Case Study - Our Process, From Discovery Through Lease

In this article I will explain in detail how our process works by following a property from discovery through leased. Cleo (my business partner) was the purchaser of this investment property so we can share any and everything about the acquisition. Included in this article you will find links to:

  • Initial walk through video
  • Initial return estimate
  • Property manager's opinion of the property
  • Initial rehab estimate
  • Purchase contract
  • Inspection report
  • Final rehab estimate
  • Day-by-day rehab progress video
  • The final marketing photos

Note that no part of our normal process changed just because Cleo bought the property. The following is what we do for every property.

The Property

The property is a town home located at 9473 Borough Park St in the south west part of the city and is marked on the map below:

The property was initially selected using our software. Our first viewing is captured in this video. (That is Cleo in the video.) The property appeared to be worth further consideration so we ran hand comps, which supported a purchase price of $180,000 (the asking price) and a rent of $1,150.
Below are the numbers:

Assumptions

Item Value
Purchase Price 180000
Rent (Mo.) 1150
Fees (Mo.) 90
Insurance (Yr.) 350
RE Tax (%) .86
Management (%) 8
Closing Cost (%) 3
Loan Rate (%) 4
Loan Term (Yr.) 30
Down (%) 20

Recurring Expenses (Mo)

Item Value
Debt Service -687
Insurance -29
Property Tax -129
Assoc. Fee -90
Total -935

Income (Mo)

Item Value
Rent 1150
Management -92
Total 1058

Return at 180000 and 1150/Mo.

Item Value
Cash Flow/Mo. 123
ROI 20 3.5%
Cash/Cash 5.3%

We know this specific community and it is located in an excellent area with new construction all around the area with lots of shopping and such going in. We were both very positive on the long term prospects for this property so Cleo was less concerned about short term return and focused more on the long term profitability.

We sent the video to the property manager for her opinion and below is her opinion:

I have reviewed the video and really like the floor plan and the neighborhood is great.

There are a few items I would look to change: I would get all kitchen appliances to match. The mismatching right now is tacky. Of course the slider blind needs to be replaced. (I would look into just a curtain rod and light weight curtain since there really isn’t a privacy issue (that I saw.) Keeping the curtain drawn up on the NON-opening side would add a color accent to the kitchen and you wouldn’t have to deal with pesky blinds. Just a thought. The garage is very large. I am not a fan of the washer and dryer in the garage but there are pros to having it there. As a rental, most tenants do prefer W/D inside the property. I would paint the walls. It feels VERY white in there now. The light beige that Eric puts on the rentals is a very warm and neutral color. The carpet looked to be in good shape but if there is gonna be yours to live in you may want to upgrade the flooring.

Overall a very nice real estate purchase. My only complaint would be the walk to the front door. It is long and not very appealing (but as the owner you would very rarely be taking that route since you will be pulling into the garage and accessing the property from there. )

If you were interested in rents---- Should be $1195 with the items mentioned above completed. (It sounds like this is gonna be your own property so the rental comp may not have been needed but good to know)

At $1,195/Mo., the return is:

Return at 180000 and 1195/Mo.

Item Value
Cash Flow/Mo. 164
ROI 20 4.7%
Cash/Cash 5.6%
We next estimated the rehab cost based on installing tile throughout the property with the exception of the bedrooms. There was already tile in the baths and kitchen, which had to be removed. The initial estimate is below:
Cost Qty Unit Cost Extension
Ceiling Fan 2 150 300
Ceiling Light 4 50 200
Replace Carpet 30% 1.8 758
Tile 70% 4.70 4619
Paint Interior 100% 1 1404
Blind 2 60 120
Estimate Total 7401

There are other items we expected to be discovered during the inspection so we ended up estimating the rehab to be approximately $8,500 plus a new microwave and a refrigerator. Adding these costs: $8,500 + $800 (refrigerator) + $350 (microwave installed) = $9,650. This still made sense due to the specific property and what is developing around it.

Cleo offered the asking price of $180,000 because we expected multiple offers on this property due to the specific community (and there were indeed multiple offers) and we believed others would offer more than the asking price so she did a few things worth noting in the purchase contract (Here is the purchase contract.) which are listed below:

  • The contract is very clean, no request for any seller concessions.
  • Page 3 and 4 of the PDF: Cleo did not ask for anything but the "minimum" seller cost items.
  • Page 5 of the PDF: Note that Cleo asked for zero repairs ("Seller's Additional Cost and Limit of Liability"). This is a big deal to sellers and makes an offer much more attractive than offers with a repair allowance. The concern is that once the seller starts the repair, other items will be found and the costs (and hassle) will increase. Most sellers just want it done and look for the easiest and safest path for disposing of the property. So, by not asking for any seller concessions, sellers will generally perceive a much lower risk and will frequently accept a lower offer. However, if something significant was discovered during the inspection, we would have gone back on the seller for repairs despite what is in the offer. We've done this many times. Ask us about this if you would like more information about this technique.

The offer was accepted and Cleo had the property inspected. Here is the inspection report..

Nothing significant was discovered during the inspection. After the inspection and the walk through by the property manager we now had a fairly clear list of what needed to be done so I met with the handyman and put together a detailed estimate of the rehab cost. Also, we were able to obtain a used refrigerator and a lower price on the microwave for a total cost of about $400 which is not included in the cost list below. The revised rehab cost estimate is below.

Cost Item Labor Materials Labor & Materials Total
Paint walls and trim 1400 1400
Repair crack in master ceiling and paint the whole ceilings 600 600
Install new tile in the whole house except the bedrooms. 840FT of tile @$4.50 3780 3780
Demolition 600 600
New baseboard 700 700
New carpet in 3 bedrooms 540SQFT @$1.80 972 972
Replace 4 fixture lights 160 160
Replace bulb lights as needed and new batteries on smoke detectors 80 80
Adjust lock in garage door 30 30
Install new screen door 100 100
Fix the water heater 80 80
Repair stucco and touch up paint 200 200
Secure garage box opener 50 50
Attach tile on roof 50 50
Install back flow in exterior faucet 20 20
Install thermostat 50 50
Replace blind in living room 100 100
Install new fan in master bedroom 180 180
Install new microwave in the kitchen 80 80
Install 2 angle valves 80 40
Repair kitchen faucet 40 40
Move appliances 100 100
Replace blind next to the entry door 60
Install curtains at the sliding door 40
Grand Total: 9512

Adding the $400 for the refrigerator and microwave the total is now ~$10,000. We reran the numbers and the return was still acceptable with the revised rent estimate ($1,250/Mo.) so we continued with the purchase.

Here is the full set of videos, including the daily rehab videos.

Once the property was cosmetically complete, I took marketing photos (as we do for every property) and here are the photos.

McKenna Property Management did the final walk through before they took it under management (a few more items were discovered and corrected at no additional cost). Based on the final condition of the property, the rent was set at $1,250. The property closed on 9/23/2016 and was placed back on the market on 10/08/2016. It went under contract 10 days later on 10/19/2016 for $1,250. The tenant moved in on 11/1/2016.

Summary

In this article we explained how our process works by following a property from discovery through leased. The processes followed are the same as we do for every property.

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