That picture is the first day that we became homeowners as well as real estate investors. This page will be a living page of running numbers for this property. It might get long and unruly, but I want to be as transparent as possible with the money side of our investments, because I think that will help shed light on the actual investment itself.
Purchase Price: $375,000
Square Ft: 2,940
Loan Type: FHA
Date of Closing: Dec 11, 2015
Current Tenants: Yes (1st and 3rd floors)
Total Market Rate Rent: $4,100
List Price: $398,500
Initial Cash Invested: $13,125
Location: Haverhill, MA
Property Type: 3 family
Year Built: 1898
Total Current Rent Roll: $1,750
Mrs Money Smith and I went through a bit of an ordeal with searching for our first property, (you can read all about that here), but the short of it is that there wasn't a ton of stock in Haverhill at the time, but we were determined to find a deal that made sense. When looking for a property, we were under the mantra of "if I wouldn't live here, how could I convince someone else to?". Luckily, we were both still relatively fresh from college and our standard of living wasn't very high. This was important because this particular property had some cosmetic issues that we needed to look past.
When we walked the property, there were some questionable decisions made by the owner and tenants that we needed to be able to look past. These items included the first floor having different paint colors in every room, ranging from bright orange, to bright blue, to brown. The second floor wasn't any nicer and was vacant at the time, also possessing a color palette of questionable decision making. The third floor, somewhat surprisingly, was in excellent condition. Lastly, for the first and second floor, all of the windows were in pretty rough shape, including two windows on the back of the house that were original, that's right - they were 117 years old!
We needed to be able to look past all of the cosmetic issues to get to the bones of the house. I personally don't have a good eye for layouts, but luckily Mrs Money Smith does, she did a great job of helping to convince me of what this property could be. Another interesting note about this property is that it had gone under contract before us, but was cancelled due to the current owner not wanting to deliver it vacant. We would soon find out why (after our purchase).
The last, and arguably most important part of this property, was that the house should cash flow positively with rents being raised to market rates. The 1st floor was paying $850/mo, the 2nd floor was empty, and the 3rd floor was paying $900. Our assessment of market rates, in current condition, to $1,500 for the 1st floor, $1,400 for the 2nd floor, and $1,200 for the 3rd, a total of $4,100!
For our first house, these issues were actually a blessing, because being able to fix a lot of the issues ourselves allowed us to learn what it takes to actually be homeowners. That and we have a bunch of personal friends who were willing to help us with painting and general repairs for the small cost of some pizza and beer!
The negotiations for this property were actually pretty challenging. When negotiating a house, the process tends to go like this:
1) Buyer finds house that they are interested in, meet with their real estate agent at the property, and walk through the property to see if they like it.
2) Buyer tells real estate agent that they want to make an offer, agent goes to seller's agent to offer the money (usually this is where you offer less than what they are asking for).
3) Seller's agent goes back to seller with the offer, seller then has a chance to counter offer.
4) After back and forth with negotiation both parties agree to terms - Then the real work begins!
Our process went mostly like this, except there is a little more to multi-families. We would be inheriting tenants that had been living in the house for a number of years. The first floor tenants had lived there for 10 years and the third floor tenants lived there for 3. The owner didn't want us speaking with, or disturbing the tenants before any agreement was in place. This wasn't a huge red flag, considering a lot can happen before an agreement is achieved, but it made us a little concerned, as we would obviously like to know the people we would be sharing a house with.
The other interesting piece about our negotiation process was that we never actually spoke to, or heard from the actual owner. All communications throughout the entire process were handled through either the seller's real estate agent or their lawyer. This made the entire process feel a lot less personal, which in the real estate investment world isn't necessarily a bad thing.
Once the initial purchase price is agreed to, the clock starts ticking to get some things out of the way. We had to order an inspection of the property to see if there was anything that an experienced home inspector would catch that our untrained eyes wouldn't. For the most part, that was a smooth process.
The inspector met us in front of the property one day and walked around the entire outside of the house making sure to point out all of the small areas of potential concern for us. Things such as brick re-pointing that we would want to get done in the next few years at the base of the house and the chimney. He let us know that we would want to get the laundry vents cleaned at some point, and that the outside of the house was in fair shape. We then took a walk around each of the units and the inspector was sure to give us a lot of good detail of what to look out for inside of houses as well.
Not a whole lot was really out of place with the property, this was a great sign! We did discover that the basement gets water every now and then, which could be fixed mostly with a sump-pump. We discovered that the heating systems in the basement seemed to be in working order, though they were quite old. We also learned that the third floor unit had been renovated in 2007, we were able to figure this out because the year had been painted on the top shelf of a closet which is apparently a common way for a contractor to leave their mark.
Essentially the walk through with the inspector gave us a little bit of ammunition to go back to the buyer and ask that a few repairs get made, or to lower our offer price. The seller wasn't about to lower the offer price, but did offer to complete the work that we requested, which was a good enough outcome for us. My preference is to actually complete the work on my own, as sellers will likely do the bare minimum with it, but this was our first deal and we didn't feel like we had much leverage.
Our closing was also relatively uneventful- the process consisted of meeting the seller's representatives, (lawyer and real estate agent), along with our own lawyer and agent to sign the paperwork that would then finally sign us up for a 30-year mortgage and the keys to the new house!
Note: Before going to our signing, we went by the house to do another walk around quickly to make sure the house was still actually there. This was our last chance to make sure we weren't being tricked or that the house hadn't burned down. Luckily for us, it hadn't!
Back to the signing, we signed what felt like a million pieces of paper at the registry of deeds, locking us into all sorts of binding documents to successfully move the property over to our names. During this process, we also worked out how much the previous owner had with the tenants security deposits and received a check for those.
