Category: Detroit rental property performance

Dougie Fresh Duplex

Travis

I’ve been really slacking when it comes to writing about our initial purchases, refinances, and breaking down all the numbers on that. I’ve only done them for three properties:

We now own nine properties, representing ten units (8 SFH’s and one duplex). Of those nine properties, six are currently rehab’d and tenanted. So I have at least three more of these reports to knock out (this being one).

The “Dougie Fresh Duplex” was the fourth property we purchased, and represented a couple firsts for us. It was our first non-single family home and first off-market deal. It’s nickname is derived from the previous owner who had rehab’d the lower unit and was living in it himself. He told me that if I ever needed a plumber, his guy was fantastic, gave me his number, and said, “Tell him ‘Dougie Fresh sent you”.

Yeah, he considers himself pretty fly (for a white guy… literally).

Anyway…

Off-market deals (aka “wholesale”) really aren’t my jam. My experience is, more often than not, they’re terrible “deals” to begin with and they’re mostly pushed by fly-by-night wholesalers trying to rip you off for a quick buck. I’ve now found it’s far better, and easier, to go track down the seller and negotiate directly yourself because few people will actually do the uncomfortable work of making cold calls.

But this deal wasn’t like that. In fact, it came across a real estate investing group I’m in on Facebook through an agent I personally know that works with another very reputable agent. In short, I trusted these guys.

I messaged him at 10:30pm, went to see it literally the next day, walked it with him, and decided we’d buy it standing outside on the street afterward. This was back in late July last year, and we ended up closing on it on August 9th, 2019.

By the numbers

So now that we have some background, let’s get into the numbers. The duplex was purchased for $64,000 with $7,000 of that being an assignment fee. So the MLS will show that it was sold for $57,000. Did I love the fact I was paying a $7k assignment fee? Absolutely not, but the deal was pretty solid so it made sense. Here’s how the numbers broke out:

  • Initial purchase price: $57,000
  • Assignment fee: $7,000
  • DWSD deposit: $150
  • Closing costs: $198 (this seems super low, but, and without checking, it seems the seller may have been responsible for most closing costs. Honestly, this is the first time I’m really noticing it.)
  • Property taxes: $1,312.37
  • Prorated rent and security deposits: $2,612.91
  • Total cash invested: $63,047.46

OK, so we paid about $31,500/unit and there was very little work to do. At the closing table, the seller gave me his notice to vacate for the end of September. He’d be paying $850/mo until then (one more month). The upstairs tenant was only paying $650, which honestly was pretty strong for the area. Many people are still paying $400-$500 because these buildings have been owned for YEARS by the same people and were bought for next to nothing.

But the first thing we decided to do was delayed financing to pull out as much money as possible right away. I had high hopes that the home would appraise a fair bit more than we purchased it for given the condition, but I was a bit disappointed.

The appraisal came in at $68,000. Higher than we paid, but still… not what I was hoping for. The other surprise was the 70% LTV. I was expecting we’d be able to pull out 75% but didn’t know that 70% is standard on multi-family units.

Oh well.

So after closing costs we received $43,560.66 leaving us with still a little over $18,000 invested in the building.

Turn over time

We completed our cash out refi on September 26th. And that’s the benefit to delayed financing. Less than two months from the day we closed we’d already ripped out a good chunk of change.

Our lower-unit tenant (previous owner) had already moved out the day before and left a TON of his crap behind. Long story short, I threw up a “Free for Haul” on Facebook marketplace, people swarmed the house one morning (literally showing up with U-Hauls), and most of it was gone. I kept the security deposit for my troubles.

He (previous owner) was livid.

We spent $300 re-glazing the tub, and $100 cleaning the apartment for the turnover. Unfortunately, being in October it was a bit tougher finding a tenant. We didn’t end up filling the unit until late November and had to decrease our asking rent from $850/mo to $800.

But, we signed an 18-month lease and the tenant has been fantastic. We gave the choice of a 6 or 18-month lease to get the unit on the Spring/Summer cycle for the next time it turns over.

