The first home I ever purchased was an all-cash purchase in 2010 for a 2-bedroom 2-bathroom condominium in an abandoned complex. I will tell you more about that purchase after I provide more context.
Before meeting my wife, all my money was in stocks and savings accounts. However, my wife was a homeowner even before dating me. I was shocked to learn that my girlfriend (who eventually became my wife) managed to save up enough money for a down payment to purchase a home all by herself. I had always flirted with the idea of purchasing a home but never thought I had enough money saved for a down payment.
Taking the leap into Real Estate
Living in California jaded my perspective of ever becoming a homeowner due to the skyrocketing home values happening all around me before the 2008 housing crash. My wife and I were married in 2009. While living safe and sound in my wife’s home in Chicago, I watched my stock portfolio almost vanish before I sold off everything in a panic. During this moment in my life, I was in a very stressful state of mind that I shared with most of the general public except for my wife. Instead, my wife had an epiphany that we should take what remaining cash we had left in that stock portfolio and buy some distressed properties. The financial crisis had created a unique once in a lifetime opportunity to buy homes at discounted prices.
Being a stock investor, I obviously follow Warren Buffet who is famous for saying, “Be fearful when others are greedy and greedy when others are fearful.” Buying distressed property at that time was the last thing people wanted to do with cash because everyone was scared of the financial collapse that almost happened. During that time, the idea of hiding money under your mattress sounded like a better option than leaving it in a bank that was about to go bankrupt. My wife had other ideas and convinced me to purchase a distressed property instead with the cash remaining in our bank and stock accounts.
How to Buy a Distressed Property
My wife and I started touring distressed homes to buy with our agent which was surprisingly easy since there was hardly any competition. Most of the homes we were looking at had been abandoned or in bad shape due to renovations gone wrong. A good handful of properties were repossessed by the bank as many ambitious owners had over-leveraged equity loans that had became outstanding.
The home that we eventually purchased was 2-bedroom 2-bathroom condominium. It was inside an abandoned complex building with several other units that had been half renovated. For the unit we were looking at, many of the more difficult projects had already been finished such as hardwood floors, electrical, and plumbing however due to the building being abandoned, the kitchen cabinets and mechanicals (water heater, furnace, air condition, appliances) were stolen which explained the padlock on the front door.
pad lock on door of foreclosed home
The subprime mortgage crisis was caused by subprime loans defaulting simultaneously causing banks to become insolvent, therefore the bank that repossessed the 2-bedroom 2-bathroom unit we were interested in purchasing wanted an all-cash buyer. Lucky for us this created a perfect buying scenario with no competing offers to bid against and the bank holding too many repossessed homes and was therefore desperate to get rid of these homes at reasonably low prices. We submitted our offer for the unit and it was quickly accepted with no counteroffer games given that the bank had been reducing the price on the unit every month trying to attract any buyer willing to take on such a risky property.
What risks come with a distressed property?
Buying a distressed property is not like a normal housing transaction sale.
- The seller of the home is a bank and not another person.
- In order to buy a distressed property, we had to hire a lawyer to verify that there were no liens against the deed.
- Paying cash made the transaction easy for escrow since there were no loan papers but instead just a deed to the property.
- Contingencies were not allowed and therefore no deposit necessary because there was no loan. It was only a one-time wire transfer for the entire amount.
Interestingly, the lawyer we had hired had some concerns for us when he found out that our unit was located in an abandoned complex building. He immediately warned us if we understood the risk we were about to take on. Uhmm I guess so. *shrug* We closed the sale and I officially became a first-time homeowner at age 31 (and for those keeping track my wife owned her home at age 28).
We are Home-owners, Not Home flippers
The truth was that we had no clue what we had got ourselves into but we knew that time was no longer a risk factor. Most home flippers are racing against the clock because they have to cover mortgage payments until they can sell the property. This property was not a home flip project. Instead, my wife and I wanted to rent the unit for a pure cash profit income with no mortgage payment to cover. Therefore we had the luxury of unlimited time to learn all the DIY projects that we needed to complete in order to get the unit into a rentable condition.
With this property, I surprised myself in terms of the number of DIY projects I completed. I had taken woodshop in junior high school but this renovation was entirely next level. Together with my wife, we completed a huge number of projects on our own including:
- replaced kitchen cabinets ripped off the wall by thieves
- replaced stolen toilets (yes the thieves even took the toilets)
- installed bathroom vanity and fixtures
- added tile backsplash in bathroom and kitchen
- built custom kitchen counter bar to provide a defined space for the tenant to have meals
- finished the hardwood floors with polyurethane
- built custom closet organizers
Once we completed all the renovation projects, my wife listed the unit on Craigslist for $1,200 per month. Our tenant remained with us over the next 6 years until we finally sold the unit to buy our home in the Bay Area.
Rental stream revenue
Owning the properties have not only created the rental stream income we were looking for but also increased our overall net worth. Another residual benefit of owning a home is learning from DIY projects where we even impressed ourselves.
From 2010, I started to build my FIRE through Real Estate portfolio and only started Rent the Mortgage blog in 2019 to tell the story. The truth is owning real estate is really not so passive income. FIRE through real estate is hard work but will pay off in the long run if you stick with it as I have.
