Looking at this whole journey of acquiring My Second Property, here's the simplified summary of it all:
1. Built connections in Indianapolis that would assist in finding future deals
2. Got pre-approved for financing
3. Started funneling in leads
4. Got a couple intriguing property leads from a turnkey company. Wasn't completely sold on them.
5. Decided to open up and look at other lead sources and reached out to an agent
6. Got a VERY intriguing lead that best fit my investing criteria
7. Got the property under contract after negotiating the sale price to my max budget
8. After reviewing the inspection report, negotiated the sale price down to $86,000
And, now we're here.
All systems are a GO. We're on the home stretch.
My lender asks me for a few more things:
-Complete a Credit Card Authorization form - to pay for the appraisal
-Provide contact info for my insurance agent
-Send over January and February checking account statements
-Send over my last two pay stubs, my 2017 W2s, and information on my work history
A couple days prior to the closing date (3/14), I receive the settlement statement from the Title company. The settlement statement is basically a rundown of exactly what I owe to the seller...it includes all the various fees and expenses.
Total money out of my pocket for this deal?
And the final step?
I had a mobile notary meet me at my office to sign the 111 page closing documents. All in all, the signing took about 30 minutes as I reviewed every document (read everything!!) and followed the direction of the notary. Man...my signature is seriously just a scribble now hahah!
And with that, I closed on My Second Property.
I'm excited for the future! After living through the ups and downs of My First Property, I learned a TON through first-hand experiences. Now with an adjusted strategy, I can't wait to see how this investment plays out. Next up: let's get this thing rented!
I'm officially in unknown territory. I've got a property under contract for $87,000 that was found by my agent. Yes, I've seen photos and videos of the place, but I honestly have no idea if it requires renovation or repairs. No worries! This is why the 15 day inspection period exists!
Thankfully, I have a rockstar agent to guide me.
My immediate action items:
1. Earnest Money - overnight a check for $1,000 to the selling agent ASAP. There's a three day deadline.
2. Inspection - I have 15 days to complete the inspection and an additional 10 days after that if needed.
3. Insurance - I must provide proof of insurance ASAP.
4. I must sign the Seller's Lead Based Paint disclosures.
Couple other things:
1. My agent sent necessary paperwork to my lender to begin the application and financing side of things.
2. The tenant has now decided to leave. So, I will have a vacant property by the time I close. Which means, I'll need to have my property management begin marketing the property as soon as possible. One one hand, it sucks I won't have income coming in immediately, but on the other hand I can now screen and place my own tenant.
Taking care of the Earnest Money, getting an insurance policy, and signing the Lead Based Paint disclosures were a piece of cake. Now, onto the INSPECTION.
I initially tried to setup an inspection with the national company HouseMaster, but their earliest appointment time didn't work for me. So, I turned to one of my connections I met online and got a referral! Thanks to my first real estate mentor ever, Morgan!
My inspection cost $310 based on square footage and all I had to provide was the property address and the listing agent's contact info. So what did the inspection uncover?
-I should add a switch for the whole house fan. Right now, it's operated at the breaker box.
-There is unsecured wiring in the furnace room
-The kitchen and bathroom outlets are not GFCI protected
-One window in the garage is broken
-Plumbing was redone recently, but there are two mysteriously cut pipes in the crawl space.
-There's sign of a little mold in the crawl space.
-The bathroom exhaust fan should vent to the exterior of home. It currently runs to the attic.
-The boiler heater is at end of its life cycle
All in all, nothing too alarming! Knowing the boiler is toward the end of its life cycle isn't the greatest news, because that would be a major expense. I might need to hire a plumber to investigate the pipes in the crawlspace. And I should have an expert evaluate the mold in the crawl space. But, everything is pretty manageable.
Because this is an "As-Is" transaction (the seller is unwilling to perform any repairs), I asked for a $1,000 reduction in asking price. I didn't want to rock the boat too much and lose the deal, since the inspection came back pretty clean. But, I did want a little cushion in case I have to repair the boiler in the near future.
The seller immediately accepted my inspection response, which I kinda expected. They wouldn't kill the deal over $1,000 would they??