While I was cleaning out ol’ Dougie Fresh’s stuff, my upstairs tenant notified me she’d be moving out to take care of her parents. That was a bummer because I absolutely loved here. It also meant more turn work.

So while we were looking for a tenant downstairs, we were pulling carpet, refinishing hardwood, painting, and re-glazing the tub upstairs. We ended up spending $5,204.91 cleaning up the upper unit which included purchasing appliances from the previous tenant.

We finished this all up on December 15th and really debated whether or not to list the unit for rent due to the upcoming holidays. Ultimately, we figured we had little to lose, and I’m glad we did.

We found a tenant that was moving from North Carolina to work at Quicken Loans. We did a virtual walk through, they loved it, and everything ended up checking out. We signed a six month lease so if they didn’t end up liking the area, they could leave, but also because that would get the unit on a spring/summer rent cycle.

The lease was at $850/mo so we were now getting $1,650/mo for the building.

The upstairs tenant’s lease started January 1st, and at that point we had just shy of $21,000 invested in the deal.

Our upstairs tenant ended up leaving after their six-month lease and moving to the suburbs. I wasn’t surprised by this. The good news? They completely moved out two-weeks prior to the end of their lease and left the place spotless. We had zero issue re-renting the unit BEFORE the initial tenant’s lease was up. So we double-dipped a bit there. Again, the unit was rented at $850/mo with zero issue in terms of demand.

Cash flow numbers

As of this writing, we now just have $11,166.30 cash left in the building, so we’ve pulled about $10,000 out via cash flow since January this year. Not bad! Dougie Fresh Duplex is an absolute cash cow.

Here are our monthly numbers:

  • Gross rents: $1,650/mo
  • Principle and interest: $251.25/mo
  • Insurance: $67.07/mo
  • Property taxes: $157.02/mo
  • Reserves: $495/mo at 30% gross rents
  • Total monthly cash flow: $679.66/mo

In reality though, I don’t put money aside for reserves. I need to write about this in another post, but my logic can be boiled down to two things. First, I now have $5,500/mo in gross rents coming through the door each month. That will tick up to $7,000 in about two months. There are very few things that will come up that $7,000 can’t fix. Second, I usually have SOME cash on hand or accessible, so I just don’t worry about stashing part of the rent away each month for each property.

We’ve had a few small repairs pop up at the property, but nothing more than a couple hundred dollars. So it’s been pretty hands off thus far. I estimate that by this time next year we’ll have all of our cash out.

Photos (because who doesn’t love those?!)

Again, we did very little to this building, so I don’t have a lot of jaw-dropping before and afters to show. But to give you an idea of the units and everything I’ve detailed above, here are some photos:

  • The Dougie Fresh Duplex on a gorgeous day.
  • Living room of lower unit with entry off to the right.
  • Dining room with fireplace in the living room.
  • We did nothing to the kitchen.
  • First bedroom. Again, nothing was done in this unit except re-glazing the tub.
  • Second bedroom.
  • Third bedroom.
  • Retro bathroom with original tile in fantastic shape.
  • The basement was finished.
  • Among MANY things, the previous owner abandoned his washer and dryer. We kept them 🙂
  • Upstairs unit living room initial.
  • Upstairs living room after.
  • Upstairs dining area initial.
  • Dining room (again) before.
  • Upstairs dining room after.
  • We debated updating the kitchen but ultimately decided to wait.
  • It’s functional and rents wouldn’t justify the updates yet.
  • Hallway to the bedrooms and bathroom.
  • Again, the upstairs bathroom tile is in fantastic shape (and not so retro here).
  • Upstairs bedroom before.
  • First bedroom after.
  • Second bedroom. The goal was to lighten and brighten up the entire space.
  • And the final upstairs bedroom.

Both units have the exact same layout, with three beds, one bath in each. Our goal with the top unit was to make it light and bright, and I think we achieved that.

