BackgroundIn 2010 I bought a bank owned 3 bed 2.5 bath single family property using an FHA loan which required a 5% down payment. The purchase price was $73K so this equated to approximately $3,700 out of pocket. During underwriting, the house appraised for $82,000. The SFR is located in Columbus, Ohio and it had a good foundation and no structural issues. The bank even put in new carpet throughout the entire house. This isn't typical and speaks to the cleanliness of the house when I bought. It was dirty. The first two weeks after closing I went to the house every night after work to scrub the bathrooms and kitchen.
I am not the most handy of men, however, at the time, I was single and had access to YouTube so I learned how to update the house while living there. In the span of 5 years I painted the entire house, updated all of the fixtures on the inside and outside of the house, sanded and stained a 200 square foot deck, and found an awesome handyman to renovate 2 bathrooms for $700. I also got married and had my first child during that time, so we bought a new house and kept this one as a rental.
In late 2015 I found BiggerPockets while searching YouTube videos on real estate investing. I listened to multiple podcasts, read articles, and even bought Brandon Turner’s book on Investing in Real Estate with no and low Money Down. I also began reading more books on real estate investing and made the decision to focus on multifamily properties. My wife is just now warming to the idea of investing in real estate so I promised her that I wouldn’t use any of our savings or income for our next purchase.
The only way that I could do this was to either refinance my rental property or take out a home equity line of credit on that property. I chose the latter because I was able to find a credit union that allowed for 90% loan to value on investment properties and there are no closing costs associated with a HELOC. Additionally, I planned on paying off the HELOC within 3 years. Fortunately for us, the market in Columbus has greatly appreciated since 2010. The credit union appraised my rental house for $130K, meaning that I could use $35K towards the purchase of my multifamily investment.
Finding the Properties
In early 2015 I worked with a real estate agent who set me up with an account for our local MLS. I would get emails as soon as something that met my criteria popped up. At the time I was primarily looking for single family homes under $100K. However, the more I read and listened to podcasts, my strategy changed to small and mid-sized multifamily properties and my agent updated my search criteria accordingly. I looked weekly and ran the numbers through a model I downloaded from BiggerPockets (not a Pro member yet, sorry Brandon and Josh), however, I couldn't find the return that I was looking for in a desirable neighborhood. So, I decided to expand my search to include two cities less than 150 miles away, in Cincinnati and Dayton. I grew up in Cincy and lived there for over 20 years so I know the neighborhoods well. My wife is from Dayton and I commuted to Dayton for work for 3 years so I've some familiarity with their landscape.
After a few months of looking at local realtor sites powered by the MLS in Cincy and Dayton, I found exactly what I was looking for. There were two 4 family units on neighboring lots boasting 3 beds and 1 bath in a working class Cincinnati neighborhood with virtually no crime. The seller was asking $133K a piece for them, and fortunately she had only posted them within two days of me finding them. I contacted my agent and we put in an offer of $250K for both of them which was accepted.
Numbers (See Image Below for Details)
Purchase Price: $125K each, $250K total
Down payment: 25% $31,250 * 2 = $62,500
Interest Rate 4.75%
7 of 8 units rented at approximately $700 per month
Conventional 30 year term
Cash on Cash Return 14.27%
The inspection went smooth and revealed no structural damage or major issues.The inspector was thorough and a former owner of multifamily investments as well so he pointed out various minor issues that he would address if he was the one purchasing the properties. During the Request to Remedy phase, I compiled a list of all of the items mentioned in the inspection and asked the seller to fix the most important ones with the expectation that I’d address the minor issues. I gave her the option of either fixing the most important ones herself, or she could pay my closing costs and I’d fix them. She chose the former, and with this being my first purely investment property purchase, I made the mistake of not requiring her to use bonded and licensed professionals to make the improvements. Her husband was the maintenance man on the property for the past 17 years, so, guess who made the improvements.
