Big Blue Tarp
The Basics of the Deal:
“Big Blue Tarp” was purchased for 38K and it offers 3 Bedrooms, 1 Baths, is about 1,000 square feet and sat on a standard city lot of 7,500 square feet.
We called this “Big Blue Tarp” because when we first drove the property it had you guessed it, a Big Blue Tarp on the roof. Given the property is in a nice area of town it was priced above our normal limit but as luck would have it, it started to rain and rain hard two weeks after we saw the property. I asked my agent to stop by once a week and sure enough the rain was causing a leak by the second week. We shared this information with the listing agent along with our offer for 35K As-Is (leak and all).
Even with a leak it took them 3 days to respond. My hope was they were addressing the problem and trying to figure out how big a problem it could be. After three days which felt like a month they countered at 40K and we settled on 38K. It should be noted that they did stop the leak but they did not repair the damage inside the house (which was ok by me given the price).
Expected and Initial Plan:
We expected the repairs to run about 8K on the house and we had an extra 2K set aside because we were not allowed to inspect the roof and thus we had no idea about the quality of the roof.
We expected this to be an easy rental and bring in $950.
Actuals:
The initial repairs came in very low at only 6K. The big wild card of roof issue turned into a $400 repair and we got a 2 year roof certification to boot (I had budgeted a minimum of $2,500). Turns out the flashing around the roof mount AC had gone bad and thus it had to be repaired. Outside of that the roof still had 5-7 years of life I am told. I have to admit this was a very nice surprise out of the gate.
The property did in fact rent quickly and we received multiple applications of which we selected a Section 8 family. Also we got the $950 that we had planned for.
Current Status of Property:
We still own this property and are very happy to consider this a long term keeper.
Unfortunately the first family that we moved in turned out to a bad choice. After 6 months of paying their share like clockwork (which was about $300) they started missing payments and giving us excuses. After about 90 days of being behind and catching up they officially went a month down. Their mother eventually made good on rent and they again paid a few months on time and then they just stopped paying.
They went a month down again and we started evictions. They eventually earned about 90 days of free rent (their portion only because section 8 was still paying most of the rent). After they were out we ended up with about 4k in repairs as they had left the place a mess.
No worries as the place rerented quickly once repaired and we are cash flowing again.
Lessons Learned:
Big Blue Tarps during the rainy season can be like found gold especially if they are on top of a listed REO property.
Tenant selection is #1 key to cash flow. As I have written elsewhere I like the Section 8 program and feel good that I am providing nice, secure and safe properties for low income families. In fact I am thankful they were section 8 as I was still collecting $650 a month.
Once a tenant breaks a long term trend/habit and starts to transition to a new trend or habit watch out, I have not seen the trend reverse itself.
Nice neighborhoods that are normally outside your price range can offer gems if you are willing to tackle potentially expensive issues like a bad roof.
Grade the Deal and Why:
I give this deal a solid “C”. The property is great and in a nice location but having to evict and turn a badly damage unit sucks. But that is why we buy them at such low prices because we have that nice margin of safety. It is rerented now and cash flowing like a champ.
Future Plans for Property:
We look forward to holding this property long term. We will look to extract 20-30k of equity as time goes by via an equity line with a bank or via private money from our network.
