Three months ago, I set out to find a purchase a small multi-unit apartment in the St Louis area because my girlfriend and I are moving there in early August. We have been living in California this whole time, so I knew networking would be key to having everything move-in ready. Over the last 3 months, I spent hours networking with people on the BP forums, analyzing the rental markets and neighborhoods, and asking lots of dumb questions. Fortunately, I was able to get a great agent and lender through the recommendations and referrals on BP. We were able to find a fourplex in a great neighborhood (looks like it will appreciate but don't need it to) and close through an FHA loan. Thank you @Alicia Sierra for helping through the whole process!
Onto the deal!
To be honest, the property immediately caught my eye. Great photos, excellent neighborhood, and the price kept being lowered. However, the rents were way too low to fit my initial criteria (1% rule). However, after analyzing the market rents through Padmapper, Rentometer.com, and Zillow, I discovered the units themselves were underpriced for the area. We put in an offer, and after some haggling, decided on $251,000 with the seller contributing $7000 to closing costs. After the inspection, we were able to get $2,500 in additional repair completed.
The units themselves are all 1 BD 1 BA and currently being rented for $525. The plan is to increase the rents to $700 (slightly below market rate) when the leases expire in the Spring. To fit my criteria, I analyzed the numbers with the increase rental rates as though I was not living there. I want this investment to make sense if we choose to move out after the 1 year FHA requirement. All numbers are on a monthly basis:
Gross Income: $2800
Adjusted Gross: $2566.67
Mortgage Payment: $1138.98 (financed at 3.875% with 3.5% down)
Mortgage Insurance: 157.66
Cost to Break Lease: $2000 (all leases ended in the Spring)
Pro-rated Rent: (651.13)
Total Cash Required to Close: $10,134
Cash-on-Cash Return: 5.54%
IRR over 5 Years Due to Loan Paydown: 52.08%
The big takeaway for me is that networking is essential to making these kinds of purchases sight unseen. St Louis is known for having neighborhoods that vary greatly block-by-block. I was fortunate enough to find people I could trust and really knew the market. All thanks to BP!
Other takeaways are try to avoid being in a time crunch when making a purchase! My original goal was to have the property cashflow at a much higher rate, but as the moving date became closer, it was harder to find deals off the MLS in areas we would want to live in. Probably could have found a better rate of return cashflow-wise if we were more patient or were willing to do rehabbing upfront.
Try to get lease information upfront if doing a house hack. We got the lease information later in the process. Buying the tenants out of the lease definitely made a big impact to the total rate of return.
Going forward, I am going to be sticking more closely to the cashflow goals. That will probably require doing some flips, so networking with other successful flippers in the area will be key.
Looking forward to everyone's feedback. For now, we expect to be paying much less than we would otherwise for rent, so we can put these lessons learned and the money saved through this experience towards our future deals.
Congratulations @Sam Levine . That's a great story. I wish I could convince my wife to house hack. I would do it in a minute.
@Sam Levine congratulations on your first purchase. Those repair, CapEx expenses seem high no? I've always seen 5-6% so are you just being safe with those estimates? Lastly, I am not familiar with the "Cost to Break Lease" term. What is that and what does that number reflect? Did you collect that "Pro-rated Rent" from the seller since it may have been mid-month or something along those lines?
Congrats on your big deal!
@Gregory A. I've always heard 10% as an estimate for CapEx and Repair expenses over the long run. Given that I'll be doing the repairs and management myself, I certainly expect the numbers to lower, but I want to be safe should I turn it over the management at a later point. Have you found 5-6% as more realistic?
We had to pay one of the tenants cash to move out of a unit because the lease was expiring in the spring and FHA requires an owner occupancy.
At closing, we are collecting pro-rated rent because of the closing occurring part way through the month. This helped offset the cash we had to put into the deal.
@Sam Levine Congratulations; glad I could help. Let's not forget the equity appreciation you stand to enjoy because of this being one of the most sought after city neighborhoods and your plans for improvements. Look forward to seeing you in town soon...and finding the next great deal.
@Sam Levine that was an "ah hah" moment for me just now. I didn't think about the fact that you would have to force one of the tenants out. The only experience I have with 5-6% being more realistic is from books that I have read, most recently Brandon Turners on real estate investing. But a total of about 40% expenses which is about what you have seems about right.
I also see that you updated your numbers a bit there since I last looked at it. So, in reality, since you are not paying for management at the moment, and you are missing 700 in the interim until you decide to move out, you are gaining equity on your purchase at the rate of only Cashflow(46.76) + Management(256.67) - Your unit(700) = -396.57. That seems like a success to me honestly for paying down the mortgage at only $400/month and that is also assuming that your repairs are that high, which likely they won't be since you are living in the unit. I would say it is a good success!
If you don't mind me asking, what area in st. louis is this in. I am currently investing in sfh's in st. louis county. Thanks
Anuj - the 4 unit is in The Shaw neighborhood. What part of St Louis County do you invest in?
@Sam Levine well done! I wish I could have found a quad when I was house hacking! We settled for a duplex and now that we moved out, its cash flowing $600 a month. It was such an awesome way to start our investing career. Be prepared though, it seems like all of our Cap ex came in the first two years. Two water heaters, two furnaces, windows, sub pump all in two years! Make sure you have an emergency fund in case this happens to you. the good news is, we can lower cap ex to a much lower percentage for the next couple of years but it wiped away a lot of our savings while we were there. Good luck to you and your girlfriend, it will help you guys bond as a couple!
@Lucas Miller wow that is really unfortunate for all of those expenses to have come up at the same time. Looking back on it now, realizing hindsight is always 20/20, could you have seen those components failing? As in, were there good signs or was one breaking and the other was probably close enough, so you just went ahead and replaced them both while you were already in there?
Congrats, Sam! I just closed on my first four-family in St. Louis last month. I also own a SFR in St. Louis County. Feel free to look me up when you make it to STL... always happy to connect with fellow investors!
@Gregory A. it wasn't completely unexpected. The newer furnace downstairs was the first to go, that was a big surprise. Especially during the middle of December. The upper one was leaking a bit of CO so that one was expected. We planned on the windows, but the pump was a surprise. We negotiated a new roof with purchase so we are pretty set for cap ex.
Congrats! and welcome to STL. This property wouldn't by chance be in the skinker-debaliviere neighborhood is it?
Just saw it was in the Shaw neighborhood!
If you're in the market for another great rental
$3120 rents in an appreciating area (not up and coming, very stable area), let me know
Great work, Sam! Very encouraging to read about your deal. I'm looking to do a similar thing very soon in St. Louis!
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