I bought my first property. Please analyze my deal.

General Real Estate Investing
1

I’ve been reading, a lot, of books about investing and property investing since I was 18 years old. I acquired my first property literally the day I turned 27. I still have a whole lot to learn, but I “THINK” I did good on this deal. I really would like someone to analyze the deal and tell me if I did amazing, good, ok, bad… etc. I’d also like to know why…

To start The building is a Fourplex. They are all one bedroom one bathroom units.

The property is located on a corner lot on one of the best streets in the area. it’s zoned MUC-1, so I can turn the units into offices, retail stores… etc. The street is becoming the trendy hang out area with A LOT of pedestrian traffic during the summer (Car traffic too since I am considered “down town”) it’s next to Coffee Shops, Hair salons, Restaurants, Pubs, parks (where they do live concerts every thursday during the summer) and much more… Again, a very cool historic street with lots to do… They consider the street I am on as the “Heart” of the city.

The lot is actually two lots. I can remove my garage and build another building on the property. Since I am commercial zone, there are zero set-backs. The building on the second lot would too be MUC-1 (so I can do more rental units or commercial) I think if i did rentals, I could get 2 more. My only limitation is the lack of parking spaces.

the building itself is a Historic building. This means the city can dictate some of the things I can, cannot do. However, I get Grant money. $10,000 matching and $3,000 matching for repairs on the outside. I’ve worked out a deal with the City to receive two of the $10,000 grants to do repairs and landscape.

I paid $230,000 (this includes all closing costs) I got a 6.5% 30 year loan. There is a lot of repair work needed, but I am doing it all pretty much solo, so all I’m paying for is materials. I figure I’ll be about $40,000 into it BUT The City will pay me back $20,000 of that through the grant, so I’ll have $20,000 of my own money.

The apartments can rent for $650 for two, and $625 for the other two (as of today) I might even be able to get more, but I’d rather keep it lower to figure out this deal.

I pay water, sewer, garbage and utility room electricity. I figure I’m about $300ish a month on that.

There is an Onsite laundry where I have coin-op machines. I figure I’ll be about $100/mo on that (but I’m only charging $1 per load and $1 per dry. So I can up that to at least $1.5

The area itself is going through A LOT of changes. I’m only 7 blocks from Main street (with even more shops and restaurants) and about 10 blocks from the River. They’re making the main street pedestrian friendly including a new boardwalk to access the water. They’re building a new “out door style” mall with an IMAX theater and Restaurants about 1.5 miles away. And they’re building water front condos with high end restaurants and parks.

I hope that’s enough information to figure out the over all deal… I have my numbers, but I want to see if I’m accurate.

It doesn’t have to be an exact 100% figure since I may not have 100% of the info needed… but I’d like to get a really good idea if this was as good a deal as I suspect.

Oh, BTW – Zillow has the property listed for $280,000 (but the low is $204,000 and the high is just over $300,000 but I don’t think zillow takes into account the MUC-1 zone and the MultiFamily)

Please let me know if I am missing any type of information.

Thanks
-jake-

2

how much are you paying a month on it? How much did you put down?

3

insanim8er,

Since this is a pretty high price for 1-bedrooms, you might want to look into furnishing them. You can get double or triple the rent and cash flow if you do this. The location sounds ideal with restaurants and businesses.

Are there are hospitals or universities nearby?
Try searching this site for “furnished rentals” and some of the previous posts telling how to do it should pop up.

We rent our furnished 1-bedrooms currently at $1200-$1800/month with one going for $2100/month. You can furnish them one-by-one so you are pulling in unfurnished rent in the meantime.

Good luck, and let us know how it goes.

Furnishedowner

4

You did not mention what state you are in so we cannot figure out taxes, but from the information you posted it looks as if this was a bad deal for you. Based on the 50% rule (do a search through these forums for information on that) it looks as if you paid about 100K too much for this property. From the prices you stated it sounds like you paid retail. You mention the values on Zillow; did you not have a full appraisal done? If so what did the value come in at? With all units occupied you will be lucky to break even every month, and if one or more units go empty you will be completely upside down. You did not mention other things like property management, maintenance, etc… For example if something breaks on one of the onsite laundry room machines it will costs you an arm and a leg just to get a repairman out there to look at it for you. That 300ish sounds kind of low for everything you stated you will be paying. Did the previous owner give you copies of their water bills and electric bills for the last two years? You left out quite a bit of pertinent information so perhaps this deal is not as bad as it sounds.

