We Bought A House In Our Neighborhood! Rental House #11 -Action Economics

This summer we were not going to rehab any houses. We even planned to not buy anything for the next 24 months to allow our balance sheet and cash position to strengthen. We did have a couple situational exceptions for this and this house was one of those exceptions. In our neighborhood houses in decent condition have been selling for around $250,000. There had been hardly any sales in our neighborhood for the last decade, then over the past year over a half dozen homes have sold, including the house next door to us that is a 2/1 that sold for $255,000. This house just down the street was listed for just $85,000.

The Listing:

I check Zillow every day, usually multiple times a day. This time I saw the yard sign before the listing was posted. Once I saw the yard sign I kept refreshing the MLS and checking the Realtor’s website for the listing to load. Finally it did and the property was listed at $85,000. The listing went live on a Thursday at just after 4PM and we scheduled a showing for 5PM. The Realtor stated that they wanted highest and best offers in by Monday at 8PM.

The house was listed as a 3 bed 1 bath with 2 car attached garage on 1.3 Acres. The house also included 2 pole barns. The pictures showed the house was cluttered and needed significant repairs. The listing stated “cash or conventional”, however I was sure than a conventional loan would not be approved.

I can’t stress enough how being quick to action is paramount to success in Real Estate investing. We had an offer in on the house before most other people even knew the house existed. A lot of people don’t see the house being advertising until a day or 2 after listing, and then they have to schedule a showing. Most people don’t put in an offer directly after a showing either. I had an offer ready to go within 30 minutes of viewing the property. This being quick to action is also a big part of how our son bought his first house.

Viewing The House:

From the exterior of the house it is apparent that a roof replacement is needed. There is also significant siding work that needs to take place. Windows were upgraded at one point, but the siding was never patched around them.

On the inside of the house it also seemed like they were not planning to sell the house. The house was a mess and full of stuff. There was a dog there. The house did not smell good. The roof damage issues became more apparent as the bathroom ceiling dipped down significantly and the ceiling was starting to fall in on one of the bedrooms. We could see that an extra layer of drywall, then a layer of plywood was added to the ceiling to shore it up (not what to do with a roof leak!) The basement was extremely damp and the sump pump drainage system did not make sense. The house has fuse boxes instead of breakers.

The 2 pole barns were full of stuff. There were also 2 piles in the yard that are full of cinder blocks and broken glass. These will be fun to clean up.

The Realtor did an amazing job with these pictures. They do not show the ceiling damage in the kids bedroom or the bathroom. These pics look a lot better than the house actually did.

Our Offer:

We knew that even though the listing stated cash or conventional that it would be very difficult for this house to get a conventional loan with the roof leak issues. We put in an all cash offer of $91,000 no inspections, no contingencies, and the sellers can take or leave whatever they want from the property. We also were flexible with closing and stated that we can close whenever is convenient for the sellers.

The next day we decided to add an escalation clause to our contract. We offered to pay $1,000 more than the next highest bid (with proof of offer) up to $111,000. I didn’t want to potentially lose this house over 10K. The odds of another affordable house coming up for sale in our neighborhood over the next decade are very slim.

The next 3 days were constant anxiety.

On Tuesday we were at the Goodwill Bin Store in Gary shopping for Mrs. C.’s eBay store and she got the call from our Realtor that our offer was accepted and the escalation clause came in clutch, there was another competing offer at $100,000 and we won the house at $101,000.

This is the longest we have gone without buying a house since 2018, it has been 14 months since we bought the brick house. (Note we put this offer in prior to buying the 7 Unit building, that one just closed quicker.) Part of that 14 month gap did include our son buying his first house and we did spend a few months of solid effort helping rehab his house.

Financing:

We had $100,000 from selling our flip house that we put down on our heloc. We have since been paying our excess cash flow from rental operations on our heloc as well. We paid our heloc down from $200,000 to $55,000, giving us capacity of $145,000. We are using $101,000 from this to purchase the house.

We are looking at 2 options for financing later:

Option 1: Once the roof is on and habitability repairs are made, refinance the house using delayed financing. This would have us taking out a loan roughly 2 months after closing. The big advantage of this is that we get our money back into the heloc to be ready for the next deal. The big disadvantage is that delayed financing loans are limited to the purchase price of the property, so our max loan would be $100,000.

