Ever wonder what it would be like
To buy a Rental Property ?
This is the first article in a series that will chronicle my adventures in Real Estate investment property in detail. Including the purchase, the renovation , the mistakes along with the good, and hopefully the rental of the units and the overall outcome of my experience.
Well wonder no more ! I have done just that and you can follow along my journey with no financial risk to you what so ever. This will be a series of articles I plan to write to document my journey through the purchase, renovation and rental of a one hundred year old property that has been converted to a 4 unit apartment building.
First the history behind my purchase. I was visiting my oldest daughter that lives in south Georgia. The visit was one of several trips I had made last year as I was planning on moving there from Virginia. My wife had died from cancer a couple of years back and it was just myself and my two youngest children so I thought it would be nice to buy a home in Georgia that we could move to in order to try and bring back our family together. One thing I have realized is the importance of family.
We had looked at countless homes in the South Georgia area and even in the northern Florida area and to a lesser extent in a eastern area of Alabama. Unfortunately nothing seemed to meet our needs, at least not at convenient times. I had found several properties on Zillow that were very promising and met the needs of what we were looking for in a home, but it seemed like every home we liked at the time someone beat us to it. I decided that it was time to try a new approach. I saw a 2 acre lot in a great neighborhood. It had a lake, a couple of ponds and only had a total of 36 lots in the community with No Homeowners Association !( I am strongly against HOAs and have vowed to never buy a home that is in one again) So, I bought the lot. My intentions were to build a home on the lot for my youngest children and I to live. I found the home plans we liked, met with a builder and started exploring loans for the construction. In January 2017 my children had a long weekend off from school so I went to talk to the builder about the project. It was during this trip that I stumbled across this old property that was listed for sale for $120,000. I scheduled an appointment with a real estate agent to look at it and learned that it was actually a 4 unit apartment located in the most desirable part of town. I also learned that it had been mostly vacant since 2007, having been purchased in 2009 by an investor who I later learned, lost the house when he went to prison (sorry, no details on why he went to prison). I looked at every square inch of the structure and noticed that there was indeed quite a bit of work that was needed to be done to make these apartments livable but what I was really looking for was to make sure that the “bones” of the home were in good shape. I could see a lot of potential for this Bank owned property. At this point I was torn – Build the home of my dreams or buy an investment property. I had a lot of serious thinking to do.
That night my family and I discussed the property and while all agreed that it was potentially a good investment not everyone agreed that I should purchase it.
The next day I returned home to Virginia( of course my mind was on this the whole 9 hour drive back) and over the next few days I pondered the deal and started doing research on how much it would take to renovate the property and bring it up to modern standards. After my research I estimated it would cost about $90,000 to renovate the property to but adjusted that total to $110,000 just for a built in contingency. So with a purchase price of $120,000 and added costs of $110,000 my grand total would be $230,000. Not bad for a $5,000 square foot apartment building. That would be a cost of about $58,000 per unit. Now I had to determine if I could make money on the apartments when finished. My research showed the going rate in this rural area of Georgia was about $600 for a two bedroom apartment. This building had 1 three bedroom / 2 bath apartment (1,500 square feet) and 3 Two Bedroom 1 bath apartments (1100 square feet each). Since this was considered the upscale part of town and I believed I could get about $3,000 per month for the units. On a side note the single family home directly across the street sold for $370,000 and it was only three thousand square feet. So after reviewing these numbers my mind was made up, This was a deal I could not pass by. I decided to make the bank an offer.
I knew just how long the bank had been sitting on this property, having to pay taxes of over $3,000 a year and keeping the lawn cut, not to mention carrying this on their books so I made a low ball offer in February 2017 of $55,000 for the property. The bank rejected my offer and to make a long story short we finally came to a sales price of $85,000 for the property. That was $35,000 below their asking price! I was elated. My two youngest children, not so much. If everything goes as planned (I know it seldom does) this will bring my total investment price to $195,000. Not bad for an expected return of $3,000 per month. This would mean the apartments could pay for itself in as little as six years.
