This was the third property in my personal portfolio. After dealing with management issues and property issues earlier in the year, I figured I would get something more or less rent-ready. This house has proven to be a solid performer over the last year and a half.

What is it?

This is a single-family home in south Janesville, Wisconsin. Details:

  • Built in 1950
  • 3 bedrooms, 1 bathroom
  • 1 1/2 story house built on a slab – no basement
  • Large 1-car detached garage
  • Fenced back yard.

How did I find it?

This house was listed on the MLS. I happened to catch a Zillow notification of an open house on a Sunday, so I headed down to take a look. I had actually been looking in this area for a while, but prices and availability had kept me out – plus, it is a pretty popular area for both investors and owner-occupants. This one was kind of an oddball – most houses in this area are small 3/1 ranch houses on basements. 1 1/2 story houses are not nearly as popular, and no basement really hurt this particular property from an owner-occupant perspective.

What did I pay for it, and how was that price negotiated?

The house was listed at $89,900, which was fairly low for the area. It has a pretty obvious roof issue, and the owners at the time had an accepted offer on another house in Janesville. My offer of $85,000 with no contingencies and a flexible close date was ultimately accepted. The ability to close quickly and on the seller’s schedule helped my offer stand out.

How did I fund it?

I used a line of credit secured by a mutual fund portfolio to fund this project. I also added funds to the closing statement for a new roof, which was completely immediately after closing. The plan was to replace the roof, get the property rented, then put a commercial loan on it.

What did I do with it?

I still have this property today. It has been rented for a year and a half at this point (February 2021) to the same tenant for $1,095/mo plus $60/mo as a pet fee. The new roof cost a little over $7,000 (it needed new sheeting as well, which I expected), so I ended up with around $92,000 in the project. I was expecting an appraisal in the $100K – $110K range, which would have been fine as I would have forced a little bit of equity with the roof and still would have a solid performing asset. Sadly, the appraisal came back at $88,000 – which I still disagree with. I ended up putting an 80% LTV (right at $70,000) commercial loan on this property and two others that is a 5-year ARM, 30-year amortization, and 4.7% interest (this was late 2019.)

There have been no other major repairs since the roof. Most of the smaller repairs happened between 9/1/2019 and 10/31/2019, and were more make-ready and new property type of repairs. Looking at just 2020, repairs were under 3% of the gross rents with no cap ex. 2020 cash flow averaged about $715/mo after all expenses. I have around $22,000 in the property, so that comes out to an actual 39% cash-on-cash return.

Zillow has the property value at just under $100K as of early 2021. My agent and I both believe the actual resale value is closer to $115K if I were to sell it. Even at the low end, that is around 9%/year appreciation.

What did I learn?

The big lesson on this place was to allow enough time to pass between the purchase of a value-add property and the refinance to keep the original purchase price from factoring into the appraisal. I bought this house in August 2019 and refinanced it in October 2019. I have to believe that the $85,000 purchase price from less than two month ago weighed heavily on the $88,000 appraisal that I received.

The other lesson was that I would much rather have nicer properties in nicer areas, even if the theoretical cash flow is going to be lower. Just that fact that the higher rents make actual repairs a lower percentage of the gross income helps a lot. Add to that the better tenant pool you will attract and you have what I would consider a far better asset to deal with long term. It changed my buying guidelines in that I won’t buy another house that rents for under $1,000 (unless it is a smokin’ deal), which limits the areas I even look in these days.

What are my future plans with this property?

I plan to just hold on to this house and let it cash flow. I’m sure it will have some repairs/cap ex coming up, but it is performing well right now. I would look to refinance it again, although I would be looking at pre-payment penalties if I do. Having the equity is not a bad deal, and maybe some day I can use it to secure a line of credit.