In the future we’ll update the windows and the kitchen. The lower unit has all new vinyl windows courtesy the previous owner, while upstairs are original yet. The kitchen is in great shape and functional, but dated. It’s had zero impact on demand though.

Also note, although the upper unit’s basement isn’t pictured (it’s not finished, either), the basement is partitioned so that each unit has their own side and their own washer and dryer. Tenants tend to LOVE that.

Final thoughts

The Dougie Fresh Duplex has been a great income producer for us. Here’s a graph of our cash invested and debt on the property since we’ve owned it:

Knowing what I know now, and had I known our upstairs tenant was also planning to vacate, I’d have waited to refinance after updating the top unit. Overall, this seems to be a theme in my “lessons learned” for properties we’ve purchased. I always seem to regret doing delayed financing.

There’s not much else I wish we’d done differently. Our mortgage is currently at a 5.25% interest rate, so we could definitely improve that on a refi, but I’m not sure it’d be entirely worth it yet given closing costs. Comps are pushing higher though, so if we’re confident it’d appraise for $100k+ next year we may end up doing it.

A year (and change) since Somerset

Travis

It’s hard to imagine it was more than a year ago when I first went to walk our house on Somerset. A lot has happened since then, including our first eviction, and having our second ever (still to this day… knock on wood!) theft.

So how has it performed since then?

Overall, it’s turned out quite well.

Once we evicted the non-paying tenants we’d inherited, we did a cosmetic rehab. We spent a total of $14,775.69 doing the follow:

  • Painting the entire house
  • Tiling the kitchen floor
  • Glazing the kitchen counter top
  • Glazing the bathroom tile
  • Updating bathroom floor tile
  • Refinishing hardwood floors throughout
  • Finishing work like light fixtures, new blinds, vent covers, and other odds and ends

Here are some before and afters:

We finally got the house rented by April 1st. It would have been sooner, but we were out of town from mid-February through mid-March. I guess that’s the drawback of managing your own properties.

The house is rented for $950 now which is a solid move up from the $800 it was previously rented for.

Checking on the financials

Unfortunately, we still have a little over $20,000 cash locked up in this one. We initially did delayed financing and were left with just $10,000 locked up. But with the cosmetic updates coming after that, we weren’t able (or at least it didn’t make sense) to refinance again later.

Here’s a look at the change in cash invested and debt:

Accounting for capex, repairs, vacancy, and PITI, it would take us about 38 months to get our money out of the home. That’s a long time. But that’s not how it’s going to happen.

Sweet sweet comps

The neighborhood this home is in has started to really heat up in the last few months. I expected this, I just didn’t expect it so soon. It was clear prices and rents were increasing, but last month it became indisputable when the home two doors down was sold to an owner occupant for $112k. The rehab wasn’t even that great.

Half a block up, on our same street, another home sold for $115k. Same story in terms of the rehab. So at this point we’re confident it’d be worth it to refinance once again. This time we’re hoping we hit at least a $100k appraisal. If so, we’d walk with a check of about $40,000 and have all of our money out and then some. We’re working through the refi process now, and I’ll update once it gets over the line.

Lessons in looking back

I’m obviously thrilled we purchased this home, and I’ve fallen in love with the area since. But if I had to do things differently, I would NOT have done delayed financing.

Knowing what I know now, I would have banked on our inherited tenants not lasting. I knew they were notoriously late with the previous owner, and I was hopeful we could whip them into shape. While we managed to get two months out of them, I should have realized it wasn’t going to last and planned for it.

So I would have waited for the tenants to turn over, done the cosmetic updates, and then refinanced. Yes, it would have taken at least six months, but the appraisal probably would have come in around $65k at that time which would still leave us with about $7,000 in the deal, but we’d get all of that out via cash flow in just over a year.

This is why I prefer to buy them empty. That’s not necessarily a hard rule, but I do prefer it. That said, if something is in great shape, in an area I love, and has tenants… I’ll do that deal.

