In this video, I am reviewing a rental property of mine where the tenant has recently moved out.
When I purchased this house around 5 years ago, the tenant who was paying $800 came with this house. I purchased it as a rental property with the tenant in place and my purchase price was $75,000. I borrowed the entire purchase price (plus closing costs) to buy this property. This house was purchased with no money down. My goal was to employ the Buy, Repair, Rent, and Refinance Strategy is also known as the BRRR Method. With this strategy, I really like buying rental properties with tenants in place.
One of the primary benefits is that when a wholesaler is trying to sell a property that has a tenant living in it, usually the tenant is resistant to showing the house. This gives me an advantage in that a lot of potential buyers will keep calling the wholesaler to try and schedule an appointment to see the house. While they are doing this, I go by the house, review the pictures and make a decision without going in the house. I have purchased many properties at a discount using this strategy.
The second benefit is taxes. If I buy a property with a tenant in place then I simply ride out the terms of the lease and while I am doing so the tenant is paying me rent. When the 1 year lease expires, I can make a decision on whether or not I want to increase the rent or whether I want to fix the property and sell it on the MLS. If I opt for the fix and sell option, If I have owned the property for more than a year then this sale will register as a long term capital gain and be taxed at a lower tax rate.
This is a classic Buy, Repair, Rent, Refinance which is my favorite strategy. I purchased the property with no money out of my pocket with the tenant in place. I purchased it at a discount to fair market value and I utilized a private lender loan. And then I refinanced the loan into a long term conventional fixed rate mortgage.
One of the first things that I did at lease renewal was increase the rent to $1,000. In subsequent years I increased the rent to $1,200 and then $1,400. Current market rents are now $1,600.
This house was appraised last year for $242,000. So the value of the house has more than tripled
With this option, I would basically be painting the interior, installing new blinds and ceiling fans, resurfacing the kitchen cabinets, and putting in new appliances. That option will cost me around $12,000. That is the cheapest and simplest thing to do and is probably the option that I will go for. Since I have a long term mortgage at a low interest rate, I don’t have a lot of incentive to sell.
With this option, I would redo the exterior of the house including removing the siding and putting new stucco to make the house look newer. I would also replace all of the windows with new vinyl windows. On the interior, I would redo everything including the floors, a brand new kitchen with a granite or quartz countertop and stainless steel appliances. In the bathroom I would convert the tub to a stand up shower and put new tile and a new shower door. I would essentially remodel the entire house inside and out. My costs to do this renovation would be around $43,000 including appliances.
Here is the breakdown:
Total Estimate $43,000
Cash laid out $43,000 possibly higher if things come up (which they often do). This rehab could easily get to $50,000. Then I would be trying to list the house for around $279,000 and hoping to get a new first time home buyer at that price. That strategy is risky right now because prices are declining. The time from starting rehab to closing could be 5 or 6 months. During those 6 months prices could decline. If I could not find a buyer at that price I would be forced to discount the price to the point where I could find a buyer, or I would have to rent the house completely renovated. Neither of those is a great option. A better option might be to try and sell the property “As Is” to another investor or a homeowner looking to relocate to Florida that doesn’t mind buying a house that needs some cosmetic work.
This is looking like a solid option since I can just spend $12,000, repair the house and make it look good and ready for rent. Then I can rent it out to someone for $1,600 or maybe a little more and get first, last, and security of $1,600 x 3 which would be $4,800. My net out of pocket would not be that bad. If I pick a good tenant, I may find someone who wants to stay in this house long term. And I can just sit back and collect the cash flow, knowing that every month that that tenant pays the rent, my mortgage is being paid down and I am collecting the cash flow.
That is how you create financial freedom and wealth. The value of this house will double in 15 years.
If you want to learn to find properties, fix them up, rent them out, and refinance them, then you don’t want to miss my upcoming Fixing & Flipping Houses Boot Camp. Learn more by clicking the button below: