Betting the Ranch

Theresa Sarappo

IT WAS 2010, I WAS age 52, I’d just divorced—and I found myself with neither a home nor a fulltime job.

As part of the divorce, we’d sold the house. Between the cash from that sale and some savings I’d amassed when I was single, I had a modest nest egg. I also had a teenage daughter who needed to stay in our current school district.

The rent on my lovely two-bedroom townhouse was devouring my savings. I had a part-time job teaching technology to elementary and middle school students, but the pay didn’t even cover my rent, let alone other expenses.

Meanwhile, on the other side of San Francisco Bay, houses were selling at depressed prices after the real-estate market meltdown. I was confident prices would recover, but I couldn’t qualify for a mortgage. I could see myself slowly going broke in a part of the country with a sky-high cost of living.

In the back of my mind, I had a thought: Assets should help you buy assets. I had my money invested in income-generating stocks and partnerships. What else could my money be doing for me? How could I leverage my investments to generate money? Could I buy a house?

I learned that I could get a line of credit—similar to a margin loan—that was backed by my investments and then use the credit line to buy a house. Make no mistake: This was a risky move. The line of credit was at a 4.1% variable rate and would increase if rates moved higher. What if the stock market crashed? My loan would be called in, meaning that my investments would be liquidated to cover the loan. On top of all that, it was a negative amortization loan, so every month interest would be tacked on to the balance.

In taking on the loan, I was making some key assumptions. The biggest assumption: I could create equity in the new house from day one and, if I had to sell, I could repay the loan and turn a small profit. I also assumed that the stock market was stable enough that a crash of great magnitude wasn’t coming soon. I limited the sum I borrowed so there was room for error—and thus something drastic would have to happen for the loan to be called in.

Driving around my target neighborhood, I saw plenty of houses for sale. But many of them were already “sale pending” by the time I got to see them. On the front door of one house, however, I saw a notice from Bank of America. It included a number to call to contact realtors who were selling bank-owned properties. I phoned and left a message.

A few days later, a sales agent called me. We set out to explore the rapidly vanishing inventory. I saw three houses in a day. One was in my target neighborhood. It had a kitchen that needed work but also had a basement that could be finished. The second house was small and cute, but in an area that I wasn’t as familiar with and near busy roads. The third house was a sweet Cape with two bedrooms upstairs and a shared bathroom. Downstairs had a living room with a fireplace, a dining room and a kitchen that overlooked a big unkept yard. A few steps down from the kitchen was a big bonus room with French doors leading to a deck.

I thought that the bonus room could be turned into a master suite. Most of the homes in the area had just one bathroom. I could see remodeling the house so it had three bedrooms and two baths, renting it out to supplement my meager income, and then moving into it when my daughter went to college in two years.

I put in a bid. It turned out there were many others. I increased my offer by $10,000 and found myself a homeowner.

That was the easy part. An inspection revealed that this cute bank-owned house was hiding all sorts of problems. It needed a new electrical system because the last renter was growing marijuana in the basement and had jerry-rigged all sorts of electrical lines on top of the old knob-and-tube system for his “grow lights.”

It also had termites, plus some structural issues with the front porch and deck. The budget for repairs was as much as I was planning for the upgrades. Now that the inspection was done, the report would have to be included in future sales disclosures. I negotiated a better deal and closed on the house.

The biggest problem was where to put the second bathroom. When I bought the house, it seemed like there was an easy solution. There was an old dumbwaiter space that I thought I could use. But it wasn’t level with the bedroom floor. My second choice was to convert a small closet in the living room. But once again, with the split-level layout, that wouldn’t work. I could convert the garage. But garages were at a premium in the city, so I didn’t want to lose it.

I was running out of ideas when a neighbor invited me into his house. Our houses had the exact same floor plan. As he showed me his house, the solution came to me. He had taken three feet from the garage and three feet from the bonus room to carve out a bathroom. I would do the same.

Luckily, my contractor was connected to the planning department, permits were issued, and the budget and plans were set. We went to work.

I had a target rent for the house. My realtor thought it was too high, so I went to rental open houses to check out comparable properties. Those seemed to justify the higher rent. I had nothing to lose except the cost of an ad, so I posted and waited. Finally, a young couple with a blended family wanted the house. A realtor friend gave me a lease form, we signed the deal and they moved in.

The first year as a landlord was stressful. The family had a break in and insisted I pay for a security system, which I did. The old furnace had to be replaced. I had some minor cosmetic damage that needed to be fixed. But the rent came in regularly.

They gave notice after 18 months. They left the house in good shape and, after a little painting and sprucing up, I put the house up for rent again. After a week or so, I had a new tenant, a retired couple who have lived there ever since. They pay regularly and are happy to be there.

A few years later, I got a better paying job and was able to get a mortgage on the property, allowing me to pay off the line of credit. I owed an additional $20,000 by the time I settled the loan—the result of the accumulated interest—but the house had appreciated at least four times that amount.

The whole thing was an exciting and scary process. At times, I would wake up in a cold sweat, imagining all the things that could go wrong. Still, every time I had a problem, I was able to find someone who could help me solve it. I’m grateful for my good luck.

Theresa Sarappo recently retired after a career in digital marketing. She’s now exploring freelance writing, photoshop and photography, while also traveling the country in her 31-foot travel trailer. Terri can be contacted through LinkedIn.

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