Option 2: Wait 6 months for a conforming loan refinance: Waiting 6 months will allow the loan to be appraised on the current value of the home and not the purchase price. By February we will have made substantial improvements to the property and it should appraise at around $250,000. This would allow us to get a loan for around $200,000 instead of $100,000, We expect to spend around $35,000 fixing up this property, so this refinance would bring in $65,000 of extra cash. This would be used to pay down other debt on the heloc and then onto our commercial loan for the apartment building. Our loan on that expires in March of 2027 and my current goal is to pay it down to a balance of under $50,000 and then transfer the debt to our heloc and pay it off from cash flow within a year. This will keep us from having the high cost of a commercial refinance.

Another benefit to waiting 6 months is the potential for interest rate cuts. It is likely that by March of 2025 mortgage rates will be a full point lower. I am leaning more towards delayed financing. Our cash position is strained right now and although I could fund this rehab out of a combination of cash flow and credit cards, I would really rather not. Having no margin in our lives for an extra 4 months is not ideal.

With either option I plan to pursue 30 year financing instead of 15 year financing. We can always pay extra on it to speed up the loan. All of our other properties are on 15 year loans because our primary credit union only offers 15 year loans for investment properties. Having a single 30 year mortgage in the mix will help with cash flow. Most likely we will end up paying it off in 5 years or less, but not having to is a great option to have.

My views on this price:

This was completely undervalued. With $30,000 of work this property will be a 3/1 comp to houses that sold for $250,000. With another $15,000 it will be a 4/2 and likely worth closer to $300,000. I got a steal on this property.

A major plus to this house is that it backs up to MDOT land on Pipestone creek. This is 1 of 5 houses in the neighborhood that adjoins this land. This gives great fishing access.

Another big advantage is the township this property is in. All townships have an extra 18 mil property tax on non homesteaded homes, but the base rate that everyone pays for this municipality is 22.8 mil, while Benton Harbor city is 45 mil and Benton Township is 32.3 mill. For a property with a market value of $200,000 the property taxes for non homesteaded would be:

Benton Harbor: $6,316
Benton Township: $5,048
Sodus: $4,088

This is effectively a $200 per month savings over the house being in Benton Harbor.

Drama:

We were scheduled to close 30 days out, which would have been towards the start of August. We found out that the sellers were going through a divorce and the wife who was the sole owner of the house ended up needing to go through the eviction process for her soon to be ex-husband who did not want to leave. Our closing was delayed 45 days for this and the seller offered a $5,000 price reduction for this inconvenience, a concession we were good with making.

During the 2 months the property was under contract we did not see a lot of activity from the house. There was not a lot of truck movements and we figured with how much stuff was there that moving out would be obvious. On the day of closing we arrived at the closing office and had our papers signed in 5 minutes. Closing paperwork is really easy when you don’t have a loan.

The closing agent stated that the seller would like to come talk to us and she came into the room (after all docs were signed). We chit chatted for probably 10 minutes, which includes her talking about her husband being irrational, a drunk, and violent. then she states “My husband still needs to pick up his guns from the house and will be coming to the house this evening to get them”. This is a massive red flag. This is information that should have been disclosed prior to the closing meeting, and the closing should have been delayed. However, we are a seller’s dream and our goal was to acquire the property. We deal with crazy situations that are temporary in order to have the property we want long term.

Her husband did not show up that night to get his guns. The property was also full of stuff, which from our contract was fine, but we did not want the situation where the husband might come back and try to say all this stuff is his and he still wants it and we have to store it until he can get it…or worse that he tries to squat there. The sink was full of dishes, the furniture was all there, the pole barns and garage were still full.

We changed the locks and left a note on the door and heard nothing. We then contacted our Realtor to see if there was any contact information for him. The Sellers agent had been working through Lawyers on each side and we heard back that the Sellers Lawyer sent a notice to him that he must remove his firearms by 5PM that day or they would be disposed of. This was not what we were looking for and had our contact info passed on to him.

He called us and we agreed to meet at the property. He was sober, non confrontational, and very apologetic about the situation. Everything worked fine, he got his guns, and we ended up buying a junk truck from him. Everything was handled without issues.

Additional Issues:

I bought this property as-is with no inspections, so all additional issues found are on me. I am not in any way attacking the sellers on this. On the front corner of the house where one of the roof leaks was there was a large piece of furniture. Upon moving it we found that the subfloor was completely rotted away in this area.

