In my last article I shared the details of the worst deal I’ve done in a long time.  So if the title of this article sounds a bit braggy, feel free to check out the doozy I wrote about two weeks ago.

Ironically, around the same time I was doing one of the worst deals I’ve done in a while, I concurrently wrapped up one of the best deals I’ve done in a while.

I think there is a lot to be learned from the painful deals as well as the success stories, so here is a recap of how this one played out so that hopefully you can take this information and replicate for similar results.

Deal Details

How I Got The Deal

There isn’t one single form of marketing that I rely on to bring  all of my deals.  Some of the deals I’ve purchased were listed on the MLS, others came from wholesalers, and many came from direct to seller marketing.

However, when I look back, the absolutely best deals that I have ever done came from sellers calling me directly from my roadside signs (better known as bandit signs).

There are lots of reasons bandit signs tend to bring in the most profitable deals, so I wrote a step by step guide to exactly how I market with bandit signs if you want to check it out.

This deal is a result of one of those signs.

In 2016, the seller, a burnt out landlord, called the number on my bandit sign and left a voicemail that he was interested in selling a couple houses (this was the only one that I ended up purchasing from him FYI).

This property was located in the Chicago south suburb of Hazel Crest, a town that works really well for the VASH veteran rental program due to the relatively high rent rate compared to the affordable prices.  It was the ideal rental at just under 1,000 sq ft, three bedrooms, one bath, no basement, and built in 1972.

The current owner had used the home as a rental, however after the tenant had recently moved out, the seller moved into the property and completed some updates while living there.

After his call, I did some initial screening to ensure the house was in the ballpark of my buying criteria and then I met him at the property to discuss the deal.

When I meet a potential seller, I always try to figure out the answer to one question, “what problem are they having with the property, and how can I help them solve it?”  This should always be your intention as buyer, not how to get the lowest price.

Armed with this intent, I went into the meeting asking lots of questions and listening for the problem I could help solve.

He told me had been managing the property himself and was burnt out.  He tried to list the property on the MLS, but after two different buyers pulled out of the purchase contract due to financing issues, he was willing to sell for a pretty substantial discount as long as it was for cash with a fast closing.

Luckily I had the cash available and could close quickly.

The Numbers

We did not come to an agreement and sign a purchase contract on the spot.  We spoke several times over the following week and eventually agreed to a purchase price of $26,500 with a closing 2 weeks later.

Because this was one of the first deals I had done after transitioning from my previous flipping business to this new buy and hold model, and because I was new to investing in this area, I negotiated for a little bit lower purchase price than normal to account for the unforeseen risks associated with this new model.

In running my numbers, this deal exceeded my buying criteria and was a great one to start building the portfolio with.

$26,500 – Purchase Price

$1,000 – Repairs (it was practically turn key)

$1,450 – Monthly Rent

The Financing

I purchased this property using my self-directed Roth IRA.

Because of the low cost basis of the property, and because it was practically turn key, this was the ideal property to own with a self-direct retirement account.

All I had to do was list my IRA account as the buyer on the purchase contract, and two weeks later when we closed on the property, the funds came directly from my retirement account, and technically I did not own the property, my retirement account did.

I recent wrote about how and why to own properties in a self-directed retirement account, but here are some of the highlights of why I purchased this in my Roth IRA.

• All of the rental income is tax free
• There wasn’t much depreciation benefit lost since the property has a low cost basis
• When you sell, all of the capital gains are 100% tax free

The Management

I lease the majority of the properties that we own to homeless veterans through the HUD/VASH program, however, because there was not a veteran with a 3 bedroom voucher needing a home at the time we leased this property, we ended up renting it to a section 8 voucher holder.

He rented it for $1,450 per month shortly after we purchased the property and he remained in place until we sold the property just over three years later.

Initially the housing authority paid 100% of the tenant’s rent, but over time, his income increased and eventually he paid about 50% himself, with the other 50% being paid through direct deposit from the housing authority.

Over the 38 months that I owned the property, the gross rents that were deposited into my self-directed IRA were $55,100 with expenses coming out for insurance, taxes, and minimal repairs.

The Sale

In 2019, we sold the property turn key with the original tenant in place for $87,000, for a 226% gain on the sale, plus the net cash flow accumulated over the three years of ownership.

So why sell when things have gone so well? 

There is no perfect answer as to when the best time to sell a rental property, but in this situation the factors that played into my decision were:

• We have already seen significant appreciation
• The gains can be taken tax free and compounded into another investment (also tax free)
• There is a premium value for a buyer to purchase a stabilized, turn-key rental
• My biggest competitive advantage is in forcing appreciation through renovation, so I can use the built up equity in this property to force more appreciation in a new deal

Main Takeaways

It’s impossible to predict how a tenant will perform or exactly how much a property will appreciate.

All an investor can do is purchase based on sound financial principals like, high cash flow to low purchase price, lower cost of purchase than cost to build the same house, and very low purchase price relative to the comparable properties in the area.

Even if we are unsure of every detail of the deal, if the fundamentals indicate that the deal is a home run, then we at least know there is some room for error.

Because I was new to this strategy and this area, I was unwilling to do a deal unless I knew there was a lot of room for error, in this way, being a beginner can have some advantages.

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