5

It is located in Oregon 15/20 minutes South of Portland.

There is a Community College about 1.5 to 2 miles up the hill, and a Hospital about half a mile up the hill. As for my rent being high, There are 1 bedrooms going for almost $700 here that are comparable to mine. There are also MUCH smaller STUDIO apartments down the road going for $550 (and I talked to the property manager who knows they’re below market for those but choose to stay low to ensure no vacancies) She said she’ll be talking to the owner within the next year or so to discuss upping the rent.

As for the numbers, I’m making cash flow (once fully occupied) … What I really want to know is, how much cash flow is considered “good” Some people say as long as they make $150 after everything, that’s a good deal… Others say a lot more is needed.

Bottom line… I pay about $1412/mo for the mortgage with insurance and property tax. I pay about $300 maybe $400 a month for garbage/water/utility laundry room electricity. And that’s with me paying HOT WATER right now. I am actually putting in all new plumbing and hot water heaters for each unit.

I have one top unit rented for $650, and I have a bottom unit rented for $625. The other top unit is where I live right now, and the other bottom unit is being remodeled. I plan on getting another $1275 from them when done and I move out. So that’s bringing in $2550 just in rent. I also have a detached two car garage where I rent one side for storage for $100
Laundry should bring in at least $100/mo when the unit is full. That’s $2750. I also plan on building a couple more storage rooms for an extra $25/$35 a month potential.

I also want to figure out how to determin the actual “VALUE” of a property based off the numbers.

I punched numbers into a cap rate calculator and it said 12% or something… but again, I don’t think I fully understood what that meant.

then on top of all that, I still have the second lot… There is a TINY 600sqft house built next to my place with a value of $188,000. The lot size is smaller than mine.

The house next to me who is also MUC-1 sold for about $250,000 (and it’s only a single family and less than half the size of mine with no extra build-able lot but it does have a larger lot) I paid $229,900. I’m also getting the grant money for $20,000, So I’m trying to figure out how it could possibly be a bad deal?

Another point – I’ve looked for 4 plex buildings all over the areas here… and Most of them are in the mid $300 or more… And they’re not commercial zoned. So again, it confuses me how this isn’t a deal.

The other thing is, I have people practically bashing my doors down trying to rent – they see me working on the place and keep bothering me when I’ll be renting… I’ve been able to pre-fill my apartments before they were even finished… The Tenants were even willing to move in before I was 100% done and allowed me to finish things while they lived there… So, explain to me what are the “BARE MINIMUM REQUIREMENTS for any type of real estate deal” deal vs a “REALLY GOOD but realistic” deal…

Thanks!!

6

Oh, as for the property repair/maintenance I am doing all that… I am able to do basically everything and already own all the tools. I also have family members who are electricians and plumbers that help me out if need be…

And for laundry/Appliance repairs, I used to sell Appliances, so not only did I pay wholesale on appliances, I know a hand full of appliance repair people VERY well, since I’ve worked with them and sent them business for years… so I’m pretty much ok with all that…

I can even have them how to tell me how to repair it with out any cost other than parts… But I shouldn’t have many repairs on the building since everything is updated.

Again, thanks for any info to help clear up my confusion.

7

Let’s look at the deal with the numbers you posted:

Gross rents: $2,750
Operating Expenses: $1,375
NOI: $1,375

Debt ($250K including repairs, 30 yr, 6.5%): $1,580

Cash flow: $205 LOSS (OUCH!)

Chris is right. This is not a good deal. You need to do a cash flow analysis BEFORE you buy your next property.

Mike

8

insamin8er,

Okay, it may not be a text-book great deal, but it sounds very interesting to me with the gentrifying river-area and the high rental demand. You may end up very happy that you bought it. It also sounds charming as hell. My parameters for making the money work has always been no more than $60,000/unit. You are within that for doing it furnished.

You could run a test: Put up a flyer in the window: “Fully-furnished charming unit with all utilities paid $1800/month! Six month lease required.” Put your telephone number. Keep track of how many call, where they work, what their needs are. See if there is a market. Also check with the Human Resources Dept. at the hospital to see if they have traveling medical workers and where do they house them.

