Making $181,000 in 4 months
Story Time
In this post, I'll share the exciting story of my first partnership, the successful deal, and the valuable lessons from experienced investors. Get ready to take a trip down memory lane with me!
Smells like Money
The July long weekend rolled around, and the weather was horrible. It was a torrential downpour, wet and mucky, and trust me, I did not want to be out whatsoever. Everyone was inside, relaxing at a cottage, drinking away, or simply enjoying time with friends and family. Where was I? Looking at properties for my first partnership. The best opportunity to find great deals is when no one else is looking (Maybe during a snowstorm, during a nice hot summer day, during a long weekend, or something similar).
After viewing a few properties on this horrible afternoon, one, small 2 bedroom bungalow on a main street stood out. Entering the home, we were immediately confronted with the smell of cat litter and musky dogs. Not terribly pleasant, to say the least; in the investment community, this is referred to as “smells like money”. Stopping at the door, my partner refused to enter, leaving my realtor and I to wonder about the 1970s dated decor & finishes by ourselves. Paint was peeling from the walls, old, makeshift retrofits everywhere we turned; and mud stains (or at least I hope) smudged into the carpet. Rat scurried around the basement, and water leaked in from the exterior foundation wall. Definitely not for the faint of heart.
We knew this house was not in good shape before we entered, the pictures made that abundantly clear. But in person, we were taken by surprise. On paper, the deal made no sense, it was too small and way too much work, but I couldn’t shake the feeling there was a diamond in the rough here. What the seller did not know, and likely not many of the other buyers as well, was that the property was being misrepresented; the lot and property size was larger than what was noted on the listing, and with a good exterminator and a few minor repairs, the ‘major issues' could have been easily solved.
We offered on the property that night, far below market value and even further below the average sale price of the area. It is always important to remember, scarcity is your best negotiation strategy. On this property we were one of two interested buyers, and were able to be aggressive with our offer because there was minimal competition. We received an accepted offer that night, $480,000 dollars. We were off to the races.
The plan was to take this 2 bedroom bungalow and convert it into a duplex (2 unit property) by separating the main floor and finishing the basement to include a separate unit. This wasn’t going to be easy. By the time we done it would be a entirely new home.
The renovation cost us $155,000. We converting the main floor into a 3 bedroom 1 bath unit and the basement into a 2 bedroom 1 bath unit. Only 4 months later the property was appraised for $840,000, a boost in property value of $360,000. After considering the closing cost (the cost required to purchase the property, not including the downpayment, i.e. lawyer fees, lending fees, land transfer tax, etc.) and the holding cost (the cost to operate the property during the renovations, i.e. mortgage expenses, utility cost, etc.) the rehab costed a total of $175,000. This left us with a built in equity position of $181,000.
$360,000 - $175,000 = $181,000
Property Value Increase - Rehab Cost = Built-in Equity
For a full breakdown, review the calculations below
But we’re not done yet. This left us with $271,000 ($96,000 downpayment + $175,000 rehab cost) invested into the property. With our new appraised value of $840,000 we approached the bank for a new mortgage (Also known as a refinance), afterwhich we extracted $288,000 from the property and now has none of our initial capital invested in the deal.
Some may argue that by refinancing the property, we are increasing our mortgage and thus decreasing our potential cashflow. And while that is true, we are much more concerned with increasing our return on investment (ROI). By extracting the capital we invested into the deal, we are are maximizing our ROI. (Increasing ROI article coming out soon)
And just like that we owned a property for nothing and increased our networth by $181,000.
The property is now rented to high quality tenants — 2 young couples (A financial advisor and a nurse in unit 1 & an engineer and a nurse in unit 2) — and produces just shy of $350 / month in cashflow (after budgeting $510 for unexpected expenses per month), along with an average mortgage principal paydown of $1,160 /month (Total Equity = $18,120/year).
Joseph Costanza
Costanza Capital Investments
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