Here are the details of my third rental real estate property. I purchased it in the middle of 2013. For reference, here are links to details on property #1 and property #2. And here are the details on my real estate plans.
One Building, Four Units
Here are the highlights of how I came to own this place:
- This purchase was similar to property #2 except that instead of two buildings with four units each, it is one building with four units.
- In June 2013 my real estate agent, Eric, and I reviewed the property. The current owner happened to be there. He was a 70-year-old guy who had rented and managed the property himself for years and wanted to be done with all his rentals -- they were just too much for him (we looked at another one of his places and even eventually made a combination offer for this (the one I REALLY wanted) and one other place (which Eric liked better -- it was down the street from my property #1) which he rejected. So we settled on the one I wanted.)
- He was very friendly and open with quite a bit of information.
- The property had been flooded in the bottom units during the great Grand Rapids flood of 2013. The sump pump had burned out and failed. He was installing a new one (himself -- it was clearly not worth much) so that it didn't happen again.
- The building had four units. Each was a one-bedroom and was rented for $500 a month.
- He also had his own laundry facilities and brought in $15 per month or so.
- The property is in an "ok" area (not as good as my other two properties) not far from other rental units, but on each side for about a block or so we are surrounded by single-family homes (in other words, it's a nice location for the renters).
Here's what the place looked like during the day (click image to enlarge):
As I stated in My Real Estate Objectives and Strategy, here's what I'm looking for in properties:
- Identify value properties that have decent cash flow. For example, many of the properties I consider already earn 5% to 6% as they are.
- Look for properties where, for a reasonable investment, rents can be significantly increased.
- Buy the places, make the improvements, increase the rents, and fill them up.
This place fit the bill perfectly.
We wanted to move quickly since the price for rental properties was going up quickly (my realtor set me up so I see every rental property offered and sold -- I get a regular email -- and prices were certainly increasing.) So far this place was undiscovered and had a very reasonable price.
It took me a few days to get a quick estimate on putting in a good sump pump, making some repairs, remodeling the units, and estimating potential rents. We eventually made an offer of $106,500 and he accepted. After the inspection, we asked for and received $2,000 in decreases, so our purchase priced ended at $105,000. The deal was finalized on June 11, 2013.
Two units were vacant and we began remodeling them right away. We made the "regular" changes -- new flooring, cabinets, paint, appliances, and small upgrades. They were done a couple months later and eventually both rented for $695 each per month.
We also upgraded the sump pump (getting approval from the city to vent the water to the street), fixed the back stairs, and repaired the back fence.
Our plan is to update/upgrade each unit as the leases run out and tenants decide to move. (If they want to stay and have their rents increase, that's fine, but we'll be raising the rent one way or the other, so most will probably move.) My property management company oversees 1,100 units city-wide, so they are helping me move out tenants as soon as we can by offering them alternative living arrangements.
The cost per unit upgrade will be roughly $7k including everything (upgrades and appliances). We finished the third apartment in March and have it rented. We just started work on the fourth and final unit.
I still have a few general changes I could make to the place (mostly cosmetic) and I'm still evaluating whether or not I will.
Before I purchase a property, I run financials including purchase price, fix-up costs, and profits after expenses. Of course these figures are really a guess since there are so many unknown variables. But it's an educated guess and I build in safety by estimating expenses a bit high and estimating rents a bit low. What I'll be sharing below are the post-purchase financials (what we actually spent and made), but rest-assured that I ran these numbers before we bought the place and they looked good.