Charm sells…it really does in upper-middle class type “Yuppie” areas. Perhaps you furnish and mint out your own unit…when that rents, you move into the next unit and do the same. Get some designer-minded friends to help you do a killer decor targeted at young urban professionals. Use vintage, campy furniture and great paint colors.

You can pull in MUCH more rent than unfurnished. I’m sitting here looking at our April P & L for 1-bedrooms–we pulled in $19,433.31 gross rent. And I really count on about 30% of that being profit. That’s with much higher vacancy than we are used to having. With a hospital nearby and a college you are perfectly situated to NOT do the ordinary thing. And you have a laundry room so you do not have to put in a pricey washer/dryer hookup. It all sounds exciting to me.

It is possible to generate great word-of-mouth if you have unique units. It is possible to have a waiting list. It is possible to rent for so much money that people simply don’t believe you. When I moved here locals told me, “You will NEVER get that!” But they were locals, and they were comparing furnished with unfurnished rather than with hotels.

It is possible to make a money-generating machine with fully-furnished rental units in the right place and at the right time. I still haven’t figured out why more people don’t do it.

Furnishedowner

9

$250K would bring in 5-6K in rents where we invest. That is twice the rents that you are bringing in and we only buy around 50% LTV. This deal is not going to kill you but you must learn from it. There is an oversupply of opportunity out there to cherry pick from. Focus on 1/3 to 1/2 discount off market value and the cashflow must be tremendous. I illustrated a bunch of deals we have done on my website below, feel free to check them out.

Whatever you do, do not give up. Find home run deals and don’t be afraid to ask the advice of experts you trust.

10

Oh, I am glad I bought this place. First off I decided to buy this place VS buying a Single Family Home, so I have no other Mortgage, and I LOVE it here… but I’m obviously missing something here…

I am not losing $205 a month off this place. My mortgage (with Insurance, and Property taxes) is like $1412/mo I put in about $300/400 a month in utilities. So that is $1812/mo (roughly) expenses. I bought the place for $229,900 but I financed $180k because I put 20% down, and all repairs are out of pocket. So I don’t understand how it’s a bad deal in terms of being cash flow positive… Is there another variable i’m neglecting to see?

I guess the biggest thing i’m confused about is I searched for A LOT of properties, not a single one touched this deal. You can’t find a single 4 plex (hardly even a duplex) for $230,000 in this area. I looked at countless rentals that were twice as much with half the income coming in, and people were eating them up. Visit Portland.Craigslist.org and check out the realestate for Clackamas county – all the duplexes sell for 300+ and they’re not even near coffee shops, and all that. Plus they don’t have dual zone, and they’re not assisted by the city for repairs. And they’re not on second lots that can build two more rentals…

so what am I missing? I just don’t ever imagine I’d find a property here that generated 5k for only 250,000 Little crappy bungalos go for $250k and you might get $1000/$1500 a month for it… I apologize for my confusion, but I really want to understand what it is that I am missing because I still feel like I got a hell of a deal.

11

You are significantly underestimating your costs. There are more costs involved than just your mortgage, taxes, insurance, and utilities. Just because you have not seen them yet does not mean you will not. The 50% rule is there to encompass some of those costs that are hard to quantify at purchase time. That you cannot find properties that give you a 2% monthly return does not matter in real world numbers. We just came out of a huge property bubble, its expected that you will be surrounded with overpriced properties. You are also likely to be in a place that people were investing for appreciation and not cash flow. In those areas people ate cash flow losses in expectation of making huge profits at the time of sale. That expectation no longer exists and you cannot realistically base a successful real estate business today on those dead expectations. For example what about vacancies, legal expenses to get rid of deadbeat tenants, and collection losses from those whom do not pay?

It doesn’t really matter much how much you have put down on the property, other than in the monthly physical cash flow. However that money that you put down is worth something. You could have invested it somewhere else and gotten a relatively risk-free and headache-free return. True that, RIGHT NOW, interest rates are very low so your current lost opportunity costs are quite small; however that situation will not last. In the end you are likely to lose about 6%/year compounded on that money you just put down. (Assuming we don’t delve into hyperinflation due to all the money printing that has been going on.)