Note: It is a very good idea to double check the math when there is any additional exchange of funds. When looking at the security deposits and rent check, (we actually received some of the rent that the tenants paid for that month since we would be owning the house part way through), Mrs Money Smith pointed out that the calculations were incorrect and we were actually owed another $700 or so. This was remedied through a phone call to the owner to make sure another check could be cut to get to us to make up the difference.
After this slight confusion, we were handed a bunch of keys and told good luck! That was that, Mrs Money Smith and I had officially become homeowners!
We now had a chance to introduce ourselves to the tenants that were inhabiting our new home. We brought cookies to the 1st floor tenants and introduced ourselves, the meeting was cordial, but the tenants only concern was how much their rent would go up. I had planned to go in and let them know that the market rate was $1,500 for their unit and that we would have to increase them to that and expect to have to deal with upsetting my new tenants. That did not happen, I quickly felt bad for the tenants as they were a family of five, and didn't seem that they could afford that, so I told them that rent would be increasing to $1,200 per month.
I let them know that I realized this seemed like a large increase to their rent since they had never seen an increase since moving in 10 years ago. I also let them know that comparable rents in the area were actually much higher, but I wanted to cut them a break, (This amount would actually hurt me long term, but I was soft). I also let them know that since they were month-to-month, I would completely understand if they didn't want to pay the increased rate and would want to move out, but they assured me they expected this and would be fine with the new rate.
Note: I realized that I am a softer person than I like to pretend to be so I decided on a new approach for next time. Next time I have to increase rates on current tenants I will have a written document already filled in that would state the market rate amount for the unit. This would prevent me from being too nice, which would ultimately hurt the bottom line for us. This isn't to be less human, but an important note about real estate is that you have to run it like a business. Your business wouldn't last very long if it sold everything for less than it pays for it...
The other set of tenants was a much easier conversation. They actually closed on a condo the same day that we closed on our house! This was exciting news as it meant that I didn't have to increase their rent, and I would be able to bring my very own tenants into the property! Humans that I myself had vetted and run my own checks on. This was great news to hear which is why my interactions with them were always pleasant. We actually became good friends with those tenants and stayed in touch with them after their move, frequently seeing them in town and even inviting them to our wedding.
We ended up living in the 2nd floor unit for a few months. During that time we got acquainted with the property. This gave me a huge boost in my confidence to be able to operate as an active landlord as well as my confidence in fixing issues as they came up. Within the first month I had an issue with a leaking hot water heater, flooding in the basement, and the tenants on the 1st floor.
The water heater issue was one in which the TPR (Temperature/Pressure Release) valve quickly went from a small leak to a full blown rush of water. This happens as the systems start to age, and judging from what was written on the hot water heater, the system was about 8 years old. I quickly had to shut off the water valve above the heater and figure out what to do. It turns out that most home appliances are designed so that a regular person can fix them. I am relatively handy so I called a friend who brought a pipe wrench over, went to Home Depot and bought TPR valve, and we had the whole system fixed within an hour, (most of that time was spent driving to Home Depot).
The flooding in the basement was from ice melt and rain. The foundation of the house is field stone and brick, so it's not the most water repellent in nature. Luckily I was able to have a specialist come out to install a sump pump in the basement that now pushes out most of the water that the house gets. It's not 100% dry down there, but this may just be a fact of life for the house. My next best option is to install a french drain, which I haven't gotten around to quoting, but I keep considering for the future.
Lastly, the tenants on the 1st floor decided that they didn't want to pay the increased rent. They waited until the day that the new rate was due to let me know that they didn't feel like I had notified them correctly, (I did), and that they would not be paying the increased rent. After some strongly worded disappointment from me, I left and returned a few minutes later with a notice of termination. The notice served as one to let them know that I would not be renewing their lease any further and that they are to move out of the property. Without getting into too much detail with this, for the sake of the tenants, this is just something that you have to deal with as a landlord. Tenants, especially those that have lived in a property for so long, can tend to feel that they are entitled to things at the residence that simply aren't the case.
Having to terminate their month-to-month lease was stressful for both parties involved. It meant that anytime we saw each other there was clear tension, it meant that I was now considered the big bad landowner who came and disrupted the perfectly good thing that they had going by forcing them to leave. I am confident that this was for the better though as it allowed us to get all of our renovations done at once and eventually move down to the first floor. Mrs Money Smith actually wanted to just kick them out on day one, but again my softness prevailed, which actually ended up hurting us in the end.
Renovations for this property quickly started, literally on the day that the 1st floor tenants moved out, we had contractors in to see what needed to be changed. Our plans involved making the 1st floor unit a premium quality unit, and fixing a number of issues that we personally experienced with the 2nd floor unit while living there. This all had to be done in a quick turnaround, but we were able to get it done.
The renovation list included:
Most of the work was completed by contractors, which is for the better. My friends and I fit in where we could to make the work move a little faster, which generally involved ripping up carpets and painting walls, but we were lucky to find a contractor who also invests in properties and was happy to share his perspective on products as well. Once the renovations were done we were finally able to move down to the first floor and finish the second floor, enabling us to have a property fully inhabited by tenants of our choosing.
For pictures of the 1st floor renovation, check back to my previous blog post here.
This is the fun part! I'll try to remember to come back each year and update this with new numbers. These numbers are all encompassing. They are a look at all of the positive cash brought in, (rent), and all of the negative cash going out- mostly repairs, supplies, landscaping. The numbers also factor in mortgage insurance, mortgage interest, homeowner's insurance, and real estate taxes.
Last Edited 7/21/2018