We Bought Another Home In Our Neighborhood -Action Economics

Our very long term goal is to ensure that it is affordable for our children to live in our neighborhood if they so desire when they are older. Housing prices have risen way faster than wages and coupled with the massive increases in borrowing costs, locking in housing when a good deal comes along is vital to this long term goal, even if it isn’t at an ideal time for us to buy.

The Listing:

I normally look at Zillow a couple times a day. We were visiting family in Southern Ohio and I did not check for several days. On the way home Mrs. C. was driving and I checked Zillow and the first thing to pop up was this house in our neighborhood with a list price of $149,900. It is a 3 bedroom 1 bath house with a full basement. The house is pretty much move in ready and the best part is that I can see it from my house. The property line is kitty corner across the street from our house, only 75 feet from the corner of our yard. The house had been listed for only a few hours and we immediately contacted our Realtor to see it. The system let him auto schedule an appointment for the next morning.

The house was certainly under priced. I wonder if they took the house we bought down the street as a comp, because the pictures on it were deceiving to its condition. This house is much more comparable to the 3 houses down the road that sold for around $225,000 to $250,000 last summer.

This house sits on just under 1 acre and has a really nicely landscaped yard with a large utility shed in the back. 1 advantage the house has is that it is set up with a whole house transfer switch so that it can be powered from a generator if the power is lost. The generator the house came with is a standard portable generator, but it would be easy to install a more permanent one in the future.

The Walkthrough:

The next morning we were able to view the house and the Listing Agent informed our Realtor that there was an offer on the table and the sellers were likely to accept it, so if we wanted to put in an offer we would need to do so right away.

The pictures represented the property well. There was no clutter or trash and minimal work than needed to be done to make the house move in ready. Some paint touch up was needed, the water heater needed to be replaced, and there was a kitchen cabinet that needed replaced. Overall this was a move in ready house. With us spending a year on the last house and a year plus on the 7 unit that still isn’t finished, the idea of a property that doesn’t need a rehab was very appealing.

We planned to list the property as a short term rental and in the future we have the ability to sell it to one of our kids.

The Offer:

We offered $165,000 for the property and gave the sellers the ability to take or leave any of the furniture. This was $15,000 above the list price and equates to an extra $3,000 down and $80 a month over the course of a 30 year loan. For us to get this house so close to us was well worth it. We hated missing out on getting the 2/1 next to us that sold for $255,000 2 years ago.

The Listing agent called our Realtor later that day and stated our offer was much stronger than the other one they had and the seller would accept our offer. Perhaps we overpaid a bit. In retrospect I could have set this up with an escalation clause to pay $5,000 more than the next highest offer up to $165,000. Oh well. It worked.

Bank Financing:

We contacted our lender and started the process of getting approved. Our finances are so complicated with all the rental properties and the way my W2 jobs works that it is an administrative nightmare to get a loan.

We hit a few hiccups along the way. The lender called us maybe a week in after we dumped all our required documents to ask if we could pay off some credit cards because we are right at 50% debt to income. This surprised us and with some discussion we figured out the problem. They were calculating my W2 income off of my “home rate” and not my total pay for the year. My home rate is roughly 1/3 of my assignment rate and I am on assignment about half the year and work 75 hours per week. Effectively they had my total income at roughly a third of my actual W2 income.

In addition to this I found out that the loan on the other house also counts as debt for our DTI (Debt to Income) because we did not have it rented yet and they are unable to use estimated future rents.

The next hiccup came with the down payment requirement. I was expecting a 20% down payment, but they required a 25% down payment for an investment property. Ouch. Also due to the movement of money in and out of our Heloc and getting a personal loan, we didn’t have enough “sourceable” cash to make this work. The solution ended up being that I needed to take a 401K loan to meet the requirements.

In total we had to upload over 100 documents for this loan. I will give Rocket Mortgage credit, because they were able to close the loan early and it was just over 3 weeks for us to close on the property.

Repairs:

Water Heater: The 1997 water heater needed to go. I replaced this and all the associated plumbing to it. $622.

Electricity: I added an electrical outlet to the kitchen so that we could move the fridge. This house came with all the appliances and they are all in good condition. I also replaced two broken outlets. $0. I had all the supplies needed from previous projects.

Drain clog: The sink had a drain clog, which we hired out for $175.

Cabinet: There was a 20″ cabinet next to the stove that was homemade and did not look great. We replaced it with a cabinet from Lowes and put a new countertop on it. It doesn’t match, but it looks much better. $256. I did end up with a decent chunk of countertop left over than I might be able to use on a future project.

Shelving: We replaced the shelves in the closets. This was one of the last tasks we did and I didn’t do a great job on it. I will replace this again sometime next year. We spent roughly $50 on this.

Door knobs, etc: We replaced some door knobs, cleaned all the ceiling fans, installed smoke detectors and removed some built in shelves in the basement. $170.

Paint: We got a paint match sample and touched up the paint in the living room and kitchen. $75.

Setting Up For Rent:

Furniture: We bought 3 nice used dressers, a gliding chair, 2 twin bed frames, and a pull out couch used for this property. We originally thought the couch was a regular couch but after we paid for it we found out it was a sofa bed. Sofa Beds, especially older ones are HEAVY. I like to buy older furniture in general because it is typically very well made and will withstand some abuse. $283.

For new furniture, we bought 2 bed frames, all new mattresses, and an adjustable height desk. $625.

We also needed to buy a thousand other small things. Portable AC units, TVs for all the rooms, dog beds and bowls, bedding, towels, soap dispensers, microwave, coffee maker, vacuum cleaner, etc. $2,500.

We set up a small game room in the basement that I will make better over time. Right now it has a small Foosball table, air hockey table, and a wall mounted Tic Tac Toe game and basketball hoop. I will likely add some home arcade games in the future and upgrade to larger air hockey and Foosball tables. I spent $90 on the Foosball games and I had the Air hockey already.

Make Ready Cost:

After closing on the house we spent a total of $5,305 to get the house ready to list. We closed on the house on August 22rd and had it listed on Airbnb on September 7th, taking just over 2 weeks to get it ready. We had several different pressures aligning to make turning this house quickly a high priority:

I was starting 75 hour weeks at work and would be on that schedule for 8 weeks.
We had another property under contract that likely would require a significant rehab.
We have 2 long term tenants moving out at the end of September and those houses will need a lot of work for turning them around.
Our cash position has depleted substantially with the amount of cash we have invested in the rehab of the 7 unit, the house down the street, and the down payment of 25% on the property. Getting cashflow coming in ASAP was a high priority because of this.

Our first 2 bookings in the month of September will bring in $1,200, which exceeds our monthly carrying costs. We will have received income to cover our first mortgage payment before it is due. This is in stark contrast to the last property we did where we had to carry it for a year.

This property is lined up with several of our goals:

Own houses in our neighborhood that can be sold to our children when they are young adults
Adjust our rental portfolio to have more short term rentals and fewer long term rentals
Adjust our rental portfolio to be less centered on Benton Harbor
Adjust our rental portfolio to purchase houses that need less work to start phasing out massive rehab projects.

What do you think of this property?