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I Invest In Real Estate

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House 01

This is a picture of my first investment property, which I bought in 2003 and it is a good example of how I go about real estate investing. It is sometimes called BRRRR: Buy, rehab, rent, refinance, repeat. I had sold a house and done well, and had around $40,000 to invest. My original plan was to buy a house for cash, pay for repairs on credit cards and flip it. I *did not* want to deal with tenants.

However, I noticed on the MLS that this house had an assumable mortgage. Since I had read a lot about real estate investing, I knew that this was rare, and an opportunity. In fact, I have never seen an assumable mortgage since this house in 14 years of investing. What happened was this: The house was originally owned by an investor named Donald who owned the house free and clear. He sold to another investor named Mario and gave him an assumable mortgage. So, I bought the house for $95,000 with about $40,000 down and assumed a mortgage of $55,000. My realtor had told me that the house would be worth $120,000 fixed up, which sounded good to me. I would gain $25,000 in equity once I made a few repairs. There were no closing costs, so I saved a couple thousand on financing. The catch was that I couldn't sell or refinance for a year due to a lock-up clause. I would have to get a tenant.

When I first got the house, I couldn't sleep. Real estate investing is very profitable, but there is always a moment when a lot of money leaves your bank account with a whoooosh and you are left with a not-so-great house that will still cost you money to get ready to rent. That never changes and it is never a good feeling. So I did a lot of painting at 4 AM since I wasn't sleeping anyway! I saw that there were various repairs around the house, and I couldn't figure out how to fix any of them. That was upsetting, since these were very basic things, like getting a lock to lock properly and getting a window to open. Fortunately, I found a handyman named David who was exactly my age, who would do 8 more houses with me over the years. He came over, made all of the repairs right away, and we set our sights higher.

The second floor of the house (a "craftsman home" which had probably been ordered from the Sears catalog originally!) had been half-finished. One part had been made into a bedroom. The other half was just attic. We set about putting up drywall, lighting, some outlets, creating a closet and turning that room into a bedroom, raising the value of the house. This is called "forced appreciation". I turned a 3 bedroom house into a 4 bedroom. We re-did the kitchen, sanded the floors and turned a boring, uneven concrete slab into a nice screened in porch by pouring some concrete until it was level and erecting some screens around the porch.

Then, I set about getting a tenant, which did not take long. The first woman to look at the house begged me to not rent to anyone else until she could come back with a deposit. I am still waiting! Fortunately, my first tenants were good ones, as most have been. Yes, I have had bad tenants. But, when all was said and done I had a mortgage payment of about $500 a month and rented the house for $800. So, I was $300 a month cash-flow positive and now owned a house worth about $120,000.

After a year, or whenever the mortgage lock-up term ended, I asked the deed holder (Donald) to give me a lower rate, since the market had moved down. He refused, so I had the house appraised for $125 or $130,000, I forget, and took out a mortgage of $100,000. Once his $55,000 was paid off, I received a check for $45,000. That was basically my original investment, except now I had a house that was grossing $3,600 a year in rent and had $25,000 in equity. I was hooked and ready to look for my next deal. Remember: Buy, Rehab, Rent, Refinance, Repeat.

I still own this house today. I had to go back and put in replacement windows and new HVAC a few years later. These days, I do all of that right away when I buy a house. Back then, I spent as little as possible and had to do remedial work on my first few houses as a result. However, the house has remained a solid rental property to this day.

In 2017, the house I paid $95,000 for is now worth $171,523 (Zillow). Also, I have paid the mortgage down to $73,265, so I have just about $100,000 in equity in the house. I have had $0 in repairs so far in 2017 and my tenants pay on time every month. The house rents for $813 a month ($875 but my property manager takes his cut) and my mortgage payment is $643, so I get $170 a month in positive cash flow. Also, the loan pay down every month is $230, so the house brings me $400 a month total.

It was a good first investment, and opened my eyes to the positive side of having tenants. I took on a lot of debt, but even with vacancies, haven't paid any of it myself - my rents have covered the payments. Also, the house continues to go up in value. If I had flipped the house, I would have owed short term capital gains tax and would never have made a penny more. This house inspired me to look for my next project. I will write that one up when I get a chance.
SW-User
what do you think about real estate bubble ?
Capo2 · 56-60, M
@SW-User A lot depends on your local market. If you buy low enough, you can protect yourself against downturns. If you have tenants you can ride out down markets as long as you make your mortgage payments.

 
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