When evaluating a property, I look at three revenue/cost scenarios (BTW, I will be sharing the spreadsheet I use at some point in the future). They are:
1. Year 1 "Get up and running" financials
2. Year 2 "On-going" financials, with a property manager (which I will be using for now)
3. "Retirement" financials, the property return with me as the property manager
I look at #2 and #3 the most since they are "on-going" financials based on whether or not I want to manage the property. For now I won't be managing the property myself, so I look primarily at option #2. Here's what the financials will look like for this scenario when all is said and done:
- Purchase price: $105,000
- Capital Improvements (will be depreciated over decades -- $7k per unit plus $2k general): $30,000
- New cost basis for property: $135,000
- Other, one-time, short-term costs to get property rentable: $0 (there were a few, but they are in the general numbers)
- Total investment into property: $135,000
My initial financials were based on increasing rents from $550 to $700. We couldn't get all the way to $700, but $695 is pretty close.
In addition to rent, I make a small amount from the coin operated washers and dryers in each building (I have a service that handles it for me in exchange for half the gross).
As such, here's what my revenue looks like:
- Monthly income for four units at $695 per unit: $2,780
- Monthly income for washers/dryers: $15
- Annual income: $33,540
Here are my annual expenses:
- Real Estate Taxes: $2,700
- Vacancy reserve (1 mo): $2,780
- Manager (8%): $2,683
- Utilities (heat): $2,160
- Utilities (water): $1,600
- Insurance: $1,200
- Maintenance (snow, lawn): $1,400
- Long-term Repairs: $1,500
- Cleaning: $200
- Trash: $500
- Annual Repairs: $500
- Utilities (electric - common areas): $100
- Miscellaneous: $300
- Mortgage: $0
- Total expenses: $17,623
Net income (before depreciation): $15,917
Net Income % (Capitalization Rate): 11.79%
A few comments on the revenue and expenses:
- I am not using a mortgage on this place. But I may. Read below for details on my options.
- The revenue numbers seem pretty solid and have a bit of room for upside.
- The cost numbers will get more solid over time. As I'm seeing them come in, some look high and some look low, but my guess is that the total is pretty close.
- Yes, I pay heat and water, which is common in buildings where everyone shares a boiler and hot main. As we remodel each unit, we are also installing low-flow showerheads and limiting thermostats (the highest tenants can turn the heat up to is 70 degrees) to keep costs down.
- If we keep the places completely rented, I earn an extra $2,780 a year. :)
If I get a mortgage on the place, the numbers become much better than above. My possibilities:
- I can get the property appraised and am guessing it will be in the $225k range in value based on the rents.
- Borrow 50% of this value ($112,500) at 4.5% for 30 years. This gives me an annual mortgage of $6,840 (FYI, I will also have some one-time loan costs in Year 1).
- My annual dollar profit drops to $5,454 in year 1.
- I will now have only $22.5k of my own money invested in this place ($135,000 - $112,500), so my return shoots through the roof and is at 22.24% in year 1. After the one-time loan and closing costs are paid in year 1, my year 2 return is 40.34%.
- I will then have $112,500 that I can use to acquire another property.
Here are a few thoughts to fill in some of the holes and close out this post:
- I love this type of property -- multiple units in one location. It's the sort of place I'm looking for if and when I get property #4.
- As I said when I reviewed property #1, one thing I don't especially need now is income (my income is at a point where taxes are killing me). So my plans for the first couple of years is to take the cash generated by these places and put them back into the properties -- replacing roofs (eventually), maybe buying a new boiler on property #2 (my management company is looking into tax incentives and cost savings of doing so), replacing windows (better insulation), and so on. In 2-3 years, all my properties should be completely fixed up and set to kick out all sorts of income.
- Of course, things will go wrong somehow. There will be bumps in the road that we cannot forecast now. That's one reason I want more properties -- to spread out the risk.
- Whatever happens, we'll take the circumstances in stride. And, of course, I'll keep you updated as things progress.
- In my last post I noted that I was thinking of selling some (or all) of my properties since I was living in Oklahoma and they were in Michigan. For now I'm going to keep hold of them and see what happens. We are near the last of the remodels and now it's time to reap the rewards.
I will give an update in the fall, once the dust settles, on how my properties are doing. By then I will be two years into the effort and should have plenty to share with you.