The following is a guest post from Investor Junkie, who shares the details of his first condo purchase. His blog discusses all things related to investing and being an entrepreneur.
The time was 1998. I was 28 years old, and still living with my parents in Long Island, New York. I did so, not because I had to, but because I wanted to. Even my girlfriend at the time was bitching I should move out as I made enough money. Needless to say that girlfriend wasn’t my girlfriend for much longer.
Unlike all of my other friends who enjoyed paying rent, I was on a mission. I wanted to own a condo as to me real estate is one of the best ways to increase my wealth. I made many sacrifices and pinched every penny I could. I knew exactly the area I was in the market for, and what type of property. There was a 134 unit condo complex next to the local train station. This made a primary location for New York City commuters like myself since, by railroad it was only an hour away. I got a hold of a friend of the family who was a real estate agent, and asked for comps of sold units for the previous year. The two bedroom, one and half bath units all sold for around $125k, plus or minus $5,000. With these condos the primary variable was how much was renovated since all had the same layout. These units were built in 1973, and were at the ripe age of needing must done improvements. I spotted an inefficiency in the market, and knew my target.
I looked at 5 other units in the condo complex before I found “the one”. After a few months after my initial research I spotted a unit for sale in the local newspaper. It was for sale by owner, and had an open house that Friday. After work I quickly hopped over to the place to take a look. As I entered the unit the first thing I noticed was an older couple walking out in disgust. I walked into the unit, and quickly figured out why. There was the distinct smell of an animal’s wet fur. I found from the presenter this unit had been a rental property since it was built. Everything was original, and nothing had been upgraded since it was built. Too my surprise the smell came from the living room, which had a caged ferret in it. After I inquired about the ferret, the presenter of the property explained to me the tenant had his two sons living all living in this two-bedroom apartment. This explained why the living room ceiling had pinholes in it. It appeared the tenant used a blanket to cordon off the living room into a makeshift bedroom for the oldest son. The story gets better from here.
Upon reviewing the upstairs bathroom I notice a rotting hole in the floor next to the tub. It was literal hole that you could stick your foot into. It appears the tub was never sloped properly, and all stagnant water on the lip of the tub would flow outward instead of staying within the tub. This in turn would cause the cork like material for the floor to expand and eventually rot. The flow of water then proceeded to cause damage on the first floor, which the kitchen was right below. It was obvious from viewing the place it need work and a lot of it. My first thought looking at the unit was, what a dump. But instead of smelling the stench of the ferret, I smelled opportunity.
The owner of the unit was an out of town landlord (California), and for personal reasons needed to quickly sell the unit. I knew other units were going for around $125k and I estimated the unit needed to at least $25k to repair the kitchen, bathroom, and other portions of the property. I instantly knew that this was the unit I had to buy. I would be able to rebuild the unit exactly to my liking and the kitchen and baths are where you get the best bang-for-the-buck when doing home improvements. In order to break even I had to pay less than $100k. Based upon this I initially offered $94,000. The owner waited for other offers that never came. She then countered with $96,000 in which I immediately accepted.
It was great I had an offer within my target price, except I only had enough saved to put a 15% down payment. Where was I going to get the $25k to improve the property so it was livable? In talking with the mortgage broker, they stated I could get the first loan as a 30-year fixed loan, and a second loan that was 10-year $25k home improvement loan. Unfortunately a week before closing the second loan fell through, and I was only left with one loan on the property. I was beginning to get nervous, was where was I going to get the finances to improve the property?
Ironically I bought the condominium so it would make my commute to New York City easier, but I just started a new job. Unknown to me at the time the new job would have me literally traveling around the world. Within the first year of owning the property very little work was done because of my travel, and needing to get the second loan approved by another bank. I calculated I did over 100,000 miles of flight travel, so you can imagine how much work got done on the condominium. My travel time also hindered me from applying for a second loan, and for myself limited whatever time I could put into demolishing, and improving the unit myself. Six months into owning the property, I was beginning to wonder if it would ever be completed so it was in move in condition. I finally got a loan, and then had to wait another month for the work to start. My contractor had to finish other work before he could get to my project.
After nine months of owning the property, the work was completed and I was finally able to move in.
In 2003 I sold the property. I was living with my fiancé and didn’t think it was worth holding onto the property to rent. Rental rates for a 2-bedroom apartment in the area were only going for $1350 month. Enough to cover the mortgage and common charges but left very little profit. I thought it wasn’t worth the trouble renting, and best to take the profit I had (tax free since I lived in the unit). I wound up selling the unit for $230k with a net profit of $110k. Not bad for five years of ownership, and less than four years of living in the unit. As luck has it a little more than a year later, I could have sold it $335k. The new owners made only some minor improvements, and sold the unit for that amount.
My first real estate purchase was a very interesting experience. In retrospect was probably one of the best investments, and learning experiences I’ve ever had. At the time though, I never thought it was going to be completed and made a big mistake purchasing the condo.
- With any investment, short-term sacrifices can lead to long-term gains.
- When making an investment, research as much as possible before taking the plunge. Know the subject better than anyone else. This allows you to make quick decisions and spot opportunities.
- When selling an investment it’s impossible to time the market and sell at the highest value. Don’t be disappointed if you left money on the table. You make money when you buy an investment, not when you sell it.