After spending some time combing neighborhood sales and rental through MLS & Zillow in Part 1. I contacted my agent next. I signed up for email alerts whenever new properties in the neighborhood within a certain price range come onto the market.
Checking Out Potential REI Deals
Whenever a promising new property came on the market, I called my Realtors and scheduled an appointment for that day or the next day. I use a husband-wife team of Realtors, so they are far more flexible and can meet me quickly to show me properties. Seeing properties within 24 hours is not easy, it’s not convenient, it’s a giant pain and involves rescheduling other appointments sometimes or cancelling on a dinner date. It requires commitment.
I Think I Found A Deal?
After a few months of seeing properties, an intriguing property that had been taken back by Fannie Mae came on the market for $17,500. When my Realtor and I met there, we could not get in, because the listing agent was so inept that she gave us the wrong lockbox code. We left in disgust.
Eventually my Realtor reached the listing agent by phone, and she gave him a different code. We went back over there, and this code didn’t work either.
My Realtor was ready to call it quits on this property, but I pushed him because the property looked so promising, and clearly no other buyers could get inside the property either, since the listing agent was so incompetent that she herself did not know how to get in.
The third time, I went by myself, after agreeing to call my Realtor if the third code worked so he could meet me there to walk through. The third code did open the lockbox… but the key inside didn’t work in the rusted, busted lock. I was not happy.
Inspecting My Potential Deal
I called my Realtor, explained that after a close inspection of the door, it appeared to be secured by screws or nails rather than the lock, and we got permission from the listing agent to enter the property by de-securing it, as long as we re-secured it afterward.
I called my contractor and he met me there, and we got in eventually, and I asked him for a rough quote on a minimalistic renovation, just doing the necessary things: new kitchen, new doors, new windows, new HVAC, new flooring, minor plumbing repairs and updating the bathroom to make it functional. He quoted me $12,000, I bumped that to an assumed $15,000 in my mind, told my realtor to put in an offer that afternoon for $10,000 on the house.
We left the house as secured as we found it: no one else was getting in. After an extended negotiation with Fannie Mae, we agreed on a $12,000 purchase price.
Closing & Repair Costs
With closing costs and repairs, I have about $31,000 in the property. It rents for $1,150. When accounting for all the expenses, from expected vacancies to property taxes to property management fees to expected annual repairs, I will earn an expected 29.37% annual yield on my investment.
A reasonable person might argue that I should include the cost of my time, in finding this deal and managing the property. After all, I could have put that money in stocks for example, and it would have only cost me five minutes instead of 100 hours of work.
A fair critique, but even if I paid myself $20/hour for the 100 or so hours of work, the extra $2,000 cost would still put me at 27.19% annual yield. The yield includes the cost of property management fees, so the only time invested by me is the up-front time in finding the property, buying it and overseeing the initial repairs.
How Did I Earn 29% ROI?
So how did I earn a nearly 30% return on my real estate investment? Not by doing anything brilliant or sexy, nothing that makes for good dinner party conversations. I did a lot of research, I spent a lot of time in a dingy neighborhood, I saved up $30,000 in cash, I was unrelenting in seeing promising properties within 24 hours of them being listed, I made immediate, as-is offers to settle within ten days.
I don’t win glamour points for doing deals like this, I’m no big shot developer planning skyscraper projects and cutting ribbons with giant scissors. But if I did one deal like this every year for 5-7 years, I could retire and go surf in Costa Rica for the rest of my days, which sounds more glamorous to me than working 60 hour weeks trying to be some big shot real estate developer.