When we went to start taking stuff out of the basement we ran into troubles. The stairs lead straight down to a brick wall and there isn’t room to get appliances in or out. I ended up building a platform covering the bottom stair, then a ramp to it to allow for getting stuff in and out.

Value of Stuff:

We are still combing through the stuff left behind, but my first guess is that over $5,000 worth of items were left behind, most notably:

3 riding lawn mowers (all older but working)
1 John boat
1 Kayak
Wood burning stove
Jack hammer
Misc Milwaukee cordless tools
Tool chests
All appliances: Fridge, stove, dishwasher, washer, and dryer
open trailer

The flip side to this is that there is also around -$5,000 of stuff left as well. We will need at least 1 40 yard dumpster, probably 2, to get rid of all the trash left behind and will need to spend dozens of hours cleaning it up. This is in addition to 2 scrap metal runs and 3 truckloads of burnable wood.

Our Plans:

First we need to stabilize the property so that we can get a loan on it. We are going to hire out the roof, and then I will repair the ceiling drywall and siding. I hate doing ceiling drywall but I will rent a lift this time, everyone I know who has used one says they are worth their weight in gold. I also may pursue hiring this out. For the siding we will likely use the Lowes Smart Siding to do the sections where siding is missing.

The entire house will get updated. We will paint and have new flooring installed. It is likely we will replace the appliances as well. The bathroom is getting a full gut.

Big Plans:

The house is a 3/1 but there is tons of space to upgrade this house into the massive garage. We plan to add a large master bedroom with a bathroom to make this house a 4/2. This will add substantial value. 2X4 framing and drywall is cheap. I run electricity all the time so that’s “easy”. The main challenge is tying in the drain plumbing for the new bathroom, which we may need to hire out.

This add on will likely not happen this year. Getting a minimum viable product is the initial goal, then after the property is stabilized we will do this add on, likely in 2026.

The blue area is unfinished space that we would use for the additional bedroom and bathroom. The Green is the actual 2 car garage.

Renting Out:

We plan to rent the house out as a short term rental on Airbnb. This will provide the highest ROI for the property. We will also, at least for now, rent out one of the pole barns for storage. The nicer pole barn is 30 X 48 and the smaller one with a dirt floor is 24 X 40. I plan to put a separation down the middle of the 30 X 48 and rent it out as 2 24 X 30 units with a goal of $300 per section. A 10 X 25 storage unit runs $200 a month around here, so with this being 3 times the size I think $300 is not out of the question. That would get me $600 a month from the large pole barn. For the pole barn with the dirt floor I currently plan for us to use, but I think I could get $200 in the future for once we no longer need it.

Having the storage rented out at roughly $600 – $800 a month total will cover a good chunk of the cost of the house. If we expand the driveway I could also rent out the garage as storage separate from the house. I’m not sure I want to go this route, as I want to minimize disruption to Airbnb guests.

Airbnb:

When we start out with the Airbnb being a 3/1 we can set it up to sleep 8 people (2 in each bedroom and 2 on pull out couch in the living room) When we make the property a 4/2 we will likely set it up to be able to sleep up to 10 people. This property would also be great for the shoulder season nuclear plant outage workers.

I plan to add a game room to the garage, like we did at the Apartment building. In the back yard we will add a hot tub, a nice grill, a shaded pergola area, and a camp fire ring. I will also build a trail going down to the creek.

Future Plans:

I am not optimistic about the long term costs of housing. I think over the next 5 to 30 years prices will only continue to increase. By owning this house I locked in a low cost of ownership for this property forever, which then give me the option to potentially sell it at a reasonable price to one of my kids or grandkids in the future. Controlling more real estate in our neighborhood is a plus. Our neighborhood has around 30 houses and they don’t come up for sale often. This past summer was highly unusual and around 6 houses sold. I think it is entirely possible we will go years without any houses in our neighborhood listed.

Virtually all of our rentals are in the Benton Harbor/Benton Township area, and having some real estate in a different area is good for diversification.

How Does This Balance With the 7 Unit Building?

We are mostly paused on this property. We spent a couple days bagging up trash and securing this property, but that is it. We plan to finish rehabbing a 2 bedroom unit in the 7 unit building and getting that rented out first. With that unit rented out the 7 unit will be cash flow positive with 4 of 7 units occupied and then we can focus more resources on this property. My main goal is to have this property ready for short term rentals by February, which will allow it to be rented for the outage season at our nuclear power plant. We also have a fall outage so this should be a great year for short term rentals.

What do you think of this house?