16 Mar Rental House #2
Between June of 2016 and March of 2019 I’d been consistently looking for another rental property and couldn’t find another good deal as the market continued to roar upward in the south metro where I considered investing to be my best bet because I understood the market and already had one home working really well in this area. I’ve never done what it takes to do the off market investing processes that would ideally send leads to my door, I’ve solely looked at and reviewed the MLS, Craigslist, and looked at wholesalers. I even considered turn key providers in the Milwaukee area for example and still may consider that at some point in the future. One day we were driving down the my wifes family farm and I realized that Albert Lea is 80 miles from our front door and on the way to the farm with 18,000 people residing there. While it’s a remote town that stands on its own there is a hospital, a couple big employers and then a number of other anchor’s like Home Depot and Walmart in town to support the community.
I looked up how much you could buy a house for and my eyes popped when I realized you could buy a home for under $100k and get rent at the 1% rule all day long. The trade off is appreciation, there really isn’t much if any appreciation and I saw this as a potential BRRRR type market (Buy, Rehab, Rent, Refi, Repeat). While I didn’t BRRRR this second rent house and haven’t since, I do see it as a potential market to accomplish this within. Albert Lea is a weird place candidly, and I don’t really know why people want to live there necessarily but there have been 18,000 people there give or take since 1950, and this is a cash flowing market if you know how to find and buy in the right areas. These are older homes mostly that will cashflow the strongest, and you have to watch out for the wrong neighborhoods, knob and tube wiring, dated plumbing and pending assessments from the city. However, if you can find the right location, you will easily eclipse the 1% rule and soar to 1.5% and even 2% if you find the right place and can add value. Cash flow is the only thing sexy about real estate in Albert Lea, nothing else about it will get you all that excited.
I began digging into MLS and on Valentines Day 2019 I remember calling my banker and verifying he’d lend on this purchase I was considering writing an offer on. The house was listed at $55,000 and didn’t have any air conditioning but the furnace was forced air so I intended to add Central Air to better care for future tenants. I liked the house because its exterior was brick, shingles were newer and the rest of the house was move in ready for a tenant after some paint. My lender confirmed he’d lend on it either on a traditional 30 year fixed with 20% down payment or if I bought it all cash he’d refi it within 30 days of me taking ownership on a 30 year fixed with 20% equity left in the deal. If you are familiar with Real Estate and/or the BRRRR method you might be wondering about a “seasoning period” which is usually 6 months. In this case since we were buying with cash and replenishing our own personal funds, the lender didn’t need a seasoning period. I was ready to make an all cash offer at $40,000 just to see what they would say and within an hour of me making that decision the listing agent texted me to say “the seller has just accepted an offer”. Nooooooooo! I was so bummed out I’d been looking for 8 weeks in the market and finally thought I found the place and it was sold to someone else. I was prepared to go all the way up to $45k in cash or switch to traditional financing at $50 or 55k on the house and would still have done well on it. The house ended up popping up as “sold” on my Zillow feed 60 days later and the buyers (out of state investors actually) got the place for $48k, ouch.
Good news however, a few days later a new house came on to my search feed at $70,000 having been lowered from $72,500 which was outside my desired price range. The home appeared to be move in ready with central AC in place, beautifully refinished wood floors and all-around solid property. My favorite part was it was For Sale by Owner, and then I noticed it said “potential short sale” on Zillow, shoot I’d been through this process before and knew it was challenging but I still felt an advantage being able to talk directly to the seller instead of a list agent. I gave the seller a call and asked a few generic questions about the property, we got about 10 minutes into the call about the house and neighborhood and I felt comfortable asking “it sounds like you are really proud of the property and have kept it in solid condition, can you help me understand the situation with your bank and the short sale?”. He sounded confused about the short sale and bank question and asked something back that caught me off guard, I think he was offended or something that I was assuming he was in a financial situation but was actually an investor that owned the property as a rental home and was selling it. I said something like “wait, you are a landlord on this property, you don’t live in it yourself?” he said and clarified he was a landlord and owned a number of homes and apartments in town so I was further confused wondering how he could be in a short sale situation. Some how I just finally said “do you realize your ad on Zillow says you are in a situation where you have to short sell your property?”. He had no idea, we laughed, got back on track with the call but I came to realize he’d had a major barrier to sale from his other potential buyers and possibly why the price drop happened.
