Our First Investment Property: Year 1

4 Replies

I had been meaning to post a recap of year one for our first investment property and finally got around to it...in April. Anyways, here goes. 

In November of 2016 my wife and I purchased a 4-family investment property in south city St. Louis. After concluding our first calendar year of owning the property, I thought I would share the results. I found posts like this to be helpful when I was first learning about investing in real estate, so hopefully someone on here can get something out of it.

Our goals were to cash flow $100 per month per door, have a cash-on-cash ROI of 12%, and achieve a total return of 20%.

Purchase price: $179,900
Our loan is a 30-year fixed rate residential mortgage at 4.25%
25% Downpayment: $44,975
Mortgage Payment (Principal & Interest): $663.75

Operating Income
$26,435 scheduled gross rents (4 units)
$(1001) vacancy
$600 garage rent
$11 interest
$26,045 gross operating income

Operating Expenses
Property Management (10% of gross rents): $(2543)
Leasing fee for new tenant placement: $(550)
Sewer: $(1397)
Water & Trash: $(1232)
Lawn care/mowing: $(350)
Gas & electric during vacancy: $(228)
City occupancy inspection aka government extortion fees: $(183)
Maintenance & Repairs: $(3594)
Property Taxes: $(2009)
Insurance: $(983)
$(13,069) gross operating expense

Net Operating Income: $12,976
Mortgage P&I: $(7965)
Cash Flow Before Taxes: $5,011
Cash-on-cash return: 11%
Equity Accrued: $2275
Total Return: $7286
Total ROI: 16%

We hit our cash flow number almost exactly at $104 per door while our ROI and total return came in a little under our projections, but pretty damn close. While not a screaming deal or a homerun, we were ecstatic with the results after one year. Having a quality property manager on our team helped make this a great hands-off investment that fit our family's lifestyle. Real estate investing really does work if you know your numbers and find a property that aligns with your goals! We hope to acquire several more small multi-families in the coming years.

Cheers and good luck in your investing!

Max

Lastly, new investors often ask what to estimate for expenses. After 1 year owning this property, we now have one year of data! These numbers are as a percentage of scheduled gross rents. I did not include the garage rents since the garage accrued no expenses and not every property has one.

Vacancy = 4%
Operating Expenses = 50% and breaks down as follows:
Property management: 10%
Fixed expenses (property tax, insurance, water, sewer, trash): 21%
Variable expenses (maintenance, repairs, lawn care, leasing fee, gas, electric, inspections): 19%

Thanks for sharing, @Max Householder ! You obviously bought a good investment and are doing a great job tracking and analyzing your progress. Funny how those expenses hit right on 50%! Do you think that will go up or down as you roll into year two? Was there deferred maintenance you had to work through in the first several months?

How did you guys decide to handle capex? Is that stuck in with your variable expenses, or do you pull that from your cash flow?

Congrats on a solid first year... and again, thanks for sharing!

Megan Greathouse

    Originally posted by @Megan Greathouse :

    Funny how those expenses hit right on 50%! Do you think that will go up or down as you roll into year two?

    Was there deferred maintenance you had to work through in the first several months?

    How did you guys decide to handle capex? Is that stuck in with your variable expenses, or do you pull that from your cash flow?

    With the change in management from the previous owner, we expected a bunch of maintenance requests would come in the first few months and then slow down over the rest of the year and that's exactly what happened. There was also a fair amount of tinkering with the boiler systems to get them filling properly which resulted in a lot of trip charges. We knew the boilers might be a hassle going in, so the plan is to add gas furnaces and central a/c as the boilers age out, so even if this is a typical expense each fall, it hopefully won't last forever. We spent about $1500 in December out of our cash flow to finish up some deferred maintenance items found during our initial inspection, so that weighed on our NOI a little bit but shouldn't be an ongoing expenditure. In short, I expect expenses to be at least a little less this year, but will need at least 3 years of data to have a better idea if this was a high, low, or typical year for expenses.

    As far as capex, we had to replace a stove during the year that's include in our expense number here, but I'm not sure if our accountant will capitalize that or not. Future capex will be a new roof within 5 years and then replacing the boilers as they age out. Two are relatively new, one is in good condition, and one is very old, but working currently. Right now we're holding all our cash flow to put toward capex and/or reinvest in the property. If we can have two more years like this year 1 then that should cover the roof and a new furnace & a/c to replace the oldest boiler. Our cash-on-cash return would be much less, but we'll still get principal paydown and everything besides the roof should allow us to raise rents (central air, updated appliances, open up the kitchen/livingroom wall, refinish wood floors). Better-case scenario, those variable expenses are much less each year and we can still cash flow on top of those capex expenditures. Since we don't need the cash flow to live on, we're taking it slow as we figure out whether the money we cleared is real cash flow or if we'll end up at breakeven after spending on capex.

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