Allow me to introduce W Melissa court, a two story townhouse in Jacksonville Florida. W Melissa has 1,400 square feet, 2 bedroom and 2.5 bathrooms. It was vacant at the time of purchase and was owner occupied when I purchased it. W Melissa is a property that was purchased through the MLS with the help of a real estate agent in the area. The property was listed at $45,000 and had been on the market for several months.
As I had already driven the area to scope it out, I did not need to return to do the same thing a second time. I had already bought two townhomes (smaller size) in the area and knew what to expect for rents, tenant base, and value.
My first offer was for $25,000, all cash, with a 14 day close. The seller originally turned down my offer and did not counter back. I checked in with the listing agent two times over the next month and the seller still did not want to sell.
Two months later, the listing agent emailed me back and asked if I was still interested. I told her I was and presented her with the appraisals I had done on the two townhomes I had already bought in the area. By using comps I myself had created, I was able to negotiate a purchase price of $33,000 for the townhome. This is less than the $35,000 I paid for two townhomes with one less bathroom and almost 20% less square feet.
I was able to grease the wheels by allowing the listing agent to represent me in the transaction, allowing her to keep the full commission.
Upon closing, the property was delivered in excellent condition.
My rehab/rent ready costs were $4,500. This included roof repairs, the entire interior repainted, new bedroom doors, dry rot repair, new baseboards, painted front door, carpets and appliances cleaned, new faucets and fixtures, HVAC repairs, trees and trash removed from backyard, GFCI outlets installed, windows services, window jams repaired, bathrooms refinished, and gutters replaced.
The kitchen was in fantastic shape and other than a leak in the dishwasher and kitchen sink, almost no work was needed. This saved me quite a bit of money.
Crunching The Numbers
This being at townhome and purchased for a relatively cheap price, many of my expenses are quite low.
A run down of the expenses of the property produced the following information:
Property Taxes= $55
Management Fees= $75
Total = $495
The property was advertised for $875 a month and rented for $825 a month.
At current rental rates ($825), this gives me an expected monthly cash flow of $330.
The property was purchased all cash, 14 day close, 10 day inspection period, with a $2000 earnest money deposit. These are very strong terms and contributed to the lower sale price being accepted by the reluctant seller.
I was able to secure a mortgage on the property for $28,500 from a local bank at an interest rate of 4.75%. When taking into account the $9000 I put down, with a monthly cash flow of $330, this works out to a cash on cash return of 44%. While I am happy with this return, it is important to note that cash flow is virtually my only benefit to this property as appreciation and ease of resale are not likely to be factors. Another factor to consider is if I’m able to raise rents to $875 a month, I can expect a cash on cash return of 50%, recapturing my investment in 2 years.
If the property becomes vacant, I plan on upgrading the bathrooms and repainting the kitchen cabinets. I hope the improved cosmetic appearance cuts down on vacancy and leads to higher rents.
What I Learned On This Deal
As this was my 4th purchase in the area and my learning curve was much sharper than it was on the first deal. I was able to replicate several of the systems, processes, vendors, and contacts I had acquired in the first three deals. Building systems is a crucial aspect of successful investing and leads to ease of mind and money saved.
- Persistence counts. By repeatedly checking in with the listing agent I was able to effectively communicate my interest and she remembered me when the seller finally told her he wanted it sold.
- By buying two townhomes in this area at a good price, I was able to make a good case that the seller should accept my lower offer. I was able to provide the listing agent with the comparable home sales to show her seller which helped convince him to accept my offer.
- Strong terms can sometimes beat out a stronger asking price.
- Replicating a system in much easier than developing a new one!
- The contractor I used became a little too comfortable with my business and did not give me the competitive prices I was becoming used to. A phone call with him revealed he was very busy and did not feel the need to lower his prices to keep my repeat business. I will be looking for a new contractor for future purchases.
- If you find a good thing, keep going to that well until the well runs dry. Much of the work in the beginning is labor intensive, stressful, frustrating, and slow. Make use of the work you did on the first deal to make the second that much easier!
- Don’t be annoying, but be persistent in communicating your interest. It worked for me here.
- If you like an area, keep buying there. Better to be a master in one space than a dunce in many.
- Crunch the numbers of your investment to make sure it makes financial sense to buy. Remember, when buying for cash flow, you are not buying a property-you are buying an income stream.
- If you’re lacking on information, or are having trouble finding deals that work, don’t keep looking for deals-look for someone who can find them (in my case, the wholesaler).
- If you can buy a property that makes sense at the current rent, good. If there is room to drive rents higher, even better. Always look for the value-add component to create wealth. Prepare for worst case scenario but plan for best case scenario.
- Cross reference your information over several mediums. For rent use:
- 1. Property Managers
- 2. www.rentometer.com
- 3. www.Craigslist.com.
- For price comps use:
- 1. Realtors in the area
- 2. Online sites like Zillow.
- 3. My KW app to see what nearby homes are selling for (email me to get a free copy if you don’t have one).
- If you can’t pay as much for a property, consider stronger terms. If you can’t offer strong terms, consider paying a little more. Nobody likes someone who asks for the world but doesn’t give back in return. Learn to bend and you won’t be broken.
- Get several bids for any construction work and offer multiple jobs to the crew if possible. You can get a better deal on the work if you can give them a higher volume of work.