Somerset fit that mold but most don’t.

Wrecked on Rutherford

Travis

I’ve previously written about two of our Detroit rental properties, breaking down the acquisition process, numbers, and general experience. Both of those turned out pretty decent. This one, however, was pretty much a disaster.

Our house on Rutherford St. was the third home we purchased. Like the two before it, this one was an MLS listing. The house looked to be in fantastic shape, and my agent was pretty into it. We knew they already had multiple offers and they were making a decision the next day.

Honestly, that was my first mistake.

I was already antsy to make another acquisition. Kaitlin and I have set an aggressive timeline for our immediate goals. With the added pressure to make a decision on this one, it was a recipe for disaster.

When I walked the house it definitely looked good. Not as good as the photos (do they ever?), but decent. I do remember seeing small things that bugged me. Things like the tub surround seam that wasn’t properly calked. It’s hard to recall them all now, but there were enough, in hindsight, to be a red flag.

But again, I was antsy, and my agent was more than encouraging about making an offer. He also knew the listing agent, so he felt him out to get an idea of what would get it done. We offered it, and they confirmed it was ours.

But the house, already being our most expensive acquisition to date, would wind up costing us far more than anticipated to get it rent ready. Let’s just say we paid some tuition with this one. Here’s a look at the numbers:

By the numbers

The house was initially listed for $55,000 on the MLS. We got it for $52,500 which was (and still is) the most we’ve spent upfront to acquire a house. This was also the first ever home we purchased vacant, so there’s nothing recouped during the purchase in terms of prorated rent or security deposit.

Here’s how the final numbers broke out:

  • Initial purchase price: $52,500
  • Closing costs: $825.00
  • Property taxes: $1,255.33
  • Closing credits (prorated rent & security deposit): $0
  • Initial cash invested: $54,580.33

The only good news about this house is that it ended up having more square footage than was listed on the MLS. So the appraisal came in at $58,000.

We were able to take out 75% of that value “immediately” (in quotes here because it ended up being delayed quite a bit… more on this later), up to our total purchase price plus closing costs on a 30-year mortgage at 4.99% interest. Here are the quick numbers on the mortgage:

  • Loan amount: $43,500
  • Closing costs: -$2,182.13
  • Total cash received at closing: $41,317.87

Now, if that was the end of the story and we rented this house out and chipped away at the ~$13,200 cash left in the deal it wouldn’t be so bad. But things did not work out that way. Not at all.

Instead, we spent about $14,000 rehabbing the home, and finally placing a tenant in November 2019 at $950/month.

Here are those numbers:

  • Rent collected: +$4,750
  • Total rehab expenses: -$14,100
  • Mortgage payments: $233.25

So as of today we have a total of $ $26,272.46 locked up in this house (ouch!). Here’s a look at all the above data in chart form:

Conned

The house clearly needed some touch up work. And the more we got into it, the more we found. In hindsight, that really wasn’t the problem. The issue was the guy I hired to knock it out.

At this point we’d done essentially no rehab work on our two previous buys. We fixed a crushed pipe in one house and put a washer and dryer in the other. So we hadn’t been through the process of sourcing good contractors.

The guy we hired had a decent reputation in a Facebook group I’m part of. That said, he was newer to the group and, in hindsight, didn’t have enough history. To make a long story short, he made a bunch of promises, got very little accomplished, and we ended up finally firing him after pissing away about $3,100 with little to show for it.

Theft

While I was still figuring out this “handyman” was really a conman, he showed up to work one morning and called me saying the house had been broken into. The furnace and water heater were stolen.

This was an extremely frustrating moment for Kaitlin and me. We were struggling with the handyman already, had debated firing him but felt we were in too deep already, and it just came at a terrible time. I remember Kaitlin being so upset she wanted to sell everything and be done.

That wasn’t going to happen.

At the time I had no idea what it cost to replace a furnace and water heater. I figured it was anywhere from $6,000 – $8,000. Turns out it was “only” $2,100 to have new ones installed. Not bad, but I’d have been much happier with that money in my pocket.

