The title company left my house a couple hours ago. I officially have two mortgages under my name (including our primary). In early June we closed on our first rental property, a small 3 bedroom, 1.5 bath bungalow on the East side of Detroit.
It’s funny reading that post now. Our tenant never signed up for online ACH payments, and she’s been late with rent for both months she’s owed since closing. Her husband isn’t on the lease, but he’s living there… sometimes, at least. I received a text from him last week stating he “no longer lives at the house” and “won’t be responsible for anything going forward”.
Fun. He was the responsive one of the two.
The next day he said he’d “still be responsible for the bills”. Who knows what next week will bring. I digress.
Our rough plan for these homes has been to pay cash for properties that need little to no rehab, get them for under market rates, and then refinance most or all of the money back out. This was the first full cycle of that plan, and it went pretty decent.
By the numbers
I like numbers. They don’t lie, and it’s easy to tell if you’re making the right moves. A lot of my friends and newer investors I meet tend to appreciate the numbers too, largely because they don’t have any of their own yet and want to get a baseline. Consider this my contribution to newer folks looking at investing in Detroit.
Here’s what the purchase looked like:
- Initial purchase price: $40,000
- Closing costs: $1,032
- Closing credits (prorated rent & security deposit): $1,547
- Rehab: $1,809
- Initial cash invested: $41,295
The home appraised for $45,000. We’re able to take out 75% of that value immediately, up to our total purchase price plus closing costs. Here are the quick numbers on the mortgage:
- Loan amount: $33,750
- Closing costs: $1,597
- Taxes/Insurance/Prepaid Interest: $1,762
- Total cash received at closing: $30,391
So when all is said and done we’re left with about $11,000 cash invested in the house. It’s not terrible, but it’s not a huge win either. That’s not including the $1,700 we’ve received in rent over the last two months. So at this point we have about $9,300 invested.
Here’s a quick glance at our monthly costs going forward:
- Mortgage: $180.15
- Taxes & Insurance: $151.45
If we assume no capex, repairs, or vacancy (poor assumptions, yes), we’d get our entire cash investment out in just shy of 20 months ($9,300/[rent – monthly costs] or ($9,300/$468.40). This assumes $800/mo in rent. In reality, we’ve been receiving $850/mo because our tenants have been late and pay a $50 fee for the privilege.
Obviously, we’re going to have expenses come up that fall outside of those fixed monthly costs. I’m tracking everything in a spreadsheet to keep an eye on it. It helps me keep track of expenses, but I also enjoy the visualization of the home’s performance:
How we found the deal
Most newer investors are led to believe that deals can’t be found on the MLS. That’s exactly where I found this one. I spent a lot of time driving Detroit, researching online, and setting up alerts for areas I wanted to buy. When this home hit the MLS for $45,000 it went pending within six days. I was disappointed I didn’t move fast enough, but not for long.
The very next day it was “back on market”. I immediately locked it up and walked through it a few days later. The tenant informed me that the basement drain backed up every time she did laundry. This was likely the cause of the home falling out of contract.
Since I couldn’t smell sewage, likely ruling out a big sewer issue (perhaps this was naive), I decided to move forward and hoped I’d only need to have the drain snaked. Regardless, we negotiated an extra $1,000 off the purchase price (we were initially under contract for $41,000).
Turns out the drain wasn’t a simple snake fix. The pipe in the basement floor was crushed, and we had to replace it. This was the bulk of our above listed rehab costs. Luckily the exterior pipe to the main sewer line didn’t need replacing. That would have been more expensive.
We also fixed a leak in the bathroom sink and replaced the vanity since the leak hadn’t been addressed for months and the vanity was essentially ruined. There was also a leak in the kitchen sink that was an easy fix. Besides sending 7-day “Pay or Quit” notices, the house has been hands-off ever since.
What I’d do differently
The transaction went relatively smooth, especially for our first purchase. But my biggest mistake, in hindsight, was giving the appraiser what I believe to be a reasonable value for the home.
When I received a phone call to set up the appraisal they asked me, “what do you think the house will appraise for?” I was caught off guard and told them I thought it was worth $45,000. That’s exactly what it ended up appraising at.
Next time I’ll shoot higher. While there’s no Zillow estimate for the house, Redfin lists the value at an estimated $53,500. It’s been creeping higher since we closed on it.
A $50,000 appraisal would have allowed us to cash out $37,500 rather than $33,750. After closing costs that’d have put an extra $3,750 in our pockets and leaving us with about $5,250 total cash invested to date. Using the same calculation from earlier, that would bring our cash invested payback period from 20 months to almost 11 months. So while the numbers are small, the impact is material.
If the home managed to appraise for $55,000 we’d have no cash left in the house to date. That’s the goal!
Moving forward
We already have three other homes we’ve purchased, including our first duplex. We’ll be getting the loan process started on these shortly, so I’ll have plenty more to write about soon.
