Our latest buy and hold success with pics and numbers
I wanted to share this recent success story with everyone. For some history my brother Nick and I have been partnering on buy and holds since 2009. With this latest story, by far our best and (potentially) most profitable deal to date, we have 12 apartments spread through 5 properties. Yes, we are small time but growing.
I first spotted this deal on the MLS in April or May 2015 but the asking price was comically too high, around $360,000 I believe. I watched it, saw no movement, so in June 2015 I decided to make what I thought was a fair offer of $200,000.
It’s a 3 unit building with 3 fairly identical 3 bedroom units on top of each other located near the center of town in a rural area south of Boston with commuter train access to the city.
My offer was countered in the low 300’s to which I countered again at $225,000. It would be an ok deal in the high 200’s or low 300’s, but I don’t want just an ok deal. They countered back at $280,000 but I held firm at $225,000 knowing the work it needed. They said no.
Two and a half months later my agent got a call from the seller stating that if my $225k offer was still good they would accept. Maybe the pro’s would say I should have countered with a lower number, but we did accept this and away we went.
We had just finished a cash out refi on two other properties so we had cash in the bank for the 25% down payment and repairs.
We closed this purchase at the end of October 2015.
Two of the units came occupied; one a section 8 elderly woman who had lived there for 15 years with no rent increase and the other a non-subsidized couple of roommates. Neither of those units were paying market rent but they were covering the mortgage and other costs of owning the building. We decided to leave them be while we focused on the problems on the first floor.
The work: We hire out a lot of the major work but still do some work ourselves, including demo and kitchens so we got started on that right away.
The first problem was that somewhere in history someone put an illegal 4th apartment in the first floor by closing off the passage from the kitchen to dining room, installing a 2nd kitchen in the old dining room and the tiniest full bath in the front coat closet. Neither first floor unit had a 2nd egress. We knew this needed to be fixed going in.
What we didn’t know going in was that the previous owner was 1 week away from a court date with the town over all the board of health violations related to the illegal apartment. I quickly became best friends with the health inspector when she unexpectedly showed up one day during demo.
Nick was doing some demo with the contractor when he called me to say that a “very nice lady” from the health department stopped by and gave him a list of things that needed to be taken care of immediately. Luckily most of the items were already in our reno plan.
We removed the illegal kitchen and turned the full bath into a half, installed new kitchen cabinets, counters, and appliances along with new bath vanities, tub, and toilets. The original 100 year old wood floors were refinished beautifully and vinyl flooring was installed where we couldn’t salvage the wood. We painted, installed new light fixtures, and replaced the old painted outlets and switches with new white ones for $.50 - $1 each.
We hired plumbers and electricians to go through the apartment and basement to clean up the 100 year old rats nest of wires and leaking plumbing lines which were contributing to sky high water bills. Our contractor installed new ceilings and did other work. We turned one bedroom entry that required squeezing past the kitchen stove into a closet for that room that framed into the kitchen while opening up the original entry off the dining room that had been closed off in the 70’s (likely when the illegal apartment came online) with that awesome wood paneling everyone hates to paint. This gave us a better kitchen layout and a more natural space to put the fridge and extra cabinets.
Outside we installed two new driveways and a walkway that improved the water drainage and added safety to the front porch access. We removed a large tree that towered over the roof causing a mess with falling debris on the roof and blocked all sun which left too much moisture.
This work cost about $25k, took a little over two months, including two major holidays, and we had it rented at $1,400 by the end of January 2016. Gross rents at this point were $3,270.
We were also successful with a tax abatement based on the incorrect data on the assessor’s card which caused the town to value this as a 5 unit property despite their knowledge of the illegal apartments. Gotta love government efficiencies. This was around $1,300 returned to us. I’ve just filed the 2nd abatement for this coming year and expect an assessed value about $50k less than last year based on the purchase price.
February 2016 was a particularly windy and stormy month for this area and one day we learned just how bad. At 5am I got a call from the 3rd floor tenant saying that the fire department was there and it was raining inside the apartment. The storm had torn up the roof and soaked two rooms plus the common hallway. Awesome.
A new roof was in the long term rehab plan, but not at this time. This was a new experience for us but needless to say we got a new roof and a partially renovated 3rd floor apartment for simply the cost of the insurance deductible. Not a bad deal.
Next up was the 2nd floor subsidized tenant who was paying rent at her original lease price from 15 years ago. I was able to get an increase from the housing authority but not to market rents. If you’re familiar with the Section 8 program you’ll understand what it means that this tenant’s original three bedroom voucher was slashed to a two bedroom voucher at some point and the previous owner didn’t care. So I’m getting subsidized two bedroom rent in this three bedroom unit which isn’t ideal, but it also means we don’t need to drop a large rehab in there right now.
Fast forward to August 2016 and we start thinking about the coming one year anniversary. We decided that the 3rd floor needs to start paying closer to market rent so we offer them a compromise. We decided to increase their rent half of what a true market increase would be, offered to fix a few small things, and let them stay. We gave 45 days notice. They did not take us up on the offer and decided to move out.
Unlike the past few weeks since the US election it was a peaceful transition.
We also started the process to cash out refi this place in August. That finally closed after an appraisal hiccup in late October 2016.
We started the 3rd floor reno on October 1 with the same plan as the first floor aside from two things: there was no illegal apartment to dismantle so that was easy, but the heating system was an ancient gas fired space heater sitting in the dining room.
Instead of installing a HE system in the basement and running new baseboard lines up three flights we decided to go with a four zone mini split ductless system. This thing is sweet! It will heat efficiently down to an outside temp of -15 degrees and lets us market this unit as having central a/c! This was expensive, but compared to the work that would have to be done to run baseboards upstairs we determined that the slightly higher cost was worth it.
We busted it during this reno and finished in 37 days, holding the open house on November 6. We would have been done sooner but our contractor who we trust more than anyone had already planned a weeklong vacation during the month. We could have hired someone else, but for one week we did not want to take that gamble on an unknown.
We found a qualified tenant on November 8, but due to paperwork issues with the housing authority we were not able to get them moved in until December 1. As of today they are moving in and we have a contract with Section 8 for a rent of $1,495 in this unit.
So, the numbers:
Purchase: $225,000 with 25% down
First floor and building reno: $25,000
Tax abatement year 1: $1,300
New roof and partial 3rd floor reno: $2,500 deductible
Third floor reno: $28,000
Cash out refi: $60,000 back to us based on appraised value of $330,000 prior to 3rd floor reno. Market comps today could allow me to argue a value closer to $360,000 or more if I were to sell.
Gross monthly rent today: $4,025. I expect this to be $4,100 come February 1, 2017 when the first floor contract renews. There is about $400/month rent left on the table due to the 2nd floor voucher situation, but that will come in time and would require another $20+k reno.
Work on this building is not done. There are three other HVAC systems (two for the first floor from the illegal apartment) that are old and will likely go soon along with some older hot water heaters. We battled a hoarding and bed bug situation on the second floor this summer, and while you never know what to expect with tenants that seems to go double for those in the Section 8 program for some reason…
Regardless we love this property and feel it will be a huge chip in our portfolio for years to come! Here are some before and after photos: