How We Doubled Property Value on a Duplex Investment

Mike DeHaan: [0:00] What's going on, guys? Welcome to today's collecting keys Friday focus. If this is your first time to one of these kind of episodes, on these Friday episodes, we have been doing a deal deep dive into a recent deal that we have done or, you know, someone from our community has done where there's been some really good lessons learned from it. And this is your first time to collecting keys. This is the show by off market operators for off market operators so that you can know what is working for people that are trying to grow and scale real estate investment businesses in the current climate. And we like to talk about general news and all sorts of tactical things so that you can get better at running a real estate investment business. And so on these Friday episodes, they're typically a little bit shorter than the others ones. And what we do is we kinda have varying topics over the years, but most recently, we've been doing these deal deep dives. It's been pretty fun because some of the most common feedback that we got a little while ago was that people wanted to hear more around specifics around putting deals together and some of the nuances that come with that. So if you don't know me, my name is Mike DeHaan.

Mike DeHaan: [1:01] I've been hosting this show for three years. You can find me on Instagram at Mike underscore Invest. And, actually, here coming up in about two weeks, I will have officially crossed my five hundredth deal since I started doing this business since beginning of twenty twenty. So, actually, just over it's five years now coming in going into my sixth year. I'll be crossing five years total doing this. And yeah. And so for this deal case study today, instead of talking about an active deal that we currently have, we have 12 in escrow. My now my my company does. But, like, I just always feel like it's kinda bad luck to dive too much into some of these deals. Right? When it's too early before they close, I don't wanna jinx them. Those of us that have been around for a while, we know how volatile a lot of these deals can be. And so what I'm gonna do with this one today instead of going into the deals that are currently pending, I'm gonna talk about an old, old one that takes us way back to when Dan and I first got started. And we this is only about a year in, I guess. And this is one of my favorite deals that we've ever done because it was truly a home run deal. And not only that, but it was a home run deal that was actually really hard for us to put together. I know there a lot of challenges that came with it, and it's one that we still own today. So we have continued to be able to benefit from this deal so many years down the line. And it's so many different times over the course of past couple of years. Dan and I have looked at selling properties or, you know, moving assets around.

Mike DeHaan: [2:24] And this is one of the few properties that never really comes into question just because it is such a great one for us, and it has really just allowed us to create so much value and so much wealth, and we get such incredible cash flow off this one. But like I said, it didn't come easy, and there's a ton of lessons that we learned from this. And so this deal, it is in Spokane, Washington. It is a duplex that we bought, and it was right at the end of twenty twenty. So there was all kind of weird stuff going on in the economy and just like the world with COVID and everything else. And this deal had a bunch of issues that were com like, made more complex because of that. And so with this duplex, first thing that we faced with it was that there was a nonpaying tenant. Back then, that was like a death wish. You couldn't evict people. There was no way that you could really even, like, demand rent. There was all these new laws in Washington state around what you as a landlord could even do without it being deemed like harassment and making it so that would actually get penalized by the law for sort of going down these routes. And so what, of course, did all these tenants do? They took advantage of it. So there was this issue which that we were gonna be facing right away. But because it was a duplex, we were okay with that because we figured that if we bought it, we could rent out the good side, and it would at least cover a good chunk of the mortgage or figure out what to do with the other one.

Mike DeHaan: [3:42] So that was the first issue that we faced. The second challenge is it wasn't owner occupied duplex. So the person that was living in the other side, they were going to need to move. And as any of everyone that has been in this business knows, owner occupied properties tend to be a little bit more challenging just because as people tend to look around, they realize their situation they've been moving to might not be as good as their current living situations or this issue of attachment. It gets more and more tricky. To make things more challenging with this guy, he was an older gentleman. He kinda just was a little bit flaky with his communication, and it was generally hard to communicate with and not super reliable. And so we had a lot of follow-up and hand holding to not only get this deal closed, but also to help this guy figure out where he was going to go. Right? And so what we ended up doing with this property, as we were looking at it, it was kind of a tough one to figure because the house is in generally very bad condition. It was in an okay part of town, but not great. And it had these couple of, like, issues that we knew we were gonna have to deal with right off the bat. And so, you know, we didn't really know how to figure out the offer. And when to make things more complicated too, what the guy owed on the house basically was going to be forcing us to pay close to market rate realistically for him to have enough money to be able to move on with his life, which was a big challenge. And so as we're walking this house, we're trying to figure out the play.