Also property prices are still crashing, all over. This was a worldwide bubble and the crash is worldwide as well, no place is immune. Unless you’ve purchased at a big discount from retail value your likely to lose part or all of your down payment capital. And don’t forget that you will need 6%-9% just to sell the property. In an environment like this property purchased for the long term should be bought at a price that it is cash flow positive even if you financed it at 100%. And it does not seam like you bought at any discount. There is some bad nonsense that goes around saying that a well priced investment property has a 1%/month return in rent. I’ve noticed that most, non-ridiculously priced, investment properties try to follow this nonsense when they are placed on the market. The reality is that you are looking for something closer to 2%/month. It sounds like your purchase price was in part based on that 1% nonsense. 230k + 40k (repairs) = 270k. 1% of that is your expected monthly rent. The grant does not count yet since you do not have the money yet (not that it matters much), things can go wrong. Everyone is short on cash now, even the government. It would not surprise me if those grants get whittled down or disappear.

What are you paying yourself? You do not seam to think your time is worth money? What happens to your numbers if you become injured and have to hire someone to do the repairs?

Cash flow is king now. The area around you may not make much difference. Its good that you seam to be in a nice area, however if your number do not work that will not matter. You can be foreclosed on if downtown, uptown, ghetto, or your private island. Also the yuppie lifestyle may very well be over for many years as we have entered a severe recession or maybe even a depression. That construction going on around you might also be a liability. Construction projects are being abandoned all over the country now that the bubble is over.

Your projected rents appear to be currently at the appropriate level since you have so much active interest already. However I would budget for future potential shortfalls. Rents are already falling throughout the country, even here in NYC where no one believed that could ever happen. If Manhattan could have 10%-20% rental rate reductions so could you. You need to be prepared for that possibility. If anything you should have purchased with lower rent in mind at a time like this.

BTW, for the repairs and upgrades… Do you really need them? It sounds like you can rent the apartments right now for your target price of $625-$650. Your 20k-40k can probably earn you about $100-$200/month on its own with almost no risk. If you fix them up, how much extra rent are you expecting? You need to get at least $25-$50/apartment just to break even and even at that rate its not worth tying up even more capitol for no real return. Do you know the rental price range in your area? If you are already at the sweet spot for your area you might not have much room to move up, despite any repairs and upgrades. And if you area not at the market price, do you know why? Maybe they are rent controlled? You may not even be able to legally remove tenants to do any upgrades and if you do them while they area there they can claim a loss in their interest in their apartment and may be able to legally enforce a rental rebate or reduction. Also you area separating the water. Does the cost of doing that pay for itself in your utility savings? Don’t forget that you rented the units with the water included already. You will not be able to change that situation until a lease renewal and even then rental control laws may limit what you can change. And if the apartment does not include the water can you expect to get the same price? Usually when utilities are included the rent is higher by the approximate utility usage amount. Maybe with the water separate you will have to drop the rents by $50/apartment to bring them to the market rate. Do your utility savings justify the change? Don’t forget that you will also have additional costs to maintain 4 water heaters plus the extra equipment over the 1. BTW, who pays the heat? Seams unusual that the heat would have been separated but not the water heater. For a fourplex I’d expect your monthly heat costs to easily be $1,000-$2,000 in the winter. Did you figure that?

I do wish you luck in your endeavor. You may very well be able to make it work in the long run, especially if you luck out and do not get any bad tenants or vacancies. I would suggest that you might actually be better off replacing all your tenants with commercial tenants. Since you are zoned for it, you probably should go for it. Most times you get paid better, commercial tenants leases can be structured in any way that you want, you can make the tenants do and pay for everything, and your commercial tenants will have minimal tenant protections. Compare the rental rates though and under price the competition. Commercial rentals are going to be doing horribly in the new few years as we work our way through the current recession/depression.

Furnishedowner… Can you really get such a huge difference in rental prices on a furnished rental in your areas? Some of the prices you have quoted in other posts seam to be even higher than what I would expect at many motels/hotels. The only thing that I could see stopping them from competing with you would be that anyone staying somewhere over 30-days legally gets tenants’ rights. I’m in NYC and I would think that if such a thing would be in high demand in any area, it would be here. However furnished prices generally seam comparable to the prices of unfurnished places here. Especially for any multi month leases. If it were me, I would just rent an unfurnished apartment and go to rent a center to rent the furniture. Or I could just buy whole bedroom and living room sets for under $500-$1,000 each. Either way it would seam that I would make out like a bandit compared to the prices I’ve seen quoted in some of your other posts. Is there something about the areas you are in or the extra services you provide?

