The goal of our first renovation project was to find a house we could fix up and rent. We ended up acquiring a West Cobb townhouse (western Cobb county, Georgia) in 2015, that we refer to as our Westwood Project. It was typical of many of the townhouses in the area, consisting of 2 bedrooms, 2 1/2 baths, and 1,419 square feet. We still own this townhouse today. Over the past five years, the home’s value has increased significantly, and the monthly rental income has shot up more than 25%. One of the most unique aspects of this undertaking, besides from it being our first renovation project, was that it was a short-sale purchase. If you are not familiar with this term, it basically means the lender was willing to accept a purchase price less than (short of) the outstanding balance of the loan.
The primary objective of our endeavor was to generate income more profitable than bonds or money market funds and less risky than the stock market. With money market funds yielding only 1% and bonds less than 5% at the time, the hurdle was quite low for finding rental properties with higher income. However, our goal for rental property investments was more aggressive. We wanted the monthly rent to be equal to or greater than 1% of our total investment (12% per year). For example, if we were to buy a property for $70,000 and have $25,000 in renovation costs, for a total investment of $95,000, then we would want the monthly rent on that property to be $950 or more.
Note: We began our journey of real estate investing with a goal of building a rental portfolio. Along the way, our primary activity changed to flipping houses. We anticipate we will eventually reach a point in our life when we say “we are too old for this stuff” and revert back to a rental portfolio business model. Until then, we are enjoying the journey
The Purchase
We found a West Cobb townhouse listed for sale on Zillow. The listing said it was a potential short-sale and was listed at a price of $60,000. We drove through the neighborhood and it appeared to have above-average looks, appeal, and cleanliness for a townhouse community. Zillow estimated rents to be around $800, making it worth pursing. We proceeded to make an all-cash offer of $55,000 on September 12, 2014.
The owner had left the state, was no longer paying the mortgage, and the bank was threatening foreclosure. The foreclosure process is anything but simple, and the short-sale process is almost as convoluted. Short-sales were not entirely new to us. Our previous short-sale attempt in another state was not successful, but it provided a glimpse into the process. In simplistic terms, the mortgage holder (the bank) reviews its delinquent accounts each month and determines whether to 1) accept any short-sale offers, 2) proceed with a foreclosure auction on the steps of the county courthouse, or 3) do nothing (try to wait it out and hope that things get better).
We don’t remember all of the gory details, but we reached a point where the bank decided to start working with us. With the lender now on board, we proceeded with a property inspection on January 15, 2015. About a week later, the bank informed us that we needed to raise our offer to $60,000, which we declined to do. The next thing we know, the deal was off. On January 26, 2015, the bank exercised its right to a “Unilateral Termination” of the purchase and sale agreement. We were out the cost of the inspection, and many hours of our time. More than four months had elapsed.
Then about three months later, the agent with the original listing called and said the bank wants to know if we still wanted the property. We said yes, but that we were now only willing to pay $53,000. After some back and forth negotiations, we finally agreed on a price of $54,400, an amount less than our original offer. We closed on May 14, 2015, a full eight months after the process began. It became known as our Westwood Project.
Renovation
The realtor suggested we just “slap some paint on it and rent it for $800 a month. The values in this neighborhood will never go over $100,000,” he continued. We were determined to take a different approach. We did not want to be slumlords, or anything resembling a non-caring landlord. Instead, we believed our properties should be a source of pride. At that time, we adopted our motto of “we renovate homes as if we are going to live there ourselves.” With five years of hindsight, it is now clear that was a good direction for us to take. We are now renting it for $1,250 a month, and our bank recently appraised the property at $140,000 (so much for that realtor’s advice).
In our view, the property required significant renovation. We wanted to eliminate the drop-down cabinets in the kitchen that blocked the view to the living/dining area, put in all new kitchen cabinets and appliances, replace all of the flooring, update the bathrooms with new fixtures and tile, and then some new paint.
The next order of business was to find a contractor, because we had no desire to do the work ourselves. After asking around, and getting a few bids, we went with a “friend of a friend” that claimed he was up to the task. He said the cost would be $15,500 and it would take him four weeks. We were to supply all plumbing and electrical fixtures, vanities, mirrors, and kitchen appliances. He started work on June 14, 2015. A couple weeks into the renovation project, we determined the roof needed replacement. We solicited a few bids, and decided to have our existing contractor add this to his job scope. We also added new bathtubs with tile surrounds to the renovation list. The contractor became a no-show about six weeks in to the project, and there was more work that needed to be done.
We were then introduced to an extremely reputable contractor, Wayne Collett with Property Plus of Atlanta. Wayne came in, finished the job, and took on the additional task of replacing the siding. Wayne and Property Plus of Atlanta impressed so much that we have used them exclusively for all of our projects since then. Again, with the benefit of years of hindsight, going with Wayne has been one of our best business decisions.
All told, we spent about $37,000 on this rehab and renovation, bringing our total investment to just under $92,000. A tenant moved in on September 1, 2015, paying $995 per month. We met our goal of getting at least 1% a month rent from our investment. See pictures of our Westwood Project.
Property Management
Many first time investors of rental properties refuse to use a property manager, wincing at the thought of having to share a portion of their rental income with a third party. Having been involved with rental real estate since the 1970s, we are here to tell you the cost is worth every penny. We will never again self-manage a rental property. There are professionals that find the tenants, collect the rent, increase the rent, take the calls, schedule the maintenance, handle the repairs, and help you get rid of unwanted tenants. Let these professionals take care of all your rental headaches.
However, finding the right property manager is not always an easy task. Our lifetime batting average is only .500 in this game, with two excellent managers and two disasters. When hiring a property manager, try to get honest reviews and recommendations from their existing and former clients, although sometimes that is a near impossible task. One property management company provided two clues about the bad experience we were about to receive. However, the lengthy contract buried those clues and we missed them. The first clue was the termination procedure. It seemed straight-forward, but on closer examination it was impossible to fire this particular property manager without paying them a 12-month termination fee. The second clue was the clause stating that negative reviews of this company were forbidden, and violations carried a stiff penalty. We did mange to eventually terminate our contract with that particular manager, but because of the “nothing negative” clause, we can’t tell you the name of the company.
Lessons
Despite the trials and tribulations, we consider our first renovation project to be a success. We enjoyed it, and upon completion, we immediately began searching for our next property. Although this was the first Bowport Project, we did have previous real estate experience. While we were probably guilty of being naive regarding certain aspects, we were not naive of the overall process and expectations. We were not shocked that schedules were not kept and costs were not contained within the original budgets. Yes, there will be surprises and obstacles along the way.
What we learned from this project:
- Short-sale purchases require extreme patience
- Your renovation contractor must be reliable, knowledgeable, and qualified
- You must have an honest, trustworthy, and reputable property manager
