Flop-Flip
The Basics of the Deal:
“Flop - Flip” started out just like all of our other investments and was supposed to be a long-term rental. We purchased the property for 45K and it offered a 3/1 configuration, plus a 1/1 "mother in law" unit in the rear.
We called this “Flop - Flip” because we had a plan for the property as a rental until something unexcpected happened, and we ended up flipping the home.
Expected and Initial Plan:
We expected the front house to rent for $950 and the back house to rent for $600. We expected our make-ready costs to be 10K for both units.
Actuals:
The front house actually required less work and was obviously the unit that would bring in the most initial rent, so our plan called for us to make it rent-ready first.
We also decided to put up a four foot fence to divide the rear yard so each unit could have its own defined area. Both units already. The back unit could pull into a carport just off the ally.
We ended up renting the front unit for $995 a month because we had to include utilities, as both units were on the same meter. "No big deal," we thought, since we could just get $650 for the back and we were good to go.
With the front unit rented (again, including utilities), we turned our attention from the little back house to another property we purchased that needed a bunch of work. That was when we got our first surprise. Our first utility bill was over $500!
All we could imagine was that the tenant had the AC on full blast with the doors wide open. We had figured that with both units rented we might approach $200, but this first bill was $500+.
We weren’t sure if this was a fluke but we knew we were not going to fill the back unit with a tenant if this was going to happen, so we cleaned up the back unit and waited for the next bill, and sure enough, it was $650+. That was it, we were done with this house and we were ready to sell.
Current Status of Property:
With that second exceedingly high utility bill, we offered the tenant $remotely clean.
They left without issue and had always paid rent on time for the three months they were there. We did some quick touch-up work and listed the property for sale, and we had the property in contract at $84K inside of two weeks.
We closed without issue and we moved our equity into several other single-family homes.
Lessons Learned:
Never rent a single family home with a separate mother-in-law unit on a single meter to two different families it is just a bad idea. Even if you don’t include utilities, you will have difficulty splitting the bills. Instead simply rent the property to one large family with multiple generations. It's simple and much easier to manage.
We were ready to re-rent the property under the guise of finding one large family, but we wanted to see if the market would return all of our capital plus profit, so we listed it with a goal of getting a contract inside of 30 days or we would start the rental process again.
If the market is willing to pay you almost double what you paid for it in under six months, take the profit and reuse the capital on several new investments.
Don’t spend real estate profits on anything but more real estate while you are building you portfolio.
Grade the Deal and Why:
We give this property a C-. We are buy-and-hold investors, and we clearly didn’t hold this property. We didn’t give it a lower grade because the proceeds actually allowed us to buy more properties.
Future Plans for Property:
The property was purchased by a nice family, and I hope it stays in their possession for a long time.
