Financing Rental Property – My 3rd Property

Our house on Madison St. was turning into a cozy little home, and our first rental property was reliably sending a rent check each month.

I had attempted to convince my Dad to partner with me, but something held him back.  He just didn’t want to be a landlord, and honestly I think tenants would drive him nuts, so this was probably wise.  Thus, I thought our partnership was off.  Little did I know, but my mom was working on my behalf.  My parents having paid off their mortgage, were proud owners of a line of credit.  Thanks to my mom, they were willing to let me use this credit line to purchase a property.

I now had the potential to pay cash, which is an ace in the hole for any real estate investor.

I could now purchase property that was vacant, and not currently habitable.  If done right, an investor in this position can get some great deals, and can quickly build sweat equity.  I didn’t have everything formulated yet, but I began looking for vacant, ugly, and solid property.  I soon found an ideal property only two blocks from home.  This property had been a rental for years, the current owners had passed away, the tenant had moved out, and the estate was looking to cash out.

The property was vacant, and it was UGLY, but it was solid.

The walls were covered in peeling, faded wallpaper that certainly was older then me.  The floors were dirty unwelcoming tile that one finds in schools.  The kitchen cabinets were a tetanus shot waiting to happen, appliances were non existent (thankfully as they surely would have been gross), and there was water damage coming from the roof.

 Ugly, Ugly, Ugly.

Lastly, there was a giant vent in the middle of the living room, this covered what I would eventually learn, was a gravity furnace.  This thing churned out heat for the entire house, right into the middle of the living room, from there it wafted from room to room on its own accord.  I can only imagine the former tenants watching TV in their underwear, then sporting a parka to visit the back bedroom.

Out of curiosity, the realtor and I turned up the thermostat, springing the beast to life.  The smoke detectors quickly followed suit.  As the smell of burning crayons permeated the room, we frantically turned back the thermostat and scanned the giant vent for open flames.  I was a bit shaken, but happy to know the smoke detectors worked.

 We decided to head back to the office and write up an offer.

The listing price of $50,000 was the exact amount of my parents line of credit.  I needed to purchase it for less in order to have money for repairs.  I proposed 40,000, which my realtor thought was a bit bold.  The sellers accepted without even a counter offer, making me the proud owner of a vacant fire hazard.  Not to buyers and sellers – always make a counter offer, a simple phone call could save or cost you thousands of dollars.  There is always room to negotiate.  The ability to pay cash allowed for a quick settlement, without appraisals, which is important when buying property that needs work.  At this point, my hope was to use the remaining 10,000 for repairs and materials. Once rehab was finished, I would sign a tenant, then place a mortgage on the property.  If all went well, in a few months the property would be fixed, rented, and my dad would be paid back.  I would own a cash flow positive property, without committing any of my own money, and I would then be able to re-use my dad’s line of credit for future property.  There is nothing better in investing then using the same dollar twice, except using someone else’s dollar twice.

I will detail the renovations in my next post in the real estate series entitled Fulton St. Renovations.

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