So now I had made an offer, it was accepted, so I wanted to obtain financing for the project. I had just sold my main home so I had the money to pay cash but remember what this site is all about – making money and one of my main philosophies is to Never give up your cash if you don’t have to. In this case I needed about $195,000 ( $85,000 for the apartments and $110,000 for the renovation). By leaving this money invested I was confident I could earn a minimum of 8% on the money (Approximately $16,000) while loans were going for around 4% or less. Unfortunately I found out that regular banks with regular mortgages would not lend money for homes that were not “move in ready” so I had to go to a local bank which gave me a five year loan with a balloon payment so I decided to only go with financing the $85,000 and I would finance the renovation costs out of pocket.My new plan was to take care of major items like Electrical and Plumbing up front and the finish each apartment one at a time. In this manner I can spend a minimum amount of money on each renovation and as I get the first apartment finished I can rent it out to help offset the cost of renovation on each following apartment. At least that is my plan, we will see if I can make it work in reality.
Now I had to find Insurance for the apartments. The bank required it but of course I would be very ignorant to not get insurance on the property. As a side note : I also purchased a Title Insurance Policy at closing. I have learned that for very little cost , in this case $275, you can protect yourself. One example I remember specifically was an instance when I lived in a town-home. A builder built units behind ours on another piece of property and started selling the units. It turned out the builder somehow built the town-homes on someone Else’s property and there was a big fight for the ownership. I don’t know whatever happened as I moved away but I did learn that you need to protect yourself from these rare types of circumstances. You just never know of the unknown lurking in the shadows of a property. Getting back to the insurance; the first quote I got for rental insurance was for $5,000 per year ! They were telling me that the building I was paying $85,000 for would cost them $888,000 to replace! This would make it one of the most expensive properties in town. Just a little more than I expected. Actually the quote was more than double what I was expecting. I sought other quotes but the other companies refused to give me a quote on a rental property because it was currently unoccupied. I ended up having to get a “Builder’s Insurance” policy because the building was vacant and would be under renovation. Even on that, one company quoted me $2,000 and another $850 for six months. No one would give me a quote for a permanent rental policy until the home was finished except the original company. So of course I took the $850 policy. It covered the property for $200,000 which was sufficient to cover the money I would have invested into it.
I originally had hoped for all the units to be renovated within six months but because of my new renovation plan of paying out of pocket and renovating one apartment at a time instead of all four simultaneously , I now expect it to take about 8 months to complete. Once the renovation is completed and I have people living in the apartments I can return to the bank and apply for a more conventional loan with more favorable terms. I plan to start advertising the apartments slightly before they are finished in order to rent them as quickly as possible. I am currently leaning towards a 15 year mortgage but I will be in a better position to make that determination at the time I have all the facts. After the original fiasco with obtaining a mortgage and an Insurance policy I will not just assume it will be an easy process this time.
I also intend to source as much as I can from the local community that is contractors and vendors. I want to let the community know I support them and appreciate their support of me. This is a rural small town and I want to make sure we are are all working together to make our community a better place. I believe that in turn the community will support me also.
One thing is certain, this is going to be a challenging project, especially when you consider I currently live out of state. At the same time it excites me with the possibilities of taking a property that so many others had failed on to turning it into a updated and modern income producing property. That is rewarding to me into itself but the income will be icing on the cake. Who knows, if this goes well I just might take on additional projects. And of course I still plan to have a home built in a couple of years.
I hope you have enjoyed reading about my Real Estate Adventure and will join me as I post updates along the way. It should be interesting to watch unfold. I have owned Rental Properties in the past but they were always single family and required little or no renovations. So here I am in the beginning stages of a huge renovation project with my two youngest children believing I have gone insane while my two oldest children seem to be excited about the project.
Will the project come in on or under budget? Will I meet my timeline? Will I be able to get at least $3,000 per month in rental income? What unknown challenges will I face? Will I want to continue and make this a full time business in the future? We will answer all these questions and more so follow along as I document my largest renovation and rental project ever!
Comments or thoughts? Please share them with us.
PS: I would also like to say I welcome design ideas also. One discussion I am already having is Kitchen counter tops – Should I go with Granite or should I go with a lower cost item like a Laminate counter top , will the granite bring in more rent ? The more suggestions the better and the more discussion the merrier!