Furthermore, the lack of a furnace and water heater derailed our delayed financing. The appraiser couldn’t sign off on the house until it was installed, and we weren’t about to install them until we had a tenant in the house.

To this day I don’t know if our sketchy handyman stole them or if the house was legitimately broken into. I used to think he did it, but after our second theft occurred the other month, I just don’t know. I wouldn’t be surprised by either.

So between the shitty handyman and the stolen goods, we were already $5,200 in the hole with very little to show for it.

Open house and rehab attempt #2

At this point we decided to simply hold an open house, find a tenant, and complete the repairs before they moved in. I’m glad we did.

We ended up choosing a tenant who’s dad was also a contractor. He was friendly, clearly knowledgeable, and capable. We ended up hiring him to fix up the house before her move in which included replacing 13 windows (about $4,000), replacing the kitchen cabinets and counter tops, and a lot of other work I can’t even remember at this point.

It ended up working out really well, and Royce is now working on the McCarty house for me while I’m out here in California. His daughter moved in on November 1st and has been a great tenant.

Conclusion

There were so many lessons with this house. As much as I resent buying it, even though I know it will work out in the end, I’m so happy we did. It completely changed our investing approach.

All in on full rehabs

I always told myself I didn’t have time to do full rehabs. Wrecked Rutherford proved that hypothesis completely invalid. Getting this home rented was a huge time sink, and it made me realize it would have been easier to start from scratch rather than working behind someone else’s crappy rehab work.

Since this house, we’ve only purchased one home from the MLS and it’s far from “turnkey” at a $14,000 purchase price that will need $25,000 – $30,000 in work.

Trust your gut

We should have never purchased this house in the first place. There were far too many small things that should have signaled a big red flag to me. I saw it, I just chose to ignore it. As much as that was a huge mistake, I’m also happy I did. Again, the lessons and change in our investing approach was more than worth the mistake we made buying this house.

But now, when I get a similar feeling from a home I either don’t buy it or adjust my offer accordingly.

Don’t give people a chance

I know this sucks, and I hate to say it… but taking a chance on contractors isn’t worth it. The handyman we hired didn’t have a very long track record. He caught my attention because he was clearly hustling and looking like he was doing solid work. I like to give people a shot that seem to be busting their ass.

But it cost us here. And we simply can’t afford to take chances on people at this point.

Overall, I’m happy we purchased Wrecked Rutherford. It’s hard to even read those words, because my brain has such a visceral reaction to this house. But if I put my emotions aside, the lessons we learned and the pivot in strategy are worth far more than this house cost us.

And the reality is real estate is forgiving. While we have a lot of money tied up in this house, we’re pulling it out a little bit each month. In three to four years it will all be out and we’ll have another little cash cow on our hands.

I can live with that.

The Great Greydale

Travis

It’s been a bit more than three months since I wrote about our first “full circle” Detroit rental property. We now have four that have gone full circle, that’s to say purchased and refinanced (technically delayed financing). But I’ve been waiting to write about each one until they are stabilized with a solid tenant. That usually takes a few months.

Our property on Greydale Ave. was the first house we offered on way back on April 19th of this year, but it didn’t close until July 11th! The closing was delayed multiple times because the seller lives in France and there was a lot of work to do getting documents through the Embassy.

But the house was worth the wait. It’s a beautiful 1,800 sq. ft., brick Tudor that ended up having one more bedroom than we thought it had. I love the house and the location. It’s a stone’s through from a newer Meijer, a lot of other conveniences, and one of the Detroit police stations. There’s a community center and park half a block away, and the house is in fantastic shape.

That said, it does need a roof in the next 1-2 years and the windows will need replacing eventually. Those are some hefty expenses. But there was also a clear value add here. Let’s take a look at the data:

By the numbers

The house was initially listed for $55,000 on the MLS. We offered $45,000 and it was accepted almost immediately. That made me nervous. Knowing what I know now, I’d have happily paid more for the house. But back then, this being our first purchase and first home we’d ever looked at, I really wasn’t sure if it was a great buy or not.