We had a great conversation; built some solid rapport and I made a plan to drive down and see the property. While we were on site I asked very little about this house unless there was something specific and focused more on them and their portfolio they had been building over the years. They were happy to share they owned over 30 doors, 20 of which were apartment units and the rest were mostly single family homes. He shared that he had most recently rented this home for $800 a month, which was my lower end of conservative rental estimate, and that they were getting out of a few of their single family homes in hopes of focusing more on their multi unit locations. I felt good about them as a couple and investor group in the area and mentioned that if they were selling more Single Family Homes and this one went well, I might buy them from over time if they were as well cared for. I went home and re-ran my numbers, while I knew that I wanted to get over $800 in rent and get closer to $850-$900 under the advisement of my property manager, I had a real life landlord telling me he got $800 so I was wondering who’s numbers I should trust. With that, I texted the seller an offer of $58,500 and would close very quickly with traditional financing. They thought about it a bit and came back to me with some comps and a few other thoughts they had, we talked on the phone a bit here and there over the course of the next day. I think I ended up raising our offer to $61,000 somewhere in there and the truth was I really wanted the house but was willing to lose it because I knew another would come up and although event at full list of $70k I was over the 1% rule, I really wanted this first deal to cash flow big time to cover up any rookie mistakes especially in a new market.
I think it took about a week and they texted me one night and said “we need to net out $64,250 to make it worth it to us to sell the house, Mitch. If you can come up to that, we’re on board and will go forward with it”. I was super excited, the house was probably worth the $72k they originally had it listed at and 15 months later it appears to still be the case but we got it for $64,250 and we actually raised the purchase price to have the seller then pay some of the closing costs (essentially so I could roll them into the loan) but they netted their $64,250 they wanted to get out of it. We scheduled the inspection for a few days later and I met my inspector and the sellers at the property to go through it all together. We started in the basement then the main floor, everything was going well until we took the steps from the main level to the upstairs, there was bubbling paint at the landing from near a window. We ended up realizing it came from an ice dam on the roof above, finished the inspection, and the owner took care of the ice dam right away and now I had something to contemplate.
I knew they needed to net their $64,250 but I had to decide how the inspection changed my offer. Aside from the ice dam there was a crazy noisy ceiling fan in the living room, a storm door on the front of the house that badly needed replacing, and a roof tile on a back deck that needed replacement. I talked to the seller about this and rather than changing the purchase price he agreed to fix it all for me except the roof tile which was a small fix, he just didn’t want to get up on a ladder at the height required to mend the issue. We decided we were good with it, and decided to go forward. There was one other funny term in this deal that I didn’t mention previously, this place had a tenant in it paying $450 a month in rent to live out of one room, bathroom and kitchen. Certainly, he had access to the whole house but he was from about 90 minutes away but worked in for stretches of time 60-90 days and needed a place to live. They set him up here on a month to month lease knowing they were selling the property and he the tenant was aware. We made an agreement with the tenant that we could perform work in the house while he lived there doing some basic painting and cleaning primarily, and notified him we intended to have a traditional tenant in there within 45 days of close but hadn’t formally served him his notice. We like having him there in this situation because we would collect the rent money before a mortgage payment was due which would cover half of the property managers “tenant placement fee” when they found us our first long term tenant.
The day we were scheduled to close my personal residence was flooding through the block walls which is a long story, maybe I’ll tell it on here sometime but it snowed, melted, rained, snowed, melted and poured rain for 5 of 7 days and close day was the day it decided to flood. We had to move closing and the seller was good with it, fortunately. We closed 5 days later and then the tenant said his work assignment ended and he wanted to break the lease and move, we were good with it and let him go without notice so we now had access to the house without working around his schedule. The day after close I began painting the house and my phone rang from the seller, he said “hey you’re not going to believe this but a former tenant of mine from years and years ago just called me and said she remembered this house of mine and the house she’s renting now is being sold, do you want to talk to her about renting your place?”. She came and toured the place with me while I was painting and needed a place to live 7 days later when the house she and her family rented was sold. We had listed the house at $950 a month at the advisement of my property manager, which we received as well as $50 in pet rent since she had dogs. We went through all the background check protocols, she’d lived in this house being sold for 7 years and the landlord loved her as tenants, the house was listed on MLS so I was actually able to look at it and see pictures on the wall of her and her family living there, they lived well and neat. Lucky me.
I allowed them to move in 3 days early as long as they were cool with moving stuff in and staging it in already painted areas while I finished painting the house and they did. We closed on March 23rd and received rent on April 1st, well exceeding the minimum $800/month in rent we were hoping to get. The Mortgage PITI was $401, property manager is $89/month, there was no tenant placement fee since we found her through the former seller, we just paid $400 for background check services etc. A year later the house still looks great and we signed a new lease for another year at no rent increase, paid a small renewal fee and while the number is debatable by those in the landlord community we consider our cashflow on this property to be $350 with a total of $17,600 in our own cash from down payment, some closing costs, paint and a few other materials. A cash on cash return of 23.8%, not bad! We do keep heavier reserves on this property considering it is older, and will need a furnace and AC at any point in time as its aging.
While I don’t anticipate they all will go this well we are looking at this area for another property, the only downside to this cash flowing market is lack of appreciation, however we can force appreciation on the property by improving it as tenants turn over. We aren’t cruising in our rental portfolio build up but we are ready to buy our 3rd and possibly 4th property in 2020 unless a bigger opportunity or passive business opportunity were to arise.
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