Our First Purchase: Breakdown of Expenses

This first purchase tossed us way outside our comfort zone.

Here’s where we were mentally at the time of purchase:

Note: If you notice something missing, leave a comment and I’ll edit the post.

• ARV for the house was 110K.
• Asking price: 100K  
• Offered 82.4K which was accepted without counter. We learned at closing that 2 bids came in the same day and ours was $500 higher.
• We estimated repairs would cost 18K and take 3 months (stop snickering)
•  We planned to reappraise and cash-out refi to pay off the credit cards. The difference would come out of the remainder of our income tax refund.
• Market rent for a 3/2/2 in this neighborhood and school district was $1100-$1200/month. We were hoping for $150+ positive cashflow.

Taken during our 18 month tenure from my favorite spot in the backyard.

Here’s what actually happened: (Numbers are rounded to the nearest hundred)

• Purchase price: $82,400
• Down payment: $0
• Closing costs: $2600 (borrowed from family, paid back with income tax refund)
• Repairs took twice as long to complete- 6 full months, almost to the day
• Repairs and Rehab: $23,700 paid for with credit cards and a signature loan from the credit union (to pay the cabinet guy, tile installers and roofing contractor– less expensive than a cash advance on the credit cards)

Holding costs: (paid out of the monthly household budget)

• Utilities for 6 months: $400
• Mortgage for 6 months: $3900

Fortunately, there weren’t many surprises during the rehab. We blew the budget on upgrades– like switching from the $100 builder grade toilets to the $220 29-golf ball Champion byAmerican Standard (if you know what this is, my condolences… you are one serious rehab junkie). Flooring went from an estimate of $1600 for vinyl peel-n-stick tile to $2900 for ceramic tile.

And so on, and so on…

At the time, I was visiting a forum full of hard-core real estate investors. One of the regulars asked, “Do you intend to keep this house? Then DIRT: Do It Right The First Time” (yes, I know this doesn’t spell dirt, but this guy was really smart and really helpful and very successful and I wasn’t about to correct his acronyms.) “Spend more for durable materials that will last indefinitely. In the long run, you’ll save by replacing less often and reducing the number of repair calls.” So we did and I’m not sorry. (Please note: Not every house will support the level of upgrades we made. If ARV is only 50K, peel-n-stick tiles might be more appropriate.)

Funny How Life Intervenes

After the tree hit the trailer, we refinanced to shave $100 from the monthly payment. At that time (about 7 months after purchase) the house appraised for $120K. We eventually got a check from the insurance company that paid off the signature loan and credit cards. We lived in the house 18 months and quickly found a tenant who signed a 6 month lease for $1100/month. When he moved out, we rented to our current tenants who pay $1150/month. Our cashflow is $400/month… very nice. Recently, we had the house re-reappraised (for 130K) and opened a 30K HELOC to make cash offers on other properties.

So how did we do? I dunno and I’m not sure I want to.  The situation ended up being most unusual.

In every way imaginable it’s been a profitable venture– starting with how much we learned about ourselves, our abilities and limitations and each other. We call the house Rehab 101– much cheaper than college tuition.

Could we have done better? Maybe– but I’m not complaining

Christmas at the rent house. Pretty nice digs for refugees.

Popularity: 16% [?]

Tags: getting started in real estate, real estate investment, REI, rent house