Jumping into the “Show Me” State
A year after our last purchase, Kim and I were back on the hunt! Unfortunately, COVID-19 was spreading across the globe and had also shaken up our lives. On the downside, we canceled our wedding ceremony and honeymoon. On the upside, Kim’s job became remote, and we lived together again! During this time, the Army sent me back to Fort Leonard Wood, MO, where our next property awaited us.
Kim stumbled upon an online auction site, and there was an upcoming auction on a tiny house 10 minutes from the base. After three auctions (we won all the auctions, but the sale price was too low for the bank), we won the property!
Underwriting
I was more comfortable underwriting at this point, but this would be our first major rehab. The rehab was mostly cosmetic except for a damaged floor joist on the ground floor. With a rehab, you have to calculate your holding costs. This is how much it will cost you to own the property during the rehab. Your holding costs should include debt payments, taxes and insurance, utilities, and other miscellaneous expenses like HOA dues.
Business Plan
We planned to do a long-distance BRRRR with the help of some local friends. Here are the steps of the deal:
Buy: We planned to buy the property in cash to avoid the pressures around hard money lending. We also couldn’t finance the property traditionally since we purchased it at auction.
Rehab: The property needed work, and we planned to hire a local contractor to complete the renovation. I created the scope of work based on a friend’s walkthrough video and then sent that to a few contractors. I got two bites, chose the contractor that created an itemized bid AND brought a tape measure to the walkthrough. I had another friend, Calvin, present for the walkthrough who gave me his opinions about the contractors, which immensely helped.
Rent: I planned to self-manage the property like we managed the rest of our portfolio. I planned to use Zillow as my primary leasing tool, Calvin for random in-person issues, and our contractor as our handyman.
Refinance: I can’t remember how I found this lender. It may have been through Marcus, but they were local to Missouri and easy to work with! Within six months of purchasing, we had a paying tenant, our initial investment, and some extra cash out of the deal.
Repeat: We used the proceeds from this deal to buy the house across the street.
Before Pictures
After Photos
(We did not choose those cabinet colors)
Outcome
This deal was perfect for where we were in our investing career. It was a low initial investment, and we had no lending pressure, which allowed us to take our time. I’d give this deal an 80% Occupancy Rating, with the main room for improvement being rehab items that I listed below.
If you don’t take anything from this post, at least take these gems:
In a cosmetic rehab, you and everyone will notice what you don’t replace! We redid the entire bathroom…except the tub. The new vanity, countertop, toilet, flooring, and paint were terrific! However, when you walked into the bathroom, your eyes were drawn to the older tub. Replacing the tub would have cost more, but it’s cheaper to replace a tub whenever something else is torn out than trying to replace it surgically.
Check the significant systems!!!! This house was vacant for 5+ years before we bought it. Surprisingly, the AC still worked, so we didn’t replace it. Six months into the first tenant, it crapped out on us. I was then forced to choose the quickest replacement option.
Close off the AC system. You need to close off the AC system so construction dust doesn’t clog your AC system.
Order and store extra materials. Catalog and store your finishing materials so you can repair them in the future and not have to replace them entirely. Things like paint colors, cabinet colors, and especially flooring can be hard to match in the future.
Make sure your contractor is paying attention to the utilities. Our contract didn’t know the AC had an “instant heat” function, essentially like turning the heat to the max in your car. We got him a $400 power bill during the first month of construction.
