Real Estate Investing Series: Here is the Deal - The Breakdown

Here is the Deal – The Cottage House Property Purchase Breakdown

We bought the Cottage house just a few days after Magnolia Fourplex. This was investment no.2 in Macon, Georgia. This property caught our attention because it was built in 2008 which is rare in Macon.

The listing price was $59,000. When we initially inquired about it, it was rented for $850. If we are going by the 1% rule of thumb, then this is a winner (850/59,000 = 1.3%). Unfortunately (or fortunately), the tenants skipped before we got it under contract. The tenants had destroyed the house, so we were able to get some items fixed and the price reduced to $55,000.

This house is a 3Bed/2Bath single family home centrally located in Macon near the Downtown area. I would say this is a C- neighborhood. There are a few abandoned houses around the area, but also several recently rehabbed/flipped houses.

In doing our research, we found out that there are a few development projects nearby, so our bet is that house appreciation in the area is likely to occur. Of course, this is just one of the many factors we considered when making this purchase.

The Financing

We bought this property cash using a $10,000 private loan from my dad at 5% and the remaining $45,000 came from the sale of our Florida Duplexes. We used our paychecks to fund the rehab.

Right after closing on the cash purchase, we started the process with bank to get financing using the Fannie Mae Delayed financing program. This program allows you to refinance the property without the 6- month holding period that most lenders have. I noticed that most lenders are not aware of this program, so we had to educate them on this.

We got a loan in the amount of $44,250 which is 75% of appraised value of $59,000.

Deal Analysis

Our analysis inputs were are follows:
Purchase Price: $55,000
Closing Costs: $7,000
Rehab: $10,000
Mortgage: $44,250

Total cash left in the deal: $27,750

Pure Cashflow: $196.0
Rent: $850
Property Taxes: $82/month ($984 annually)
Insurance: $50/month ($600 annually)
10% Vacancy Reserve: $85
10% Management Fee $85
10% Maintenance Reserve: $85
5% Capex Reserve: $42.5
Mortgage P&I : $224

Cash-on-cash: 8.5%

Notice above that the property appraised for $59,000 which is less than purchase price + repairs = $65,000. As you will read below, we had a few hiccups that brought the rehab cost up.

For some investors, this may not be a good deal, but this met our investment criteria and that’s what matters. This is why setting your OWN criteria is key.

The Rehab & Lessons Learned

While I love how cute this house looks, it’s been quite a pain. To begin with, this was the first Macon property that needed substantial repairs before renting it out. Macon is about 2 hours from our house so we asked our property management company to help us manage this project.

Our property manager had a handyman she worked with so we decided go with him. We quickly realized finding quality and reasonably priced labor in Macon was going to be a challenge. The quoted price was above our expectations, but we didn’t have the time or patience to find someone ourselves.

It was our first time using a property manager and it felt nice to be hands-off. The job was getting done while we were working! All we had to do was give instructions and pay. Well, is it always that simple?! Of course not. Using a property manager added a layer of communication. We were used to talking directly to the contractors and now we had to tell our PM and then she would communicate back and forth. That didn’t go too well. A lot of times, we are not 100% of what we want to do rehab-wise, so we bounce back ideas with the contractor. Well, when we tried doing this through our property manager, it didn’t workout so well.

Another issue we had was letting go of control. I am a control freak by nature, so it was difficult for me not to be the one managing the project, so of course, that frustrated my manager so we ran into a lot of inefficiencies and wasted material.

The property was turned quickly and our manager directed us to pay, so we were like, “This is awesome!”. Then, we go to the property to take pics and OMG. The paint was super patchy, several missed spots, the doors didn’t close, the tub wasn’t finished and a whole bunch of small items that we had requested. Luckily, our manager acknowledged that she made a mistake and should have checked before telling us to pay. She finished the job herself and I can appreciate that.

The unit was rented out pretty quickly and we thought it was over when we got a call from our manager that the house had a mice 🐭 issue and it was going to cost $1,900 to hire a exterminator to take care of it 😩. Fine, we took the hit. The treatment worked and tenants were happy. Yay!

Fast forward to September , tenants stopped paying rent and now we have to evict. F*mee!!

The Cottage house has yet to meet expectations, but we are in this game for the long-term so we are not as concerned. The monthly holding costs are low enough that the cash flow from the other properties is enough to cover for this.

We invest in C- and D class properties, so these issues are expected to arise specially at the beginning. The first year is always a heavy hit, but once they are up and running, things tend to settle down. For us, it’s a risk worth taking.

I’ll be sure to update next year

This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

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