Yep, you read that headline correctly. We bought a foreclosed rental house!
Instead of me simply writing about it, why don’t I show it to you? … Check out this 2-minute video in which Will and I show off the house:
It started thanks to this website.
A woman sent me an email saying she lives in Atlanta, she’s a regular Afford Anything reader, she owns two rental properties and she aspires to own more. Would I like to have lunch?
Obviously I said yes. I love meeting my readers, and I love meeting people who are passionate about investing.
We quickly became friends … hanging out through several lunches and dinners. One evening, she told me about a foreclosed house that she thought was a fantastic deal. For a variety of personal reasons, she couldn’t buy it herself, but she encouraged me to check it out.
We Checked Out The House …
Will and I toured the house the next day. It’s a 3-bedroom, 2-bath, ranch-style home; 1,450 square feet, built in 1985. It needs cosmetic repairs — cabinets, countertops, carpet, drywall, paint, doors, bath vanities, tubs — but it needs zero structural repair.
The garage door, gutters and water heater need to be replaced. Some roof damage needs to be patched. The deck needs to be demolished and replaced. Otherwise, the house is in fairly good condition.
How Much Did It Cost?
At this point, you might be thinking: “Okay, Paula, enough already! Get to the good stuff … how much did it cost?”
First of all, let me just say that at the height of the housing bubble, in the year 2005, this house sold for $97,000, according to public tax records. The house went into foreclosure last year, and ….
… we bought the house for $21,000. That’s not a typo. We bought this house for one-fifth of its peak value. We bought it for less than the price of a car!
My concept of “total purchase price” equals the initial purchase cost PLUS the initial repairs needed to make it rent-ready. When I saw the house, my gut reaction was that the upfront repairs would cost roughly $10,000 to make the space habitable. We called in a professional inspector, and he agreed.
In the end, the “total purchase price” (purchase + repairs) will be around $30,000.
Remember when I discussed the “one percent rule of thumb” a few weeks ago? The One Percent Rule states that you should look for properties in which the gross monthly rent equals one percent of the purchase price or more.
One percent of $30,000 is $300. Two percent is $600. I’m fairly certain that I can get three percent, or $900, for this three-bedroom single-family home.
How Do You Afford It?
We paid cash for the house, which sounds impressive — “we bought a house in cash!” — until you consider that a new Toyota Camry costs more than this house. (The Camry starts at $22,000).
We saved that cash last year, in 2011, so I’m not counting the initial purchase cost towards my goal of investing 100 percent of my 2012 income. We saved roughly $28,000 by the end of last year, which we earmarked for some future investment. (We thought we’d use it as a down payment on a rental home … not realizing we’d use it for the entire cash purchase of a house!)
We’ll use a combination of do-it-yourself labor plus contractors to carry out the repairs. The most expensive tasks — like installing a new water heater and doing some electrical work — we’re going to do ourselves. (Specifically, Will is going to do himself. Don’t worry, he used to own an electrical company).
Simple touch-up tasks, like painting the front door, changing out the door hardware, and replacing the switchplate covers, I’ll do myself. Time-consuming and frustrating tasks, like installing a new garage door, we’ll hire out to contractors.
UPDATE 04/09/2012: The house is fixed and ready to go on the rental market! See the “after” photos here. And from that page, continue onto Part 3, where you can learn how much money this house rents for, and how much passive income we collect!