12

Jake,

What you are missing is most of the operating expenses. Throughout the United States, operating expenses run 45% to 50% of the gross rents (I use 50%). That has shown to be true across all areas of the country and across all rent ranges.

For the purposes of the 50% Rule, operating expenses include taxes, insurance, management (even if you do it yourself), maintenance, vacancies, utilities (even if only during vacancies), advertising, legal fees, entity maintenance, evictions, court costs, lawsuits, damage done by tenants in excess of the security deposit, etc, etc, etc. In other words, operating expenses are all the typical expenses you will incur, other than the debt payment (principal and interest only)

Over time and/or a large number of rental units - your approaches will be in this range. You ARE losing $205 per month - you just don’t realize it yet (and may not for quite some time). When you only have a few units, you can survive even though the numbers don’t work. However, if you had 50 or 100 of these units, you would be in BIG TROUBLE (unless you’ve got a big pile of money to keep putting into the property). Failing to understand this issue is the number one reason that the vast majority of newbies fail in this business.

Furthermore, as Sammy said, putting money down doesn’t improve the deal - it just masks the reality. Think of it this way - if you put 100% down (paid cash) for even the worst property you could find - it would appear to cash flow because you’re not including the cost of the money. Does that mean it’s a good deal? Of course not.

The good news is that you’re living in the property and you’re shouldn’t be destroyed by this one mistake. If you hold this property over the long term, you should end up making money with the tenants paying down the principal; the tax benefits; and any appreciation. You just can’t build a successful rental property business based on properties with these numbers. So, study the 50% Rule and work harder to find a better deal next time. You’re not going to find great deals on the MLS or Craigslist!

Good Luck,

Mike

13

Insamin8or,

Keep good books on your units (QuickBooks) and you will learn much more about the costs of landlording. It’ll be interesting to see your post in 6 months!

I would probably have bought those units, just because potential charm and location have a dollar value to me. Being able to live there means you will have a very well-run place. With a great area and rental demand you can raise those rents. I know I would love your Historic brick units, and I think you will do just fine.

Yes, Sammydy, I really do get those rates. The hotels here charge about $80-115/night. There are a few poor-quality motels @$200-$250/week plus lodging and gross receipts tax–another 13%. Currently we are charging from $30-$70/night for a fully-furnished home. We require a 30-day minimum stay, so we are not subject to tax.

REI Club has been very valuable to me because it made me realize, as one person said, “You’d better milk that cow while it’s there!” This town is growing and there is a shortage of hotels. Five are now being built, but one of them burned down last night. No, I didn’t do it…

Imagine you are a new-hire manager in training at a chain restaurant for 3 months, then they send you to your new location. Now where are you going to stay? A hotel? Expensive! An unfurnished apartment? Most owners want at least a 6-month lease. You can come right into our office, flash your credit card, and get a key for a 1-bedroom cottage,currently at $1500/month. Now you can cook, do your laundry in your own washer and dryer, put your dog out in your yard. You are home.

There will be more hotel suites built. And we will adjust. But we do offer more–your private BBQ grill, books in the bookcase, a unique charming little place with plants, and oil paintings on the walls.

We offer extra service in that we can assure parents that their law intern daughter will be housed safely here for her summer job. We can put in the baby crib and high chair for the new family. We check people in on weekends when ALL the apartment and rental offices in town are closed. We are EXTREMELY responsive to tenant complaints or needs–“Oh, Dr. Chin, you need a wok? No problem, we’ll drop one off at your door in the morning.” Sort of concierge service.

We have even picked up foreign doctors at the airport (20 minutes-no big deal) and oriented them to the hospital location. We have helped insurance companies with burned-out families…3 kids, 3 dogs, 2 cats and a bird. For all of that service and TLC, you bet we charge high dollar.

We also pay all utilities including high-speed wireless internet and free long distance. If your town has furnished rentals that are priced like unfurnished they are probably minimally furnished with old furniture for single working males, sort of like the old lodging houses.

If anyone has more interest, I can start a “How To Do Furnished Rentals” thread.

I love my work, and it has been fun creating and furnishing the units. Currently I have started work on a shacky 1-bedroom. The floors slant. The porch leans. It is as old as dirt. It is incredibly filthy. Other people look at it and say “Tear it down!” But I have found online wallpaper that looks like log cabin logs! I have found an antique Kelvinator refrigerator with a rounded top!

Someone checking in. Gotta go.

Furnishedowner