A Series of Unexpected Events
After the seller agreed to make the repairs I thought I was in the clear. I had given my lender all of the requested information and she had sent it off to her closing department. A couple days later the closing department informed that I needed a shared driveway agreement because my two properties shared a driveway with a third 4 family unit owned by someone else. When the buildings were built in 1967, all 3 were owned by the same family. They began selling them in 1999, and there had been 2 additional sales since then (most recently December 2016) however, no one thought to create this document. The closing department asked my title company to write the document and it needed to be signed by the seller and owner of the other building, and recorded at the county office before they would give the clear to close. I was a nervous wreck because we were about a week out from the closing date set forth in the contract and I didn’t know if the seller would allow us to extend the date.
About two days after learning of the shared driveway agreement, the closing department inquired about my down payment source. I had informed my mortgage broker from the beginning that I planned on using a HELOC for half of the down payment and a gift/loan from my Dad for the other half. Unbeknownst to my broker, her company won't allow down payment gifts on investment properties. The timing on this news was horrible and I was beyond upset, because had we known earlier, I could've made different arrangements. Fortunately, I had enough money to cover the second down payment in my TSP account (similar to a 401K for federal employees). So I took a loan from my TSP and will be using funds from my Dad to repay the loan.
A couple of days prior to the closing date set forth in the contract we reached out to the seller regarding an extension and she gave us another 12 days. This was important because my wife and I were going to Hawaii in 14 days, and we wanted to get the deal done prior to leaving.
The title company was able to get both signatures on the shared driveway agreement and file it with the county. 2 days prior to the new extension deadline I was informed that we had a clear to close. The pre-closing walkthrough was scheduled for 10am and the closing was scheduled for 11:30am on the same day.
The night before closing I left for Cincinnati with my 3 year old son. Less than 2 miles from leaving we got a flat tire on the highway. Rather than change a flat from the shoulder on the highway, I drove another ½ mile to an exit and found a church parking lot to change the tire. Of course, this shredded the tire, but I couldn’t take the risk with my son in the car. Just as I got the spare tire on, my wife drove up with our 1 year old daughter. We switched cars and were on our way 2 hours after our original departure.
The next morning I went to the bank and wired my down payment funds to the title company. Following that, the seller met my Dad, my agent and me at the properties and we walked through. It was great because I was able to establish rapport with her and she introduced me to all of the tenants who were there at the time. I passed out information on behalf of the property management company that I hired so that the tenants would know what to expect moving forward. As we were about to head to the closing, my agent received a call from the title company, stating that the lender is requiring me to drive back to Columbus to sign closing documents. In the state of Ohio, we have Dower Rights, which means a spouse has rights to all property purchased while married. As I mentioned above, my wife is starting to warm to the idea of REI, and she wanted to release Dower Rights on these properties. The initial plan was for me to sign paperwork at the closing in Cincinnati with the seller, and for her to visit the title company's office in Columbus that afternoon to sign her paperwork.
Needless to say, once we got to the selling agent’s office for closing, there was a large amount of confusion and a bit of understandable apprehension for the seller. I was going to leave with the keys to the properties and if I didn’t get to Columbus before the title company closed, then we’d have to repeat this process at some unknown date in the future. While the seller was conferencing with her agent, I asked the rep from the title company to verify that they received down payment funds. He verified that the funds were there, and this reassured the seller to come back to the table to continue the closing process. However, we still had one more hurdle to climb before she’d sign any documents. The figures that the title company sent me were different than the ones the seller had sent to the title company. Whereas the title company was giving me prorated rents for 3 days, she gave them a proration of 1 day because that’s what she needed to pay off her mortgage. Additionally, one of the tenant deposit figures was off and she had collected the following month’s rent from another tenant. So, now the title agent tells us that it’ll take at least a day to get the paperwork corrected, unless…….the seller and I could work something out. Me being a lover of all things Excel spreadsheets, I went into another conference room, and made a spreadsheet with one table containing the seller’s figures, another table with the title company’s figures, and lastly a table showing the difference. The figure standing between me and these properties was a measly $168.96. The seller’s agent wrote me a check for that amount, handed me the keys and I was out the door.
I dropped off the keys with my property manager, made a stop at one my favorite Cincinnati spots, Izzy’s deli for lunch, picked up my son, and we were off to Columbus. We arrived at the title company at 4:30pm and closed on both properties.
