinance. We started with the bank that held my original loan. It didn't work out because they wouldn't accept a new appraisal if the property wasn't owned for 12 months. Upon application we owned it for 11 months and 2 weeks. We didn't like the bank that much anyway so we decided to go elsewhere. We found a good broker and submitted my request. They were a dream. Very attentive and fast. There were no issues securing the financing. We went for a VA loan at 90% LTV for 3.125%. All we needed was a termite inspection, which went off without a hitch, and an appraisal which we were nervous about because VA appraisers are notoriously bad for investors. We were also nervous about a lot of very small things that we notice everyday living in the house. Like red paint behind the baseboards, paint on the moldings, and all of the dings and some off the mismatched fixtures. The VA is typically slow on paperwork and have a high standard on the condition of the home. The appraiser wound up being another local investor. He asked me one question before he looked at the house. "How much work did you do to this place". I responded with basically everything. He said great I can give you the amount you want. He spent 10 minutes in the house taking pictures of the house and submitted his report that night. Two days later we had approval from the VA for a 220 thousand dollar appraisal. Unfortunately living in such a small town finished houses don't sell very often so comps are hard to come by. Fortunately for me 3 houses sold between November and March for anywhere between 210 and 285 thousand. When we bought we were planning on a 180 thousand dollar appraisal.

Despite nearly doubling our debt service we are only paying an extra 200 dollars a month for the cash we took out. Reducing my interest and removing the PMI we were paying made up for the increase in flood insurance. We paid about 6 thousand in closing costs and pulled out 57 thousand for our next deal. We pulled out all of our cash plus an extra 17 thousand leaving just as much equity in the house as when we started. We were expecting to break even and greatly exceed our own expectations.

Repeating it.

We are now ready to put our money to work again. The goal was to rinse and repeat without moving in to the flip but this pandemic is throwing some uncertainty curve balls at us. The construction loan my lender did offer are now suspended. Our rental also took a loss this year making my 2019 tax return showing a decrease in income. This makes our DTI too high for a conventional loan. Maybe hard money is our next option. Maybe holding on to our seat for a while might be best.

Despite doing so well on the first deal I am even more nervous the second time up. We are not house hacking so we need a larger down payment. We also want to use contractors to do the work which opens me up for high costs, hiccups, and more coordination.

My biggest lessons, advice, and take ways.

Underwrite conservatively, pursue income aggressively.

Using DIY you can develop a better understanding on what it takes to complete a job.

Having a plan for the unexpected makes the unexpected expected.

Being willing to do something you wouldn't normally do for a short period of time opens you up for more growth potential.

Leverage other professionals to take you to the next step. If you are serious and they are good at their job they will hold you accountable and work with you to achieve your goals.

Continue to educate yourself. There is always time for podcasts and audiobooks.

Even if you think you are not over renovating, you probably are.

Keep your ideal tenant in mind during renovations.

Have your standards in mind before starting your first project, but they do not need to be finalized until you get to that step.

A little bit of forethought goes a long way.

Do everything correctly and as formally as possible even if you feel you don’t have to. The tenant who is willing to share a wall with you is less likely to screw you. Use them as practice for those who are.