So, with the inspection complete, I really know the condition of the property. I'm all in...and I got it for under my maximum budget!
Let's review this investment:
Square footage: 1,400
Two Car Garage
Bonus sun room and full laundry room (could be converted to a 3rd bedroom)
Full steam ahead! I'm Jumping In! Let's close!
-As an out of state investor, I 100% recommend you get an inspection on your property. That is a MUST for me to really understand the condition of the property. Trust the professionals!
With three great investment properties within reach, the biggest questions are:
1. Do I go after Leads #1 or #2 which are freshly rehabbed properties from a turnkey company?
2. Do I go after Lead #3 which was found by my agent?
First, let's take a closer look at each property:
Square Feet: 1,360
Square Feet: 1,134
Listed: $95,000 (negotiable because it's on the MLS)
Square Feet: 1,430
Soooo...what am I thinking? All properties meet my acquisition budget (under $100K), all properties meet the 1% rule (they each bring in at least 1% of the acquisition price in rent), and they're all brick ranches (I like brick in the Indianapolis weather).
Ultimately, my decision came down to buying in the best neighborhood. And that = LEAD #3.
Lead #3 also has the newest roof (which would be a large capital expense in the future), it brings in the most rental income, and it has the best chance of appreciation (being in the best neighborhood). On top of that...it's a wildcard...with 1,400+ square feet, there's enough room to add a 3rd bedroom if I decide to put a little money into it. This would greatly force appreciation.
So, LEAD #3 it is!
Now, on to my FIRST EVER offer and negotiation. If you remember, I bought My First Property through a turnkey company so there was no real negotiation or offer. I basically just said..."I'LL TAKE IT" and closed.
Running numbers again, I'll tell you right now, the maximum price I could offer for Lead #3 was $87,000. It's important to know your max price before heading into a negotiation. Then, stay strict to your maximum and don't go over! Don't get emotionally tied to the investment. It's all about the numbers!
Now...I get it...my maximum price of $87,000 is a solid $20,000 under their initial asking price of $107,000. Not the best offer...and I probably have a slim chance of even engaging the seller. But, they recently dropped the price to $95,000, so maybe I have a chance??
There are two basic negotiation tactics to understand when submitting an offer:
1. Submit your highest/best immediately, hope the seller accepts, and be happy with the ROI.
2. Submit under your highest and best, and try to negotiate the best ROI possible.
For this property, I knew I wanted to give my offer a fighting chance, but I also wanted to give myself a little wiggle room to go up.
I offered $86,000.
And being pretty naive to all of this, I actually felt pretty confident with that. Other terms I included: 30 day close and 15 day inspection (with an additional 10 days of discovery).
Surprisingly. They countered at $87,900.
Wow, we're close here. They came down A LOT more than I expected. So I went straight to my highest and best at $87,000, fully confident we'd come to an agreement.
Drum roll please....DONE.
They accepted at $87,000. A few electronic signatures here, a few electronic initials there, and we've got a deal!
WOW...now it's real.
And...crap...now I'm really Jumping Into unknown territory. Financing, an appraisal, an inspection...I've never done this before...
-Really know your numbers going into the negotiation phase. You have to understand what your max price will be before submitting an offer.
-There are a couple negotiation strategies to consider: Offer your highest and max up front, or offer lower and work your way up.
"You da one that I dream about all day ay ay. You da one that I think about always..."
Sorry, that Rihanna song just jumped into my head while writing the title of this post.
ANYWAYS. Back to real estate.
After receiving a couple promising property leads (Lead #1 and Lead #2), I didn't stop there, pick one, and plop down my money. Nope. Not that fast.
While the numbers on paper for Leads #1 and #2 checked off most of my investing criteria boxes ($75k to $100k acquisition, bring in at least 1% rent at $900+), I honestly WASN'T 100% sold on the neighborhoods they were in. Remember, a huge goal of getting My Second Property, was to jump into a better neighborhood and attract a better tenant class.
So, keeping my options open and casting a wider net for leads, I reached out to an agent I met briefly last year in Indianapolis. We'd connected online and I squeezed a quick little meeting in with her right before flying home to California. Naturally, we met at a Starbucks (I don't drink coffee...haha!).
