Stripped
The Basics of the Deal:
“Stripped” was purchased for 43.5K and it was a 3/2 with a detached garage, and as the titled indicates it had been stripped. To be specific, I am referring to some copper pipes, most of the electrical wiring and all of the fixtures.
If you have read some of our other acquisition reports, you might be asking why we paid so much for this house given its condition. The wrinkle in this deal is that the selling bank actually agreed to finance the deal with 25% down at 6.5% interest fixed for 30 years. This means that we got a lower interest rate than normal, and we only had to come up with half our usual down payment, which is 50%. To date, this is the only deal in which the selling bank agreed to finance the deal (It was a small So-Cal Bank).
We would love to do more deals like this, where the selling bank financed the deal. If you are an agent or a bird dog that has such an opportunity, we should talk ASAP.
Expected and Initial Plan:
We estimated about 15K in repairs and about 30 - 45 days to perform all the work. We originally planned to receive $975-$950 a month.
Actuals:
We ended up spending about 20K on repairs. Most of the overage was caused by two factors we couldn’t plan for, due to the fact that the house was tough to inspect given its lack of electrical wiring and all the boarded windows.
The first factor required more work in the detached garage, which was partially converted, and we needed it to be a functioning two car garage. The second and main overage was the conversion of the attic into a large 4th bedroom. Once we got the house open, we realized that for only a couple of thousand dollars we could add some real value.
This extra-large bedroom actually turned the house into a 4/2 and allowed us to get $1,125 a month. Converting the attic was a no-brainer decision given the increase in rent.
Current Status of Property:
This property is a true keeper, as it is in a great area. The original tenant is still occupying the house and we receive rent payments like clockwork. Section 8 currently pays 100% of the rent, and it shows up on the 1st of the month without issue. I suspect that the large family will continue living in the house as long as we choose to own it.
Lessons Learned:
If you can find a bank willing to finance a fixer rental, it is ok to pay a little more since it will improve your leverage.
Turning an attic into a nice large bedroom adds value in both the short term with increased rent, and the long term when we choose to sell it.
Be very careful with garage conversions. In most cases, I will choose to ensure that the garage is functioning (at least for storage).
Grade the Deal and Why:
We give this house an A+. We got our best leverage, our best rate, and our longest term on a high quality property in a great area. We admit that we went over our original budget, but that was mainly caused by the addition of a 4th bedroom, which earned us an extra $150 a month every month.
Future Plans for Property:
We will hold this property long term. We will certainly look to extract some equity via a bank equity line or via private money as time goes by so we can continue to recycle our capital.
