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Case Study: How I Earned a 29% ROI on a Deal I Found on the MLS

by Kevin Kiene

How do you achieve a 29% return on investment on a rental property?  Before I tell you how I went about it for my last real estate purchase, here’s a disclaimer, albeit probably not the one you’re anticipating: this is a no-fluff account, so don’t expect a story about how I installed gleaming cherry wood floors all over the house and bought everyone on the block a puppy.  I’m not trying to win glamour points at cocktail parties, but neither am I some parasitic mobster; I went into this deal looking to make money, and I don’t think there’s anything wrong with that.  If you disagree, go read Salon.com while sipping a soy latte brewed with fair-trade espresso beans.

I buy houses in blue collar neighborhoods, for a very simple reason: they mostly sell wholesale, to investors, instead of retail to homeowners.  That means a huge discount on the purchase price right off the bat.  I have to put up with jokes from my friends that I’m a slumlord, because white collar people with advanced degrees don’t understand why anyone in their world would get their hands dirty by dealing with blue collar people in blue collar neighborhoods with blue collar problems. 

But it’s a lot easier to find deals that will offer 29% returns in blue collar neighborhoods, rather than manicured picket-fenced suburbs or trendy yuppie districts.

Here’s the thing: you don’t want awful neighborhoods, with high crime rates and more welfare recipients than workers.  You want stable, old working class neighborhoods, the kind of place where Big Jim works the docks and grew up two blocks away, raised by a dad who worked the same docks.  There should be a stable source of decent-paying, working-class jobs nearby.

Some properties in the neighborhood should be updated and renovated, but many should still be old-school properties occupied by the same couple who’s lived there for forty years. 

Have several neighborhoods in mind, in your neck of the woods? 

After looking through a handful of prospective neighborhoods in my home city of Baltimore, I picked one.  I looked at all the properties sold in the neighborhood in the last six months, on both the local MLS and on Zillow.  I looked at every property’s description, every property’s photos, every property’s square footage.  I got a good sense of what an average-sized house in good condition goes for in the neighborhood… and what constituted a good deal on a property that needs repairs.  Then, I did the exact same thing for all the properties rented or available for rent in the neighborhood.  I walked around the neighborhood, looking at the properties that sold or were listed for rent, and refined my sense of prices and rents.

I saw that there were some good deals sold in the last six months, even if they were snatched up quickly.  Not a lot, but a solid half dozen.  If I had only seen one or two, that wouldn’t be enough to make me confident that good deals do come along in this neighborhood.  I saw that I would need to move quite quickly to land a good deal here, though.

Moving quickly means buying with either cash or hard money.  I used cash, and I strongly recommend cash for many reasons, but I’ve used hard money lenders in the past.  They’re expensive, but the good ones will make it worth your while by moving at lightning speed.

Rental Property Bathroom

I signed up for email alerts whenever new properties in the neighborhood within a certain price range come onto the market.  Whenever a promising new property came on the market, I called my realtors and scheduled an appointment for that day or the next day.  I use a husband-wife team of realtors, so they are far more flexible and can meet me quickly to show me properties.  Seeing properties within 24 hours is not easy, it’s not convenient, it’s a giant pain and involves rescheduling other appointments sometimes or cancelling on a dinner date.  It requires commitment. 

Original Kitchen upon Rental Property Purchase

After a few months of seeing properties,  an intriguing property that had been taken back by Fannie Mae came on the market for $17,500.  When my realtor and I met there, we could not get in, because the listing agent was so inept that she gave us the wrong lockbox code.  We left in disgust.

Eventually my realtor reached the listing agent by phone, and she gave him a different code.  We went back over there, and this code didn’t work either. 

My realtor was ready to call it quits on this property, but I pushed him because the property looked so promising, and clearly no other buyers could get inside the property either, since the listing agent was so incompetent that she herself did not know how to get in. 

The third time, I went by myself, after agreeing to call my realtor if the third code worked so he could meet me there to walk through.  The third code did open the lockbox… but the key inside didn’t work in the rusted, busted lock.  I was not happy.

I called my realtor, explained that after a close inspection of the door, it appeared to be secured by screws or nails rather than the lock, and we got permission from the listing agent to enter the property by de-securing it, as long as we re-secured it afterward.  I called my contractor and he met me there, and we got in eventually, and I asked him for a rough quote on a minimalistic renovation, just doing the necessary things: new kitchen, new doors, new windows, new HVAC, new flooring, minor plumbing repairs and updating the bathroom to make it functional.  He quoted me $12,000, I bumped that to an assumed $15,000 in my mind, told my realtor to put in an offer that afternoon for $10,000 on the house. 

We left the house as secured as we found it: no one else was getting in.  After an extended negotiation with Fannie Mae, we agreed on a $12,000 purchase price. 

With closing costs and repairs, I have about $31,000 in the property.  It rents for $1,150.  When accounting for all the expenses, from expected vacancies to property taxes to property management fees to expected annual repairs, I will earn an expected 29.37% annual yield on my investment.  

A reasonable person might argue that I should include the cost of my time, in finding this deal and managing the property.  After all, I could have put that money in stocks for example, and it would have only cost me five minutes instead of 100 hours of work.  A fair critique, but even if I paid myself $20/hour for the 100 or so hours of work, the extra $2,000 cost would still put me at 27.19% annual yield.  The yield includes the cost of property management fees, so the only time invested by me is the up-front time in finding the property, buying it and overseeing the initial repairs. 

So how did I earn a nearly 30% return on my real estate investment?  Not by doing anything brilliant or sexy, nothing that makes for good dinner party conversations.  I did a lot of research, I spent a lot of time in a dingy neighborhood, I saved up $30,000 in cash, I was unrelenting in seeing promising properties within 24 hours of them being listed, I made immediate, as-is offers to settle within ten days. 

I don’t win glamour points for doing deals like this, I’m no big shot developer planning skyscraper projects and cutting ribbons with giant scissors.  But if I did one deal like this every year for 5-7 years, I could retire and go surf in Costa Rica for the rest of my days, which sounds more glamorous to me than working 60 hour weeks trying to be some big shot real estate developer.

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