My Ninth Investment Property, my Third 4-plex

Investment property

By August 2009, I was ready for another investment property purchase.  The previous properties I had purchased were going well.  I was looking in the same complex, as I knew the process and knew the rental market.

I had already had an outstanding offer on a similar property when this one came up.  Once again, a property built in 1984, a 4-plex, all three bedrooms, 1 bath units.  The major difference on this one was it was totally redone.

The owner purchased the property in 2007 for $430K.  He was intending to split the property into condominiums, which were selling for ~$150K each.  He had already completed over $106K in improvements, plus a bunch of free labor, before the condominium market went flat.  He started renting the apartments out.  There was a pending offer on the property.  It was going to be an investment loss for the owner, and the bank was going to take a haircut, but not as much as they wound up taking…

I contacted the owner directly, and asked him what his situation was.  Remember, the best deals are those you find outside the MLS.  By the time you see them on the MLS, so has everyone else.  And the investors that are in the loop have already passed on it.

The owner said he had sold the property to an owner-occupied couple, for $390K, and he was giving them free rent in the building while they were waiting on the close.  The problem was, after three different appraisals and mortgage applications, the buyer could not perform.  The seller was frustrated.  The buyer’s agent was still hanging his hat on the deal going through.  The agent was both the listing and buyer’s agent, so the agent wanted to attempt a fourth time.  It was a potential hogger for him.

I brought in my Realtor to meet with the owner and myself.  It was going to be a short sale.  We needed a listing contract, and a purchase agreement.  Luckily for us, the previous listing agreement was expiring and the pending purchase agreement was past its closing date.  We explained to the owner how to cancel the previous purchase agreement, and tell the agent that he was listing the property with my agent.

We made the offer.  Other properties in the area were selling for 269K, as I just completed a transaction within the past few months.  Our offer was for $269K, the same as the last one.  We offered the seller $4K for all of the personal property in the building, i.e. all of the appliances.  These appliances were only three years old, and were mostly in great shape.  I wanted them to stay.  At the same time, that gave the seller additional motivation to work with us.

In the middle of this, a counter-offer from the bank for the previous offer came back.  I had multiple offers out, just in case one did not go through (see first part of the story).  It was just $2K above what we offered.  The selling agent and seller offered up half, or $1,000.  They wanted the buyer side to come up with $1K.  I declined.  I didn’t want two properties at this time.  It could impact my mortgage application.  The second one was by far the better of the two properties.  I was thinking I might have given up the ‘bird in the hand’ for the one in the bush.

It was a long wait.  The offer was made on 08/19/2009.  The short sale approval letter came on 12/23/2009, over four months later.  It stated that the deal had to close on or before 01/18/2010.  As I recall, that was the final day of the redemption period.  Miss that date, and the deal is not a deal.   We only had a few weeks to work up all of the details and get the mortgage underwritten and closed.  I was working with the same mortgage broker as I had on my previous two deals, so it made life easier.

So we closed on 1/15/2010.  The place needed some work, but not much.  I think I probably spent only about $10K fixing up the entire building, ~$2500 for each unit.  Some paint was needed.  I changed all of the stop valves in the unit.  I had the carpet cleaned, but not replaced.  All of the locks were changed.  I put in some Maytag coin operated washers and dryers.  There was a lot of cleaning to be done.

My first mortgage payment was going to be due on 3/1.  A P&I payment of 1,146.  When fully rented, it would bring in $3,980.  (995*4)    It would have a cash-on-cash return of almost 17%.  Cap rate of 10%, and a gross rent multiplier of 5.6.  Debt service ratio of over 2.  But I needed about $85K to ante up with the 25% down payment and initial fix up costs.

The property was vacant, and I started advertising right away.  I found some solid renters, and all moved in on the same day, 3/1.  I still have one tenant from that original group today.  The property currently brings in more rent, but the fixed rate mortgage is static.

I now had 16 renters.  It was time to start looking for the next acquisition.

What was your start in investment properties?  Have you ever had multiple offers out?  What is your plan to start investing, if you do not have any properties currently?