January 22, 2010

My Second Rental - Quick Action Made the Deal

I bought my second rental about 3 and a half years ago.  I again bought the property 50% / 50% with my father.  This time my father was the one that found the property.  In fact he had a Realtor he knew that bought the property to his attention. 

The property was a 5 plex on the market for roughly 80% of market value.   The owners had bought it less than a year before that and they had paid about $10k less than they were selling it for though I didn't know their purchase price at the time.  When the previous owners bought it they started to convert 3 of the units into a single family home for themselves.  But they didn't really seem to know what they were doing and accomplished little more than tearing down a couple walls.  They rented one unit to a friend of theirs.   So the property had only one tenant and a some walls half torn down.    Overall the property was in decent shape but it needed some repairs and renovation.   Nothing really major but some of work that needed to be done.

We acted quickly and offered them $5,000 less for the property and they accepted it.   Within just a day or two after we made our offer 2-3 other offers came in at full price or $5,000 higher.  We were lucky to have made the offer as fast as we did or we wouldn't have gotten the property.

My dad did a bit of work to fix it up and restore the walls that they previous owners had torn down.  Other than returning the 3-plex to 3 separate units by restoring a couple walls the buildings did not require any major work.  Most of the required work was cosmetic, surface level changes like paint and new  fixtures and such.

The property is now worth 20-60% more than we paid for it according to Zillow.  As a 5 plex we could easily sell it for a 30% profit over our purchase price.  That gives an annual appreciation rate of about 7.5-8%.   With rents netting a return on capital in the 5% to 6.9% range. 

This is another success story in rental purchase but its possible we could have had a failure here as well.   If we'd bought the property with a hefty mortgage and then had difficulty renting the apartments then we could have had negative cash flow.   If we had bought the property with little or no experience as landlords then we might have selected tenants poorly and ended up with deadbeats, lots of property damage and no rent.    If we had some bad luck the property might have had major repair requirements that could have cost us substantial amounts of money.   Theres always a little good or bad luck involved in a property.

In our case we profited from this deal because we were able to act quickly and make an offer that was accepted.   If we had waited just a day or two more than competing offers would have won the property.   I'm not saying you should rush into buying property or make hasty decisions.   But if you have your financing and other ducks in a row then quick action can benefit you.

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