Three friends and I joined forces in 2008 and formed a LLC to invest in property. We all have full-time jobs but have high hopes of someday making investing our full time profession. We've done several deals in the past two years and seem to be trying to make it doing rentals right now although we keep all options on the table. Our first deal, we think, has been the sweetest for us.
We found an out of state property owner with two side-by-side one bedroom houses in a solid, quiet, peaceful, middle class neighborhood. He rehabbed both several years ago, lived in one and rented the other before having to move out of town for work. Houses had been vacant for the past two years and apparently a pain in the neck for him. He tried selling them with an agent with no success--nobody wanted two small properties. Why other investors in the area didn't snap these up we don't know, but in this business TIMING is everythihng. What wasn't a good deal one day could become a great deal the next day if one or more factors change.
The houses are identical, have one bedroom, bathroom, kitchen, living room, back porch, and a long narrow backyard. They are very attractive structures. We decided to be very aggressive to see what happens thinking that this deal would never happen on our terms. We were going to call in a learning experience when he laughed in our faces. Well, to our shock he didn't.
We worked out an owner-financing deal where he signed over the property to us in exchange for $272 a month plus 6.5% interest over ten years. We gave him 6K in cash and financed 24K. Yes, we got both properties together for 30K and they were in very good shape. I think we may have spent about 5K in repairs and rehab over the past two years on them. Both have been occupied by the same tenants since we bought them each paying $475 a month. The tenants seem very happy there and to our knowledge have no plans to move. One works at Lowes and is planning on putting up a backyeard privacy fence on his own dime. We approved it. He also started a neighborhood watch in the area! Both pay their rent on time with no hassle.
The former owner took our first offer and didn't counter. We'd made it very low to give ourselves some wiggle room, but he took it. Needless to say we were very excited. We'd heard and still hear from other "professional" nayseyers in the area that one bedroom houses don't work. Well, by our experience they do and we'd take that deal again all day long. We still have a waiting list of people's e-mails interested in them.
This must have been a win for the previous owner--he got a good deal by moving on with his life in another state with a small check each week and we got two great properties. It's good for business and good for your karma if you can structure deals that are good for all parties involved. We want to get great deals in the future like this one but we never want to take unfair advantage of someone. I think getting rid of those houses was what this man needed, so to his way of thinking we came along at the right time.
My story isn't done yet. We've made 1.5 years of payments and had another idea. We just offered the man a lump sum of 15K cash to pay off our remaning principal of approximately 21K. The man has not been consistent in cashing our checks every month sometimes waiting weeks and weeks. This could indicate that the $272 is probably a nice bonus for him to have but that it's not that significnat a sum in the grand scheme of things. He could theoretically do a lot more with 15K in his pocket now than $272 every month for the next 8.5 years. Will he take this deal? Who knows. Letter was mailed to him yesterday with the offer. He may have a counter or say no completely which is okay. Here's the neat thing...
We want to get this lien released so we own the property outright. Then we HELOC it to find money to make other deals. As a company it's time for us to begin leveraging up the ladder. We had some recent success with another property we own outright and HELOC'd. The interest rate is great. We purchased that property for 40K from the owner and the bank gave us 44K in a HELOC. Unit is a duplex and brings in very good rent every month.
Based on the above information we think our little one bedroom houses could be worth a lot. The total purchase was 30K and we put down 6K. We've paid about 3K so far of the 24K still owed. If the lien holder accepts 15K then we made another 6K on the back end of the deal. Keep in mind these numbers are only approximates. I know there are some probable tax implications for both parties, and I have already posed some questions about that on another forum on this site.
Let's say in the end we get these two one-bedroom houses for 24K. They have a hx of bringing in $950 a month. This looks very good to any bank. We estimate we can get a very nice HELOC amount. Even if the lien holder wants to counter and says he'll accept 18K or whatever my partners and I are still ahead. If he turns us down completely we may pay it off anyway (he can't say no to that legally). The estimated HELOC and lower interest rate than what we are paying to him should be worth it.
whew...that's a lot of typing but as you can see we are really excited about what's happening here. I will keep you appraised of what the lien holder has to say in response to our letter.
