Inner Circle Member Deal Analysis of the month: A rehab for rental

Narendra Mundhe is a part time investor who lives in Cincinnati. He’s wholesaled, bought notes, but his key strategy is buying value-play rentals with equity and keeping them long term.

Tell us about the property: This was a 5 room 2 bedroom brick in a bread and butter area with a detached garage. To increase the living space, I semi-finished the basement, which has a family room, full bath, and 2 rooms that aren’t officially bedrooms because they have no egress other than the basement steps.  The area has a pretty good school district.

How did you find this deal? From my probate mailings.

How did the negotiation happen? The seller called me and we started talking about price; then about halfway through the negotiation, they brought in an agent that they knew. The property was never officially listed, but they felt better having an agent involved.

Initially, the seller was asking $60,000 for the house. It’s small and across the street from some businesses, plus it needed about $30,000 in stabilization to make it rent ready. I brought in my mentor to help me evaluate it, because it’s not exactly like other houses in the area and so comps were not perfect. We thought it was probably worth $100,000, so obviously $60,000 was too much.

I offered the seller $40,000 cash. They never countered that offer, but kept asking me directly and through their agent if I could pay more. This went on for about 4 months; they’d call and ask I could pay more and I’d say no. Finally, they agreed to the price.

What happened next? I closed with cash they day before I was heading to India for a month, which set me back 30 days on the rehab. When I got back, I started the work—removed 3 dumpsters worth of ‘stuff’, replaced the kitchen cabinets, countertop, and appliances, removed the carpet and refinished the floors, put new vinyl in the basement, redid the bath, painted, removed a huge tree—a process that ended up taking an additional 5 months and costing $10,000 more than my original estimate.

This put me at the beginning of November, and it was rented by end of November for $1,200 a month. In January, I appealed the taxes and got them lowered based on my purchase price. The taxes and insurance together are now roughly $200 a month and after putting aside 20% for reserves, my cash flow is about 760/mo, or 11.4% ROI on the $80,000 I have invested.

What are your future plans for this property? I plan to refinance this to get the cash back out once I’ve owned it for a year and can borrow 80% of the value. The value has gone up, so I should be able to refi without any money down. I’ll get a 30 year loan to have the lowest possible loan constant, but my goal is to pay off my rentals as quickly as possible from cash flow.

 

So, what were your key learnings from this deal?

First, I’m really glad I stuck to my maximum allowable offer. It was tempting to raise my offer to get the deal, especially after months had passed. If I had, I would have been in trouble, since my rehab went over time and over budget. There’s a reason for MAO.

Second, manage contractors aggressively. This was my first rehab of this size. If I were doing this again I would schedule it better, so that multiple contractors were working on it at once. I also would have set deadlines for the contractors and made them stick to them. If it had taken 2 months instead of 5 months to finish it, I would have saved a lot in holding costs and not gotten myself into the position of trying to rent a property around the holidays.

Don’t be in a hurry to rent. Because it was November, I was a little looser with my requirements than I should have been, and there have been some problems with the tenants. I knew that they were marginal, but I took them anyway because I didn’t want to go into December without a tenant. I won’t do that again.

What’s your best advice for someone looking to buy their first rental? Don’t buy properties that are too far from where you live or work unless you have a property manager. Think about whether you really want to do a lot of work to a property; one that’s more turnkey will cost more but is also a lot less trouble. Learn to really screen tenants; there are a lot of bad people out there who will try to fool you. Most of all, make sure you run the numbers before you buy. When you’re a landlord, cash flow and return on investment are key.

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