I recently wrote a post about purchasing my first investment property. After that first purchase I was hooked on real estate investing. Seeing those rent checks roll in every month had me eager for more. I couldn’t wait to purchase my next my rental property so I could collect more checks. As a result, a month after closing on my first property, I already had my second property under contract.

Finding the Deal

My second real estate deal was found using the “Driving for Dollars” technique. Incidentally, I was on my way to the local home improvement store to pick up some materials for investment property number one when I saw a “For Sale by Owner” sign on the side of the road. Curious to see what this home looked like, I drove around the neighborhood and found it. I called the number on the sign and spoke with a nice lady who gave me information about the home. She told me she was helping a friend sell it. Afterwards, I found out the owner was an older gentleman who had already purchased a new home outside of the city. According to her, he was looking to sell the home because he had no use for it and the upkeep (lawn care, utilities and taxes) were costing him money that no longer wanted to spend on the home.

Seller’s Asking Price

While speaking to the nice lady, one of the first questions I asked was, “are there any problems with the home“. She assured me there wasn’t and told me that the owner had lived in the home for nearly 30 years and had only moved out a few months ago. When I inquired about the price, she informed me the asking price was $55,000. I initially told her the price was a lot more than I was willing to spend for a home in that area. Even though the asking price was close to the going rate for homes in the area, I was looking for a deal so that price was too high for me. Furthermore, I knew properties in the area typically only rent for $600-$800 per month, so paying the full asking price would not net a good return on my investment. My strategy is to buy a property that will cash flow positively and I was sure this one wouldn’t at the $55,000 price tag.

My Counter Offer

I once listened to a podcast on Biggerpockets where the investor’s strategy for bidding on homes was, if he’s not a little embarrassed by the offer, then the offer is not low enough. With that in mind, I reached out to the nice lady again a few minutes later and asked if the seller would be willing to take $35,000 for the home. She promptly told me that my price was much too low for the home. At this point, I told her I understood and thanked her for her time. I ended the conversation by saying “please feel free to contact me if anything changes“.

I didn’t really expect to hear from the seller after that. Ultimately, it felt like we were so far apart on price (a $20,000 difference) that we couldn’t possibly work out a deal. That’s why I was really taken by surprise when I received a call from the lady a few days later. The first thing she said was “if he decides to accept your offer of $35,000, you do realize you would be responsible for all closing cost“. I was super excited when I heard her say that and promptly agreed to cover all closing costs associated with the purchase.

Property Details

My next step was to schedule a meeting with the owner to get a sales contract signed and view the inside of the home. At this point I had made an offer and agreed in principle to purchase a home that I haven’t even seen yet. When we met at the property to sign the contract, I had an opportunity to walk through the house with the seller to check out the condition. The home, for the most part, was in good condition. The owner was an older gentleman and lived in the home a long time, so there were some things that looked really dated and need to be updated or replaced (for example floral wall paper in bathrooms & appliances that looked to be from the 70‘s). Since this was only my second investment property and I’m by no means an expert on property conditions, I informed the owner and put in the contract that the purchase was contingent on a professional property inspection. I then contacted a property inspector and scheduled the inspection.

The inspection went well with no major issues. Of course the inspector found numerous things that I didn’t notice or overlooked (that’s why you hire them). The issues were minor things such leaky faucets and missing GFI plugs. To my surprise, the owner agreed to fix several of the issues noted on the inspection report. As a result, we were ready to move forward with the purchase of this home.

The Money

To purchase my first investment property, I took equity out of my personal home via a cash-out refinance. After purchasing the first investment property I still had enough money to purchase the second property with cash. Looking back, it would have been more advantageous for me to put down 20% and finance the remaining balance. That would have allowed me to use the additional money to purchase even more properties. However, it can often be a challenge to find lenders that are willing to finance a property for such a low purchase price. Some of the lenders I had spoken with informed me that they wouldn’t even consider doing a loan for less than $50,000. I’ve since found some lenders that are willing to lend on these less expensive properties but my mindset at the time was just move forward and close on the property before the seller changes his mind. So, I purchased it with cash.

Renovations

We closed on the property a couple of weeks later without any issues. Next, I hired a contractor do some painting and other repairs to get the home ready to be rented. That’s when we learned the owner had still left a significant amount of stuff in the home. It wasn’t that big of a deal. He agreed to move it all out the following week and it didn’t stop my contractor from doing his work. Our updates included removing wallpaper, painting the interior, replacing the dated counter tops and appliances and other miscellaneous things. The owner had closed off the garage and turned it into a storage room. We ended up putting in some insulation, Sheetrock, vinyl flooring, paint and a ceiling fan in this storage area. We were able to convert the space into a functional office or living room. The tenants ultimately decided to use the space as the husband’s “man cave”.

Renting the Property

Renting this property turned out to be quick and easy. My property manager knew of a family in search of a home and showed the property while it was being renovated. The family liked the home and its location. They agreed to rent if before the renovations were complete. Once the contractors finished working on this property, the tenants moved in the following week.

I set the rent at $700 a month on this property, which is the middle of the road for rental rates in the area. I purchased a new range to replace the dated appliance in the unit and was planning to purchase a refrigerator too once the rehab was complete. When the tenants viewed the property, they informed the property the manger that they already had their own refrigerator and asked if the rent could be lowered because they were bringing their own fridge. We agreed to reduce the amount paid on a security deposit instead.

The Numbers

How do you know if you are getting a good return on your real estate investment?

Calculating the ROI on your investment property is critical to knowing how your investment is performing, or when comparing one investment to another.

Cash Flow = Monthly Rent – Monthly Expenses = $700 – $300 = $400
per month

Cash on Cash Return = Annual Cash Flow / Total Cash Invested = (12 * $400) / $42,708 = 11.24% ROI

Summary

As of today, the family has been living in the property for several months and they have been wonderful tenants. We receive the rental payment on time each month and we have not had any major issues so far (we had a minor HVAC repair). It took a little over one month from the time I closed on the property until the time I received my rent check.

Overall the entire process was a great learning experience for me. Although I’m still early in my real estate investing adventures, I strongly believe that buying rental properties is one of the best financial moves I’ve made. It offers residual income, price appreciation, and the safety of owning a hard asset. I am looking forward to finding my next deal but I am looking carefully at the current market conditions because profit is made when you buy