Mike DeHaan: [5:00] The guy's obviously motivated. He's really stressed out by the tenant. He just doesn't have to deal with his fixer upper anymore. We recognized that there was this big value add opportunity with this property. And so how it was set up is it was a side by side. There was a one bed, one bath unit on each side. Generally, pretty small. Realistically, that property at that time on market was worth probably a low 2 hundreds. Down below, there was an entire basement that was unfinished that had, like, kind of a central stairway that made it so it wasn't really usable by each unit because it was shared. And so no one's gonna wanna, like, have a neighbor that you have to, like, share a stairway with to go down to your lower area. And so it was, like, maybe, like, a fourplex what it was built for. I don't know. But the downstairs area, it had, like, some some walls and stuff set up. It had a each little downstairs area had a toilet, but it wasn't really, like, a desirable layout to do anything with. And then that central stairway made it so that you couldn't, like, just open it up and suddenly make them, you know, three bed, two bath units or something like that. And so we ended up having to do was price it as one bed, one bath with, like, a little bit of extra space. So we ended up signing it for a 195,000. And our goal initially was to turn it into a four unit and basically have this interior access that you could access from the back of the property. Right? And so what it would have looked like, it would have been two one one bed, one bath upstairs, two one bed, one bath downstairs, and that would have been fine.

Mike DeHaan: [6:23] And we were like, if we do that, we'll be able to add some additional capital. It'd be a pretty sweet deal. So we got this contract this property under contract, and we're moving forward. At that point, it was trying to figure out how we're gonna close it and starting to determine the best way to essentially make it illegal for a unit. Right? And so we're going through the closing, and we're constantly facing problems, tenant not responding, not talking to escrow, not providing loan payoff, instructors, permission, things like that. And then to make things more challenging, the seller is looking for an apartment to move into. His credit is okay. He's able to qualify, but the problem is is that he has a dog. And with this dog, I wanna say it was, like, maltreated. It wasn't like he was beating it or anything, but it was not getting the attention that it needed. It was a young black lab, and it was a, you know, a situation where the guy, like, wouldn't necessarily let it out, wouldn't play with it, things like that. But he still had, like, a little bit of an attachment to this dog even though he didn't necessarily take care of it. Right? And so something that that led to was the the apartments, the thing that they was looking at, not being willing to accept him because he had this rather large dog.

Mike DeHaan: [7:31] And so we had to have the really uncomfortable conversation of like, hey. Do you really want this dog? Let's be honest about it. You need us to help you rehome it. What does that look like? And, ultimately, what happened is he decided that he didn't wanna have the dog being a little bit more important, but he was too ashamed to rehome this animal. And so what we had to do is we went out and we started posting on Facebook and starting to find a nice replacement home for this dog and rehome this dog. And I always remember the when we went to, like, pick this dog up to do this, the dog had been in the basement kinda locked down there for a while. Obviously, he need to go to the bathroom. Poor thing. He so neglected. You know? And like I said, he wasn't getting beaten. He was like, he was getting food and stuff, but he wasn't getting let out. And the dog just proceeded to pee all over the stairs for, like, minutes. Like, Dan and I still talk about this. This poor thing just kept going and going and going and going, we're like, we gotta figure out what we're gonna do with this dog. And we ended up actually finding a really nice family that had a home up on a lake, had an older black lab, and they're looking for a puppy, like a younger one. This one was probably one or two years old to essentially be the next dog after their older one passed away. And so we're able to make that connection, and they took the dog.

