Our Least Sexy Deal of 2018 - But our most profitable rental for the year.
In April of 2018, we were neck deep in a huge rehab, you can read all about it HERE. We were too busy doing a lot of the work on it ourselves to start another project of that magnitude but wanted to keep buying cash flowing rentals. So we kept scouring the MLS for deals that would cashflow. We were specifically looking for multifamily rentals because we thought that’s how we could get the most bang for our buck. We made multiple offers on different on market conversion multifamily residential properties. But most of the time got beat out by cash offers or got beat out by slightly higher offers. We even got one accepted but as soon as I verified the last year of utility bills with the utility companies and got a quote on flood insurance it became obvious that it was not a good deal because the units were not separately metered. Then we found a single family residence on the MLS with very little detail in the listing and a couple very unimpressive pictures. It was a 5 bedroom, 2 Bath 1800 sf house with an attached 1 car garage.
It had been on the market for a little while and quite honestly they were asking full retail for it. The only feature that drew us in was the description in the listing said that it was occupied and rented for $1850/mo! We ran our initial analysis and realized it was a huge cash cow! Plus the listing said the tenants paid all utilities! (We found out later that the previous owner was responsible for paying the trash but that definitely wasn’t a deal breaker.) When we went to see the property, we found that it was in really good shape. The windows had all been replaced, it was fairly updated, the HVAC was about 5 years old, the basement and the roof were solid and the tenants were taking pretty good care of the place. There was a pile of laundry in each bedroom and dishes in the sink (typical college boys) but nothing terrible.
We also thought from the beginning that $1850 for rent was pretty high, but even if we couldn’t rent it for quite that much in the future, it still looked like a good deal. We bought it with a conventional loan and put 20% down on a 30 yr mortgage. At that time, we had the cash for the down payment and closing costs, however we were planning on closing it in my (Megan’s) name. The problem there is that I couldn’t use my part time job income to qualify for a mortgage and we didn’t want to use Jeff’s income to help me qualify. When you are getting conventional (secondary market) mortgage loans, there is a maximum amount of these loans that you can have per person. At that time I believe the maximum was 4 (now I think it has gone up but don’t quote me on that), so we didn’t want to be capped at 4 rental purchases by jointly qualifying on all the mortgages so if we applied separately for each mortgage, theoretically we could get 8 properties before running up against the cap. So to allow me to qualify for the mortgage, I brought on a silent partner. His role in the deal was very simple and very limited. In exchange for his buying power he would get $150/month. He didn’t have to put any money into the deal, he didn’t need to worry about any repairs or maintenance or anything except signing the loan docs. He would get paid that $150 every month, whether we were profitable or not, even if the house was vacant he would still get paid. And if we stopped paying (which we wouldn’t) we had put 20% down of our money so there was plenty of equity there. We also agreed that he didn’t have any equitable interest in future profits (if we were to sell later) and when we refinanced him off the loan then we would be free of the responsibility of paying him the $150/mo. I explain all that to say that even if you are not the best borrower, you can still get into real estate if you find a deal that has enough margin to get someone else to help you with the parts of the puzzle that you may be missing.
“So to allow me to qualify for the mortgage, I brought on a silent partner. His role in the deal was very simple and very limited. In exchange for his buying power he would get $150/month. He didn’t have to put any money into the deal, he didn’t need to worry about any repairs or maintenance or anything except signing the loan docs. He would get paid that $150 every month, whether we were profitable or not, even if the house was vacant he would still get paid.”
Once we closed on the property we quickly realized that the tenants that we had inherited were pretty fantastic. They paid their rent on time and let us know about any small maintenance issues, but otherwise the house was really solid. About 3 weeks into owning the house we noticed the trash was piling up outside the house so we asked them about it and they acted confused and told us the owner always paid it, and they had been wondering why it had got shut off too. (Oops) So I guess they don’t pay ALL utilities, but still the numbers were great. We asked them if they were going to be staying for another year when their lease was up at the end of July, and they let us know that they wouldn’t be. That caused another slight dilemma, we only had the few terrible pictures from the listing but we wanted to start marketing for new tenants. We could have just chose to take pictures of the house in its current state but all the bedrooms were always a mess of laundry and their was always dishes out in the kitchen so the pictures would have been not very appealing. So we talked to the boys and said, “If you guys all get together and clean the house really good and let our photographer come in to take pictures we will give you a $200 visa gift card.” They agreed and so we were able to get some pretty good pictures (at least for being occupied) and we were able to start looking for our new tenants.
I don’t know if we missed the prime window to be looking for college tenants, maybe it didn’t show well because they were pretty messy, or maybe we just didn’t market it well enough but we could not get it rented for $1850 so we dropped down the price and ended up finding an extremely qualified group to rent it for $1700/mo. The best part was that we had it pre-leased before the previous tenant group moved out. So, we planned for 3 days of vacancy to get everything ready for the next group and finish the tenant turnover. That was a pretty stressful timeline because we had never done a tenant turn over, and it was a big house and who knows how they were going to leave it.
When we got the house back we saw they unexpectedly left quite a bit of stuff so we got a rolloff dumpster delivered same day and got everything out of the house. We also had to have a drain line in a wall repaired, so then we had some drywall patch work, and a few paint patches. The second day we had a cleaning crew come in and do WORK! They deep cleaned the house from top to bottom for such a reasonable price. (Anthony @ Details Cleaning 402-613-3939) They also had their crew clean the carpets in the upstairs bedrooms. And we had new carpet installed in the main floor bedroom and on the stairs. And when it was all done we got it photographed again so that we had really great vacant pictures for the next time we went to list it. AND we finished it in the time frame we set for ourselves.
Throughout the year we had a couple unexpected maintenance issues. We had a part go out on one of the fairly new AC units. I think it was a capacitor or condenser, I don’t know but it was $1500 so that was disappointing. The claw foot tub repeatedly had issues with the shower head either breaking off or leaking etc, and because they don’t make parts readily accessible it seemed to just get more and more ghetto rigged, which is really not our style. So that house will most likely be getting a new tub and surround during the next tenant turnover.
Final Numbers For 2018
So we bought and rented the house from May through December for 2018. During that time we collected $11,905 in rental income and fees, and our net income (after expenses) was $3239. Because we only owned the house for 8 months, that comes out to $405.87/mo. If you multiply that number by 12 you get an annualized return of $4858, and our initial cash investment was $28,800 (down payment+closing costs) for the purchase of the house. So that is a 16.8% cash on cash return for year 1. One other nuance to mention is that you get to take depreciation expense on your taxes for rental real estate, so over $3000 of that profit was tax free! Not bad for a very boring, not sexy deal. Also during the entire 2018 we probably spent less than 30 hours on every aspect of this deal, from acquisition, management, tenant screening, and tenant turnover, so if you don’t have a lot of time, but you do have a little chunk of savings ($25,000-$30,000) you could potentially be making some pretty sweet returns with a mostly passive rental real estate deal.