Here’s how the final numbers broke out:

  • Initial purchase price: $44,000
  • Closing costs: $803.00
  • Property taxes: $1,106.56
  • Closing credits (prorated rent & security deposit): $1,224.52
  • Initial cash invested: $44,685.04

You’ll notice the purchase price listed here is $44,000 rather than the $45,000 our offer was accepted at. We asked for a $1,000 credit for the delay in closing and received it without issue.

The home appraised for $48,000 which was lower than I’d expected. But seeing as it was still higher than we paid for it I wasn’t too disappointed.

We were able to take out 75% of that value immediately, up to our total purchase price plus closing costs on a 30-year mortgage at 4.99% interest. Here are the quick numbers on the mortgage:

  • Loan amount: $36,000
  • Closing costs: -$2,035.75
  • Other costs: -$618.35
  • Payoffs and payments: -$137.10
  • Closing costs financed into the loan: +$1,083.40
  • Total cash received at closing: $34,292.20

So all said and done we were left with $10,392.84 in the deal. But that doesn’t include the rent we’ve collected since then, rehab expenses or mortgage payments.

Here are those numbers:

  • Rent collected: +$4,160
  • Total rehab expenses: -$300
  • Mortgage payments: $386.08

So as of today we have a total of $6,918.92 in cash tied up in this deal. Here’s a look at all the above data in chart form:

Raising rent

You’ll recall the tenant was paying $730/month when we purchased the home. This is pretty low for the area, especially considering the size of the house. I knew we’d be able to raise it.

The existing tenant is section 8, and we almost immediately put in a request to have it raised. They require 60-days notice. Our request was approved for $900/month which did up the tenant’s portion from $166/mo to $321/mo but I spoke to her beforehand, and she said she’d be comfortable with it still. That was important to me because she kept the house clean and tidy. I didn’t want to lose her.

So we collected two months of rent at the $730/mo rate and the last three have all come like clockwork at $900/mo. Our tenant hasn’t ever been late with her portion. She’s fantastic.

Not really rehab, rehab

As previously mentioned, the house really didn’t need any immediate work. That said, I noticed the tenant did not have a washer and dryer. She’d been living there a couple years, too. I saw this as a great opportunity for some good will, especially with the rent hike.

When I asked the tenant if that was something she’d like, she was super excited. It cost us $300 for a used set, delivered, and installed. That’s a win-win in my opinion.

Mortgage and monthly expenses

Our monthly mortgage payment is a whopping $193.04. I’m pretty sure I could go panhandle for that if it came down to it.

Now, that does not include our property taxes, because we don’t escrow that. But that’s only a little over $100/month on average.

We also have property insurance which runs $45.70/month. That puts our grand total for fixed expenses at about $350/month. That leaves $550/month to set aside for repairs, capex, and cash in our pocket. Not bad.

Most folks I talk to that don’t own property in Detroit site the “extremely high” taxes and insurance. They’re surprised when I share mine with them. As a percentage of the home’s value, taxes are high, sure. But as a percentage of monthly rent, it’s not at all bad.

Conclusion

Knowing what I know now, I’m extremely happy I ended up following through with this purchase. Again, it was our first, so I didn’t yet know what I didn’t know.

I don’t expect us to truly start turning a profit from this house for 2-3 years due to the roof and windows that will need updating. But that’s really true for all the houses we’re buying.

Houses in Detroit have been neglected for years, if not decades. There’s a ton of delayed capex that needs to be addressed with almost any purchase. I’m well aware of that and have a long-term mindset. So it doesn’t bother me. And I still firmly believe it’s a great time to be bullish Detroit. We’re going to look back in 5-10 years and wonder how we bought such great houses for so cheap.

The first full circle Detroit rental property

Travis

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.