She immediately set me up with MLS alerts based on my criteria, which was amazingly helpful. And she also asked if I'd be willing to look outside of the typical 3 bed/1 or 2 bath houses that most investors were looking at. I told her I'd be flexible in house layout criteria (which later proved to be key), but I wouldn't compromise on my investment criteria.
BOOM. Within 12 hours she sent me a lead.
Email from my Realtor: I just had one that popped up this morning that looked interesting in Washington Township - west side. I see now it's a 2/1, but it's actually quite a big 2/1 at 1400 sq ft. Tenants are already in place, but the listing doesn't say what they're currently paying. Rental comps are in the $1100-$1200 range. They actually just dropped the price on it this morning as well. I used to live just north of here - pretty decent area. I would say B class.
FIRST IMPRESSIONS OF LEAD #3: Holy crap. That wood paneling is UGLY. It's only a 2 bed/1 bath...not thrilled...will there be much rental demand for it?? At least it's got good square footage (1,400) and a 2 car garage with wrap-around driveway. Rental comps are actually higher ($1,100-$1,200) than my target and the property is listed at $95,000 which is under my budget. The seller also just reduced it from $107,000, which could mean they are super motivated to sell.
You know what time it is now? Time to dig into the numbers and do some major research!
Luckily, within a couple hours, my agent confirmed the tenants are paying $1,000 per month and they're on a month-to-month lease. Confirming the actual rent is HUGE, because estimating rent range can be difficult and it's such a critical number in calculating cash flow. $1k in rent is a little less than the initial estimate of $1,100-$1,200, but I can't complain, it fits my criteria and it's confirmed.
After some quick calculations, the numbers look good! I'm VERY VERY interested. But, of course, I've got a few more questions. After all, this is the first property I've ever looked at without the help of a turnkey company. Venturing down this path of buying on my own, is completely unknown territory. I ask my agent a ton of questions:
1. How old is the roof? - Just over 1 year old. Roof and gutters replaced August 2016.
2. How old is the furnace? - It's a boiler. Great working condition. Age unknown.
3. Hold old is the water heater? - 3 years old.
4. Is it currently under a property management company? - It's self-managed by owner.
5. How long has the tenant been living there? - The tenants moved in 2014.
6. Can you send any more photos and videos? - Yes, but exact date to get into the property is unknown with tenants living there.
Lesson #1: Your agent and the selling agent won't be able to answer every question right off the bat. Many infrastructure questions will most likely have to be answered by a professional inspector.
My agent coordinates a time to check out the property, then sends over photos, videos, and shoots me a note:
All and all, nice property. The only thing I wasn’t a fan of is that it doesn’t have central air, but the list agent said the window unit does keep the whole house cool. Typically, though, that’s going to keep your rent lower than another unit with A/C. It’s on a broiler for heat as well, which I think might be better than having a furnace - probably not as energy efficient though. I don’t love that it doesn’t have a paved driveway either, but the gravel is pretty compact and if a tenant would need to shovel they shouldn’t have too much difficultly doing so.
Property has been well maintained - as I mentioned new roof and gutters 2016, and the electrical box was updated in 2014. Flooring looks in good shape, and most of the walls are paneled, so not a lot of upkeep there. Also noticed that there was no dishwasher - again, typically something that is provided at this price point along with the A/C.
Alright...so a couple little curveballs...no central AC and no dishwasher...but nothing horrible. Just a couple more questions for my agent:
1. What repairs do you think are needed? Fresh paint? New carpet? Garage windows? Anything big? - Depends on if the tenant stays or not. I would probably repaint any areas that aren't paneled and clean the carpet. It looked in pretty decent condition. Would repair the garage windows as well.
2. Any idea why they're selling? - It's the list agent's mom's property. It's the only rental property she owns, and probably sees it as a good time to sell.
NOW IT'S REALLY DECISION TIME.
Work with a new turnkey company and go after Lead #1 or #2, which are both freshly rehabbed, and would probably be an easier transaction.
Or, take matters into my own hands and go after Lead #3, which is in a better neighborhood, and would be a venture down an unknown road?