How a foreclosed 4-plex turned into 43 units!
We have been investing for a number of years in KC and I have followed many of the success stories here on BP and thought I would contribute one of ours. Its quite long but I hope instructive.
In late winter 2010 my partner located a foreclosed 4-plex in a great neighborhood in midtown Kansas City for $120k. It had been on the market for some time but was not moving. We watched the price drop to $100k within the month; it was apparent the bank was eager to get this off the books. We contacted the listing agent who was unresponsive so we turned to another broker/agent in the area and he got us into the property. The property was fantastic! 4 large two bedroom apartments with all new windows, HVAC but with two missing compressors; we could fix that; all new appliances and individual hot water heaters. There was some missing copper and the two upper balconies needed to be repaired/replaced. There were some homeless folks living on the decks in the rear of the property but the overall concern and the obvious reason why this property was not moving was the condition of the foundation.
The East wall bowed out significantly but it had been reinforced. At some point in the past steel supports and concrete pillars were installed in the basement to stabilize the property. At this time in the KC market, there was plenty of low hanging fruit and we assumed that most investors didn't want to bother with a property with foundation problems. All the while the price is dropping $20k per month.
We brought in a structural engineer and foundation expert. He inspected the building, made some comments about some things we might want to do but said it was sound and that we should not be concerned.
By now the price of the property was down to $60k and the whole time my partner is chomping at the bit to buy it; we had cash in hand after the recent sale of several SFHs. I wanted to wait a bit longer to see if we could get another $20k off but we went ahead and made an offer.
We offered just under $60k and it was accepted. All cash close and quick. Once we closed, we replaced the two front balconies as they were in rough shape. We tiled the bathrooms and kitchens, replaced two missing compressors, repainted and repaired various drywall and carpentry issues and refinished the hard wood floors that were under carpet when we bought the place and we fenced in the back yard. I seem to recall replacing a hot water heater as well.
All in all this ran close to $40k and was all funded out of operating income from other properties. We rented the first apartment for $700 within 6 months and the rest rented within a few months after. Each subsequent rental rented for more so that the property grossed nearly $3k per month with no mortgage and water as the only owner provided utility.
Jump ahead a two years or so and we took out a line of credit against the property in the amount of $100k and bought an off market 12 plex in the Union Hill neighborhood in KC. Here is where having a broker with lots of personal contacts in your market is worth gold. They asked for $450k and we countered at $400k. They came back at $425k and we countered their counter for $415k which was accepted. Beautiful cash flowing property in a highly desirable area with below market rents. The management at the time was getting $5 a year increases in the rent!
The inspection came back with very minor issues and based upon our analysis of the property, it would have taken a heck of a lot to make us back out. We closed and made some minor updates. Rents were increased over the next year and a half and the only thing we did to the 12 plex above and beyond basic maintenance was to repair a gutter and replace one furnace. Home run!
We then sold the 4 plex for $210k, a pretty solid return, and quickly found a 15 unit in midtown KC through yet another broker we had done business with previously. We were the first ones in the property and made an offer on the spot. This was a gem. Out of town owners with a local property management company that couldn't manage a tent at a Boy Scout camp. Rents were too low and had not moved in years. Fit and finish was ok but given the market, a few updates and upgrades would bring substantially increased rents. Gross income when we bought it was around $64k; its now over $90k trending towards $100k.
This year we sold the 12 plex for $559k! Nearly $150k more than what we paid for it and we put virtually nothing into the property. The value all came from solid management, increasing rents and keeping expenses low. We self manage by the way.
We 1031'd the proceeds and have an incredible 14 unit River Market property under contract for just over $1.1. Once again, knowing a broker with lots of contacts is key. He brought this to us before it went on the market. We paid asking price but our analysis shows plenty of room for rent increases. We calculate there will be $17k per door on the back end along with great monthly income.
So here is a success story with plenty of lessons to boot. Lessons by the way that I learned the very hard way.
Know your market and rents; too many PM's are content to get less than market rents since they believe they will be quicker to rent and the percentage difference between a $500 rental and a $600 rental is pretty small to them and not worth the effort. We are seeing month over month increases in rents in KC right now. If you self manage, check the rents around your properties and make sure you are right up there; unless your property stinks.
Make your property shine. All of our properties have hard wood floors and it makes a huge impression when someone walks in for the first time. We bought our own floor refinishing equipment and DIY. But even if you hire it out, you will most likely only need to scratch and poly between turns so won't need to constantly have a floor crew working.
Don't be afraid of the way a property looks. Spend a bit and get an expert to evaluate and inspect. You might find it looks worse than it really is.
Always negotiate up from your starting price. Don't work down from the seller's. We saved $35k when we bought the 12 plex.
Most importantly, build your relationships. Several of our best deals have been brought to us by brokers who we work with and who have strong relationships with property owners in the area.
And for anyone doing the math, we don't own all 43 units now - we owned and sold some on the way.
Best of luck* investing!
*(There is no luck! Just hard work!)