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.