My investor career thus far, $4500 per month cash flow, hopefully helpful to newbies?
Hi All,
In another forum post, a user had asked me how I was able to amass my rentals in the past 4 years. After I went into a bit of detail, I thought it could be helpful to those starting out. Hopefully it is, enjoy!
***Excerpt from a different forum begins here***
Here's a brief overview of our investing career to this point; it's kind of the Tale of 2 Cities, as Denver home values were much lower in 2010 than they are today, and I've been the beneficiary of a nice tail wind during the recovery. That said, I don't think I would ever settle for only $200 per door. It always depends on how you crunch the numbers though; I have been accused of calculating too low on vacancy/repairs, while you may be very conservative!
Lastly, I have to note that being a Realtor is the ONLY was I was able to jump on these properties and secure them. Except for property #1, Every. Single. Home. had multiple offers on the 1st day it was on the market, and my ability to be first in line, present a strong offer and terms, and act on my criteria was instrumental in getting the deal done.
All properties were purchased with 20% down.
#1) 2011 Our first investment was a big leap of faith, buying a large SFR from 1902 that had been split into a duplex for 141k. It was in an up-and-coming part of town, close to a thriving downtown Denver and City Park. As a SFR it has 6 bedrooms, and came to me with a Section 8 tenant on a lease for $1516 per month. The lease was more than double the PITI payment, and was paid by the state automatically on the 1st of each month. Even so, it was SO hard to take the leap of faith and test what I thought was a good deal. This tenant is still in the home today (unfortunately at a similar rent!), but it just keeps chugging along. If next year is a little calmer, I'm considering turning it back into a duplex to bump the monthly rents to around $2000 per month, but I didn't this year as the tenant wanted to stay, I was BUSY, and I knew the home would need 10k of renovations after years of a big family. The value of this home has doubled since 2011(!), and I seem to have one of the largest homes on the block. I'd consider selling it, but I'm waiting for the curb appeal of this block to take a turn for the better.
2) 2012 This was a gigantic duplex in Aurora CO, not far from where I was living at the time. One side is 3/2/1 garage, one side is 2/2/1 garage, with a total of 3000 square feet. The Seller was out of town and had below market rents (total of $1565 for both sides). Somehow it was priced at $155k, which was a steal even when things were relatively cheap in Denver. I was in the home for a showing 20 min after it hit the MLS and had my offer in within the hour asking for a quick signature. We had Seller signatures 3 hours later, and more offers kept pouring in after it was too late. Payment on this one is still only $825, and I've raised the rents to $2100, and the value has nearly doubled. This home is probably the best thing I have ever bought.
3) 2013 This year we refinanced property #1 and took out $50k of equity which we used to purchase and remodel our primary residence in Denver. This tapped our money and energy for most of the year.
4) 2013 At the very end of the year, however, I was able to purchase a 1999 duplex in Greeley CO, both sides have 2 bed/1ba/2 car garage. It's a unique and appealing setup. Purchase price was 175k, rents are $1700. I took a bit lower GRM on this one because the property was newer, in great shape, and the Denver market was already exploding so there wasn't much worth buying imo at the time. I thought this might be my last hurrah for a while.
5) 2014 I had set a goal to have $5k of passive income in 5 years at the outset of 2014. I was then at $2100 or so. A few serendipitous things happened:
--I found a lender who understood what I was doing and would make me multiple loans (up to 10) if I so desired and had sufficient down payment and debt coverage (they only wanted to see 1.2, my properties were closer to 1.8 on average).
--I knew we had made a great buy on our Primary residence, so after a year had elapsed I secured a 130k HELOC as our home had risen from its purchase price of 258k. After we invested $40k in a remodel, it now appraised at 407k! I'd rather be lucky than good.
6) As I was waiting for the HELOC to process, I made a breakthrough with my criteria. I identified a few neighborhoods in Denver/Aurora built in the last 10 years where condos/townhomes (which are appreciating rapidly throughout the whole metro area) were being hobbled by bad appraisals and the legacy of foreclosures had not yet allowed them to return to market rates. I felt this was a temporary situation as a few strong sales would allow these neighborhoods to rise to the prices commanded by similar neighborhoods throughout the metro area that were not similarly afflicted. I didn't love the idea of turning over control to an HOA, but the simplicity of owning/managing these units was attractive to me as well. Duplexes/4plexes and other traditional investments in Denver are so overpriced that they weren't even a consideration at this point.
I bought 4 units with roughly this criteria:
3 bed/2ba/1 garage/built since 2005/ low taxes/$175 HOA/$135k price/$1400 rent.
I signed all 4 new tenants up on 2-year leases since this is a hot rental market, and they are cash flowing an average of $650 per month each.
The HELOC allowed me to make cash offers to cut through the multiple offer scenarios, and then I would refinance into a mortgage immediately. This approach has lots of closing costs, and I would usually use my commission to pay for them. I even took 2 of them "as is" to encourage the Seller to work with me. Because most of these were priced too low, in a development that was artificially low to begin with, each unit generally has $15-35k of forced equity from the beginning, which is great. The developments have continued to appreciate as I had hoped.
7) I now have one last short sale condo under contract for $77k, which is a very low number around here. 2 bed/2 ba/detached garage, built 1980. I'm going to rent it out without the garage (which I will retain for extra appliances/tools/countertops etc). and it should cash flow $500 per month after PITIHOA.
Because most of these units are so new, and many have HOAs, my budget for repairs is lower than many people on the forums experience. I hope this continues. Also, I have had 7 weeks of vacancy TOTAL for all of my properties thus far. I account for 5% vacancy just the same, but so far with my management style, they do not stay empty for long. I hate vacancy and retain tenants like crazy if I can.
Once the math is done (including the last condo I have U/C), I should be able to count on $4,500 per month of cash flow after my average expenses and 5% vacancy. Perhaps a little liberal, I know, but all I can do is extrapolate from my own experience!
In hindsight this has been an incredibly fortunate and successful whirlwind, I feel like I'm waiting for the other shoe to drop in some regards. Whatever I decide to do job-wise for the next few years, I will pursue paying these properties down to combat a little of my unease about being leveraged so much, but at the same time I don't much care if we have a RE correction as I'm in this for the long term and it likely wouldn't have a huge effect on my rental income. After the first 2 properties, I've consciously acquired properties that are newer/nicer/larger than average so that they would appeal in a rental environment with more options, which will likely happen down the road.
Hope this helps Erik! And a big thank you again to all who have shared their experiences and reached out to help a stranger. Best wishes.