Mike DeHaan: [8:36] But that was a whole thing. Maybe oversimplify that real estate took us a couple weeks, and it was a whole process trying to figure it out. So got the dog taken care of, and now we had to deal with the seller. So we're going around shopping. I'm trying to get this guy approved. He's a little bit picky about where he's gonna stay, different reasons, whatever. We end up finding him a place. All's said and done. So we kinda go through closing, constantly having to bring in paper from a title company, all sort of stuff. The whole time, we have this other tenant who is just super upset, not paying rent, not talking to us, not engaging with us at all that we know we're gonna have to deal with. So we had this property closed, and we give the seller three weeks to essentially kinda get their stuff together. We tied it up so they could move into a new apartment. We were sort of facilitating that whole moving process. At this point, we now own the property. So we have a moving date. We let the seller know. Say, Tony, we're gonna come pick you up. We're gonna help you move. We're gonna be here at 09:00 on Saturday. So be ready. Does that sound good? And he said, that sounds great. Sure enough. It's moving day. Dan and I show up.

Mike DeHaan: [9:36] We have Dan's trailer. It's 09:00 on Saturday. Guess what Tony hasn't done? Packed up or prepared for literally anything. So what was supposed to be a simple move turns into an entire day process where Dan and I are literally putting all this guy stuff into boxes. We're unloading his like, picking out his couches, his beds, all stuff in his kitchen. We're doing all of that. We're loading in to Dan's trailer, and we're helping him move it to his apartment. Fake matters more interesting. We finally get to the apartment at, like, 01:00. Apartment's not ready for him to move in yet. They aren't gonna be ready for him until that afternoon because he didn't know when his actual move in time was or he'd forgotten whatever. And so Dan spent the rest of the day driving around with Tony's entire life in his truck while Tony hung out at a coffee shop nearby, basically ready to move in. And so there was all these ups and downs of it. And then finally, you know, we are moving in move him in that night. Tony got all settled. He was good to go. He had his money. He had his new place to live. He was safe and secure, and we now had a property. And funnily enough, I do still see Tony walking around every so often, and it's always kinda cool to see him. But so we finally owned the property. That was a whole situation. Then now is how do we deal with this tenant? And so up to this point, the tenant had been completely nonresponsive to everything.

Mike DeHaan: [10:51] And so we're like, what do we do? I don't know. And then one day, we were at the property, and she just happened to get home from work. So she tried to, like, scurry into the house that I was talking to her, and we were able to, you know, kind of, like, I say, block her and cast and be like, hey. We need to figure this out. We own this property now. And we essentially said to her, listen. We own this property. We understand that we can't evict you. What we're gonna ask is that you start paying rent. Here's the rate it's gonna be. If you can do that, then we won't have an extra year. We'll be good. And she said, alright. That's fine. I kinda knew my time was coming. It's just that Tony was too nice to ever ask for rent, I never paid it, but I'll start paying paying you his rent now. To this day, five years later, we have had no more issues with her. She's paid rent every month on time. She was literally just a lead taking advantage of the system. And so that was a major stressor for the seller that we were able to overcome with a hard conversation. So that property is good. Ready to go. Right? Now to fix up the properties to be able to access that lower level, which is the real value add here where it was a slam dunk.

Mike DeHaan: [11:52] And so we found out along the way that we cannot turn it to a four unit because of the zoning issue. The zoning issue only allowed for a single family or duplex. Four unit was not possible in this property like we originally planned for. We knew this before closing, but we went for it anyway because we figured we could just turn it into a duplex and we would just figure it out. Just move forward and figure it out. That's been Dan and I's model for years. It's usually worked out. We have lost a couple times, but for the most part, if you do that and you have exponentially larger wins, you come out on top of the whole game. Right? And so as we're going to this property, we realized that it wasn't gonna work we're trying to do. That's And when we came up with the idea of what if we have this kind of oversized living room upstairs, we cut in a stairwell that took us down into the lower level of each unit so that we had essentially a actual private stairwell that went down, and then that central stairway to that was the existing there could just be used for moving people in and out because it was larger. It was easier for moving furniture, and that we wouldn't have to have a massive stairway to be able to get, like, a couch or beds or things downstairs. And so we talked to a couple contractors. We figured out the permitting that was needed, and that's exactly what we did. So I have an old video of Dan, which is actually pretty solid, of him basically forecasting and walking through this project.

