Hello BP world!
I bought my first property (thanks to the help of BP) back in April of 2014 in Oklahoma City.
Although I naturally made a number of mistakes throughout the process, I believe that it was ultimately a success. The property has been rented out for a while now and is cash flowing approximately $300/month.
Shortly after purchasing this first property, I made a long-term plan. This plan outlined exactly how many properties I needed to purchase each year in order to meet my final goal. For 2014, that goal was 2 properties…but I only had one…so I started looking around.
In November, I got onto Realtor.com and found two properties in my target market that were being sold as a pair by a fellow real estate investor. The amazing thing I noticed is that they are located literally right next door to the one property that I currently own. What a beautiful coincidence!
To make a long story short, I was able to take a trip to Oklahoma to check out the properties a few weeks later and put in an offer. After a few counters back and forth, we came to an agreement and just had the closing yesterday. It was the best Christmas present I received by far :-)
Here are the highlights...
- Square Feet: 1,000
- Type: 2 bed / 1 bath
- Market Price: 55k
- Purchase: 47.5k
- Gross Rent: $850
- Operating Expenses: ($256)
- Mortgage Payments: ($187)
- Vacancy: ($68)
- Cash Flow: $339
- Cap Rate (Purchase Price): 13.3%
- Cash on Cash Return (Year 1): 18.4%
- Square Feet: 1,300
- Type: 3 bed / 2 bath
- Market Price: 72k
- Purchase: 67.5k
- Gross Rent: $950
- Operating Expenses: ($262)
- Mortgage Payments: ($282)
- Vacancy: ($76)
- Cash Flow: $330
- Cap Rate (Purchase Price): 10.9%
- Cash on Cash Return (Year 1): 15.3%
Thanks to everyone for their help over the last year. Can’t wait to see what 2015 has in store.
Have a Happy New Year!
Congrats on the acquisition!
Were these properties already leased when you purchased them? The rents seem a bit inflated for OKC, unless they're section 8.
How are the roofs, water heaters, HVAC, plumbing, electrical, etc?
Did you pay for a home inspection on both properties or inspect them yourself?
Are you managing yourself or do you have a property manager?
How much are you estimating for repairs and capital expenditures?
Awesome @Tyler Flagg
Congratulations @Tyler Flagg I'm really hoping to purchase a property next year maybe 2 and also wholesale for more funds!!
Also a great way to start the New Year!
@Nate Garrett thanks!
Nope, there are no tenants yet. The first property that I bought back in April is currently rented for $850...so since these two are right next door I'm assuming (fingers crossed) that I'll be able to get that again.
The roofs are new as of 2011, and there are only minor issues throughout the homes when it comes to the other stuff. I had a professional inspection done and there looks to be about $2,000 per house worth of stuff that needs fixing. However, I'm going to remodel one of the kitchens.
I've got a property manager for the first property and plan on using him again. It's been working out well so far.
So about $4k for repairs as well as another $8k to remodel the kitchen. I plan on taking out a HELOC or BLOC after the holidays in order to do the repairs.
sounds like pretty good deals. good return overall. what part of town are you in?
@Rhett Tullis I'm in the Plaza district right now.
good area, i own a few around there and manage others. improving quite a bit. some streets are good and others not so much.
Your estimates of market rent are on the high side. You may be able to find someone to rent the property at above market rates, but your turnover rate will be higher, leading to higher vacancy costs, turnover expenses and leasing commissions, which will more than eat up any extra monthly rent you received. If your property management company is recommending you set rent at the top of the market, they will be the party that benefits via higher management fees and leasing commissions.
Right now you're estimating around 35% total expense ratio with property management in place and properties that must be older based on the area you described and the price per foot.
If you lower your estimate of rents to market and include a budget for cap ex, your expense ratio + cap ex will look a lot more like 50% of gross potential rents which is close to what it will end up being over the next 20 years, if you keep it that long.
@Nate Garrett I can tell you I manage several in the area in that range of rent. It really comes down to the age/condition of the property as well as which street it is on. there is a wide range in that area, some spots can get in the 900 to 1000 range other streets you are lucky if you get 700. it is changing fast there though (by oklahoma standards of fast that is :O))
There are also quite a few new units going up in the neighborhood as well. I drive by them daily.
Not disagreeing with you on your numbers but there are exceptions in that neighborhood. It is a very unique area.
@Nate Garrett thanks for the feedback. I definitely appreciate it.
I guess I'll just play the rent by ear once I finish up working on them. Luckily there is enough of a buffer that I could definitely bring them down in order to keep my vacancy costs low.
I completely agree with you that I should probably re-evaluate my Capex budget. Right now I'm only budgeting about $500/yr for it, but I'm sure that'll be higher.
@Rhett Tullis I'd love to bend your ear about the neighborhood one of these days. It seems like you've got a great grasp on the area.
sure anytime. im around there pretty much daily.
Admittedly, I'm not familiar with the neighborhood, so I'll defer to your judgement. I believe the properties he has purchased were built in the 1920's and 30's.
Looking at rental asking prices on Zillow, Tyler's estimates seem at least $50 - $100 / mo high to me.
Older C properties are very difficult for out of state owners. The folks that I see doing well with them live close by and are hands-on, even if they have a property manager. Many owners of C/D properties convince themselves that they are achieving significantly higher rates of return on their properties when in reality they are merely neglecting to account for their time. These properties require a lot of maintenance and cap ex, making them management intensive. Your property manager is going to charge you to deal with that. Or you'll deal with it. Either that or neglect the property.
If I was an out of state owner, I would choose class A, newer-construction properties, especially full brick with 30 year roofs. These properties require less maintenance and very little cap ex for 15 or 20 years from when they were built. I would also expect about a 5-6% cap rate on this property type in Oklahoma at current prices. I don't think I could do much better than that with C properties from out of state, even if I was heavily involved. There's just too many expenses that will end up eating the cash flow.
@Tyler Flagg , not trying to tip your apple cart, and Merry Christmas / Happy New Year by the way! You're starting an exciting adventure, and I'm sure you'll be successful. Good on you for being open minded and willing to accept challenges to your assumptions. Best of luck!
i see good and bad in class c and in class a rentals. there are lots of benefits and negatives in both. as long as you go in knowing the issues/expenses/risks they can both be a good investment when done correctly.
Completely agree. There is no "best" property type. I know people that do very well in various niches in real estate. That's what's great about it. Something for everyone.
With that being said, the C/D investors I know that are happy with their investments are hands-on and typically live close by. Some of them self-manage and basically have management companies of their own.
I don't know of many out of state investors that have more than a few C/D properties for very long. They usually get frustrated with the required maintenance / cap ex costs and normal C/D tenant issues and sell them.
@Nate Garrett haha feel free to tip away! I'm still new, so I eat up all the constructive criticism I can get. You're definitely right that a class "A" property would be a lot easier for out-of-state investors then the route that I've taken. Hopefully I can anticipate some of the more major issues and catch them before they become and issue. Thanks again.
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