The BLOG! - MD WV HOMEBUYER
As we talked about in the Part I of this post, I had saved up some money to get started, made a focused effort on obtaining education and I was ready to take action. Nervous but ready to take the leap.
Early on I identified the type of property I wanted to start with: the duplex. In our part of the country it is common to have what we call duplexes and they are just semi-attached homes that share a common wall. For me, one of the attractive parts of a duplex was there were two units. Even if one was vacant, the other unit being rented would cover my mortgage.
I teamed up with a Realtor I had met who was investor friendly and also loaned money. She showed me several duplexes throughout the market I had identified. I’m not sure how many I looked at before I made an offer but eventually I pulled the trigger and made an all cash offer on a duplex that I had found. As it turned out, the duplex I offered on was owned by an accidental landlord who was moving out-of-state and they didn’t owe anything on the property. (What I would later learn is AWESOME!).
The duplex I offered on was listed around $125,000 and I offered $101,000. I don’t recall how I came up with that number because I had not discovered Bigger Pockets or the 2% rule, yet. Since it was my first property, I paid to have a home inspection done and they cited a several items (as they all do). When I received the inspection report, I took it to the seller and showed them the repairs that were needed. They offered to give me a seller credit to make the repairs. After some negotiation and obtaining quotes for the repairs, I was able to get a credit of around $18,000.
Now you might be wondering how I made a cash offer for $101,000 when I said I only saved up $5,000 to start. Well, like I said I was working with a Realtor who also lent money. So, between her, my money and borrowing some from a family member, I was able to get the purchase and rehab done.
While the repairs to the property were warranted, some of them I did were what I would later come to know as over improvement. Once completed, these units were both 3 bedrooms/1.5 baths on each side and rented for $925/ month plus all utilities. They were nice and they rented relatively easily.
Repairs to the property had run around $20,000. So, I was all in this property around $105,000 by the time you figured closing costs, holding costs, etc. I really thought because this property was built in 1985 and all the comparable sales were built in the early 1900’s, mine would appraise much higher. WRONG. The appraisal came back around $125,000 which was about $25,000 less than I thought it would.
Knowing what I know now, it shouldn’t have been a surprise for it to come in at that number. At the time, it was like a kick to the stomach. The bank I was doing the refinance through would allow 70% of the appraised value to be pulled out with the re-fi. I was able to get a check at closing around $87,500 to pay off the folks I borrowed the money from. However, this left me short of getting all the money back out by about $18,000. So, I did a little more learning by doing and worked out a secondary loan for the remainder and gradually paid it off.
That was the day I learned how important ARV’s were ☺
You might be saying “see?! That’s why I don’t do real estate! It’s risky!” At the end of the day, I didn’t lose any money and I learned SO MUCH from doing my first deal. Did things go as planned? Not 100% but do they ever? In my opinion, it is more risky to leave your livelihood solely in the hands of your employer or one source of income. This property was the first next step to me securing the financial independence I sought and taking action for my families’ future…because remember...“if not me, then who?”
Mike is a partner with MDWVHomebuyer.com, a real estate investment company in the Maryland, West Virginia and Pennsylvania markets. Mike is a co-founder of the Berkeley County Real Estate Investor MeetUp – a networking group specializing in investment real estate. He works full-time as a career fire lieutenant with a mid-sized fire department in the Washington D.C. / Baltimore Metro area. Currently, he resides in Maryland with his wife and son. For more information or to connect, visit MDWVHomebuyer.com.