Mike DeHaan: [13:06] And it's still one of the bigger projects that we've done just with how much we have renovated this property because we had to, like, move a bunch of stuff in the kitchen. We were moving move some interior walls. We had to install a beam, do all these things so that we could add this stairway essentially into the the main living space. And then once it was done, what we ended up with was instead of having a property with essentially unusable basement and two one bed, one bath units, we ended up with a duplex that was double the size and two three bed, two bath units, which is significantly more valuable. Right? All said and done, the numbers on this deal, we bought it for I think it was 195,000. We put all this money into it. I think it was about $70,000 to fix it up. Right? And then, you know, add these stairwells and everything else. Once we refinance it and got it appraised, the thing appraised for $450,000. Right? And we were able to do a cash out for just over a $130,000 that came directly back into our account. Right? So that was all our renovation costs plus an additional $50 that we could go and use to put towards the business and everything else. Plus now we had this property that at this point, interest rates were nice and low that we were able to rent each side for $161,700 dollars a month. This thing was suddenly cash flowing $1,502,000 with with how low we're we're able to leak out. And so all in all, it was an absolute slam dunk of a deal. We put the seller into a better place. He was a lot more comfortable with where he's able to ventured out to deal with anymore.

Mike DeHaan: [14:38] We bought it at an excellent time with the market, helping us out with the, things like that. We doubled the square foot of the property. We did a massive renovation that was very creative for us to be able to add these stairwells and, like, actually make them truly functional livable space. And all in all, this property is just one of the better ones in the neighborhood now. And it was really one of like, it's become, like, one of the the tokens of our of our little portfolio. Right? And kind of the main morals of the story here is along so many parts of this deal, a ton of different reasons for us to not follow through. When we found out that we couldn't do the four unit, we could have dropped out when there was a tenant. We could have found out we could have decided that we weren't gonna move forward anymore as soon as they were nonresponsive. The size of the renovation was an issue. Once we found out that Tony owed extra money on the property and he wasn't gonna be able we weren't gonna be able to get it for enough of a discount in his current condition, that was the reason it coulda we could have dropped out of the deal. Once we realized how hard it was gonna be to move Tony out, which we knew was gonna be a challenge before we close, we could have dropped out of the deal. There was, like, 10 different warning signs that this is gonna be a challenging deal, but we chose to move forward with it because we recognize the potential of the property because of all this unutilized space. Right? And there was a true value add opportunity.

Mike DeHaan: [15:53] And when it comes to real estate, the key to make real money is to learn how to increase value. Right? And increasing value isn't, like, modifying the kitchen, making it look better, like adding in backspace, things like that. Increasing value of a home is increasing square footage, right, making a layout actually more appealing, increasing the rent roll, especially in commercial properties, things like that, whether that's through doing short term rentals or that is modifying the property in a way that we'll be able to ban more rent, adding bedrooms, things like that. Right? Those are the best ways that you can simply increase value, and that is an incredible way for you to make a very, very high ROI, the money you put in the deals, as opposed to just buying and hoping the market goes up or, you know, having to buy at a steeper and super discount all the time, which is not always mutually beneficial, especially from the seller's point. So that's kind of a long one. I rambled on there a little bit. Hopefully, you don't get too lost in the sauce. But if that's interesting for you, let me know. I would appreciate it. Hit me up on Instagram at Mike underscore invest. And, yeah, I'm sure you're listening. So thanks, everybody, and we'll talk to you guys next week.