Have you ever felt lucky that your parents taught you something? For me, that luck was my father teaching me from the school of hard knocks. The introduction course? Practical Sense 101. Even though I didn't enjoy it at the time, my father would bring me around the house as things broke down. From plumbing to pools and drywall to tile, he always had an attitude of fixing it himself.
That has always been my attitude until recently when I decided to start investing in multi-family apartments. I realized that it’s nearly impossible to do all the work yourself. But my first four single family rehabs were done with hands-on experience.
Single Family Real Estate Deal
As is Value Appraisal: $146,000.00
I did it all: refinishing hardwood floors, drywall, painting, baseboard, crown molding, trim work, interior and exterior doors, glass repair, kitchen remodels, tile work, toilets, vanities, lights, windows, brick/patio work, tree removal, and everything in between. I've got a pair of lucky LL Bean jeans and boots that are covered in hours of hard work.
There is something to be said about learning from doing, and I’m truly blessed that I have that ability to figure things out. I’ll admit, it can be hard at times. This is especially true when you build a built-in breakfast nook and assume 2x4s are actually measured 2×4 inches… You should have seen the scrap pile 😉
Look for Potential
But as I progress in my investing career, the things my father has taught me are invaluable to the process of buying real estate. When I walk through a property now, I don't notice the paint color or the make and model of the appliances. I look at quality of work, construction materials, and whether the property has potential. My father taught me to have an eye and focus on the final product.
All his teachings work through me in every deal. The most important was to buy right and buy something with potential. So, when walking through this project, I saw the end product and not the foreclosed mess that was left behind. By doing the work myself, I was able to save on construction costs.
The material cost was $10,371.76. If I had hired it out, the labor would have added another $10 to 15K. Yes, it still would be a profitable investment but not as much as paying myself over $26,000 at the time of the refinance.
It’s Not Magic
The title of the article sounds like a sales pitch, right? Like I have some magic 7 step process or secrets of the trade and for only $997 you can have them, too! …No way! I just want to show you how I completed this deal.
The only magic comes in the form of my three golden rules for investing:
“Do what you'll say and say what you'll do.”
“Protect your lender and yourself through buying right”
“Don't get emotional”
Buying the Property
When buying a foreclosure, you typically offer cash and take the property as-is. This leaves you with two struggles. The first is that you must get all your due diligence completed at the time of the walkthrough. This is where my father’s lessons have come in handy. However, I still like to get an expert’s opinion because I am not a master in all those fields.
The other struggle is the financing. Buying this property for $100,000 cash as a former teacher was a big problem. I didn't have nearly that amount of money in savings. In fact, I actually had to borrow all of it and more. In return, I gave my investors a return on their investment secured by the asset (1st position for the purchase and 2nd position for the rehab). Plus, it was also insured just in case something catastrophic happened. My total loan amount was around $117,000, which is 63% of the final value (ARV).
The Day of Closing and Beyond
Within the matter of an hour, I was in my boots and jeans working on the exterior of the house. I believe it is important to start on the outside. The neighbors will thank for it as well. Typically, these houses haven't been lived in for awhile and the grass is knee high. With just a lawn cut, tree/bush removal, power-washing, shutters, and mulch, you can truly make the property pop!
Within the next 11 and a half days, I busted my butt working around the clock. Another thing I was grateful for was the work ethic my father had taught me:
“Early to rise, last one to leave”
So, here are some photos of the work completed during that time. The entire kitchen was outdated, but the cabinets were structurally sound. New cabinets cost around $3,600 for a 10×10 kitchen. What you see here costs $40 in paint, $60 in new hardware, and $150 in countertop with a day of labor. The appliances were bought as a package deal for $2,200.
This was my second job refinishing hardwood floors. The hardwood on this property was about 700 square feet. In Connecticut, the cost to refinish floors is $2/sq ft. Of course, it depends on how bad they are and how many coats of poly you want.
For me, it cost around $50 to rent the floor sander and another $90 in materials like sand paper, rollers, and semi gloss clear.
Pool removal was not one of my specialties either. So, I found some contractors who were in-between jobs. Total cost was around $3,500 with permits. This was, by far, an amazing deal for me. Other quotes came in around $5,500 to $7,500.
The reason I removed the pool was that the cost to keep it was far greater than removing it. Eventually, I will keep the house as a rental and didn't want the liability and upkeep that comes along with pool ownership.
Cashing Out for $26,000+
Once I had completed the rehab work, I put the property up for rent while I waited for the seasoning requirements in Connecticut. Typically, lenders want to see a year of ownership before they will give you long term debt on a house. Once that year was up, I went to the bank to talk about getting 80% of the equity out.
Now here is where the magic happens, so follow closely:)
1. I bought if for $100,600.
2. I had another $17,000 in rehab and holding costs.
3. My tenants paid the carrying costs for the first year.
4. I then went to a bank to get a cash out refinance and told them I would like to pull some equity out, 80% LTV.
5. The house appraised for $185,000, which means a $148,000 loan (185K x 0.8)
6. I paid my investors the $117,000 I owed them for borrowing the funds.
7. I got to keep the rest, minus closing costs
8. This resulted in a $26,663 tax-free check!
I know I made it sound easy, but there was countless hours of reading books, attending investor meet-ups, and hands-on experience to make this deal possible. And with real estate, there is always a risk. But with the right amount of knowledge and experience, magic can happen.