Wednesday, October 19, 2016

Anatomy of a Deal

Four years ago I bought a single family house in the Ballard neighborhood of Seattle for full list price on the Northwest Multiple List Service. The common wisdom is that nothing in Seattle cash flows (it is mostly an appreciation market), that there are no investor deals on the NWMLS market, and that one cannot make money paying full retail. All of these assumptions are false.

This house had four bedrooms/two baths on the two upper floors, and one bedroom/one bath in the attached mother-in-law unit in the basement. The elderly seller had previously rented out the entire house for $2300/month. She was having trouble selling this property and it sat on the market for over a month, primarily because all doors seemed to lead to the kitchen (4 entry points), and the main bath had a jetted walk-in tub - expensive to buy or to remove, but great if you are into hydro-therapy.

It was listed for $409,000 in 2012, which is what I offered in price. The Seller was willing to consider owner-financing, with $35,000 down on a seller note at 5% simple interest only, cash-out in five years. Monthly payments are $1558.33.

An inspection revealed a crack in the sewer line to the street, which the Seller repaired prior to closing.

My $35,000 down payment came from a private lender (whom I subsequently cashed out about a year later). My $12,000 real estate commission was used to pay closing costs, and make repairs. So basically, I was able to purchase this property with no mortgage, no credit check, and no money out-of-pocket.

I moved things around in the kitchen and was able to block off one of the entry points there; painted the interior; and remodeled the MIL to make a more habitable space for an on-site property manager.
I converted the new sunroom to a bedroom by adding a wardrobe closet. Then I furnished the common areas, and rented out each room on a monthly lease agreement. Currently I collect $4225 in monthly rents, so cash flow is approximately $2000/month.

My on-site property manager pays rent, but gets a discount for property manager duties.

Property management duties include collecting and depositing rent, showing vacant units to prospective tenants, doing move-in/move-out walk-through, advising owner of needed repairs or tenant problems, advising tenants of energy conservation efforts, ordering common household supplies, yard work, coordination with contractors as needed. I rarely go to the property or meet the tenants in person.
It is true that Seattle is a great appreciation market, and I conservatively estimate that equity in this property has gone up by at least 50% in the time I have owned it. So there is at least $200,000 of equity in a SFR property that cash flows $2000/month. That, folks, is a home run.
Such opportunities are not always easy to find, but they are out there. Keep looking, and use your creative acquisition tools to hit your own home run...
Happy Investing!

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