Shameless Self Pat On The Back
Well I'm happy to say that 2018 has been a year of .... Character building ... but I made it out the other end with another great deal under my belt.
I wanted to share the experience here in order to show another simple example for people looking to walk the path, and also for the community to critique my methods to help me grow.
Synopsis:
I used rental income from my first two house hacks to fully fund my third rental property rehab project. The building was taken over in March of 2018 and will be 100% completed by 28 Sep 2018. On this path I was faced with letting go not one but two general contractors, a homeless person living in one of the basements, lawless tenants, a tenant eviction, broken windows, a flea infestation, my first experience with section 8 and more. I'm so happy to say through with hard work and perseverance, I made it through to the end.
Finding the Deal
So like a lot of people, I did well with bitcoin last year. I decided (thankfully) to move it out of crypto currency and into my specialty, rentals. At the beginning of 2018 I had two four family buildings in great locations. Both are very profitable and have great long term tenants in them. I wanted to get another building in the same locations but unfortunately the market is about 3x too expensive right now so I decided to look elsewhere.
I came across a four family in a less desirable neighborhood. So I decided to do my research and see what I could infer without actually going to look at the building. The current owner and realtor posted almost zero pictures of the place. I knew that couldn't be a good sign. I always like to fully think out deals though, if not just for practice.
- Asking: 100k (Realtor.com)
- Comparable prices in area: ~150k (Realtor.com and Zillow)
- Average Comparable Rent Per Unit: 500-600 a month (Realtor.com and Zillow)
- Estimated Monthly Mortgage: ~1000 (Mortgage calc with 25% down plus estimated insurance and tax)
- Estimated Monthly Water: ~200 (I budget 50 per unit usually)
- Estimated Monthly Expenses: ~300 (For surprise repairs, lawn maint, snow removal etc)
- Total Estimated Monthly Operating Costs: 1500
- Total Estimated Monthly Rental Income: 2000-2400
- Estimated Net Operating Income: 500-900
I knew these numbers weren't fantastic but I figured the building was at least worth going to look at. So I spun my trusted realtor up and we went and took a look at the place. The building on the outside needed some love. Broken windows in the basement, downspouts broken, chipping paint. It needed love but nothing that couldn't be fixed easily. The first unit I looked at was occupied by an 18 year old who didn't bother putting his alcohol or crack pipe away for us. The unit was cosmetically bad but nothing that some carpet, paint and elbow grease couldn't fix.
I wanted to see the rest of the units so I could tell if this was just going to need some polish or if there was more. The seller's realtor told us that we were allowed to look at one unit. If we wanted to see the rest of the units we would have to make an offer. I instantly smelled something bad.
The Negotiation
It was at this point that I felt we might have a deal or a nasty bate and switch. I had to press forward though. You miss 100% of the shots you don't take, right? I knew that even if I put an offer in, it was contingent on me blessing off on the rest of the building, so I offered them exactly what they were asking. My hope being that the other units would be a wreck and that I could beat that price down instead of pulling out.
A few days later, they accepted the offer and let me inspect the rest of the building. Sure enough, the other units looked like a dumpster fire floating down **** creek. Every unit needed carpet, paint, bathrooms gutted, new kitchen cabinets and counter tops, electrical work.... Basically everything. Based on past experience doing some of these things, I was able to generally estimate what the total cost would be. I was hoping that it wouldn't go over 15k for all repairs but I planned for 20k just to be safe.
We went back to the seller and told them that we wanted 20k off the purchase price because of the extensive repairs that they hid from us on our initial inspection. They pushed back but eventually gave 10k off.
So the deal is, 90k for a building that needs aprox 20k in work and should be worth at least 150k and generate ~2200 a month when fully repaired. That sounds like a good deal to me so I took it. That's when the real fun began.
The Grace Period
Once I had the keys in hand, I decided to go meet the tenants and explain what was about to happen to them. I like to get this out of the way quickly so there's no speculation. My intention was to tell each tenant that over the next 6 months they would each get a rehabbed unit, that their rent was right where it needed to be and wouldn't change. Also, that there was a new sheriff in town, I'm a former Army SGT, Military Police Officer, with combat experience, and that I don't tolerate shenanigans in my buildings. Pay your rent on time, tell me about problems and everyone will be happy.
The first door I knocked on, the first tenant I met, the first 3 hours I owned the building.... I made her cry.....
I introduced myself, told her about all the great things that were coming, mentioned I knew she was a long term tenant and that I couldn't wait to work with her. The last thing I said was,
"Rent is due on the 1st by 5pm. I don't do late rent. I never have and I have the same expectation from every tenant. You pay by 5pm and we'll never have an issue."
Instantly, she changed. She went from happy to broken. Apparently this tenant was allowed to pay her rent on the 3rd due to what ever subsidy she was getting. I had no idea, it wasn't documented anywhere. So she thought I was going to kick her out.... Great job Anthony.... I calmed her down and made it clear she would be allowed to continue to pay on the 3rd if that was the previous agreement.
I didn't start the rehab until about three months in. I wanted to rebuild my safety net funds. I also needed to get quotes and line my contractors up. Things were calm for a few months. I had a homeless person living in one of the basements that I had to contend with. They actually had enough nerve to changes the locks on the basement.... I buttoned up the openings and that ended quickly.
Also, one tenant decided not to pay rent the very first month I had taken over. It was the druggy that I met the first time out to the building. No problem there, filed a 3 day eviction notice on the 2nd and had them out by the end of the month. I got rid of some dead weight, sent a message to the other tenants not to mess with me and I also had the first unit I was going to rehab. Everyone wins.
The Hunt For Contractors
This is by far, the worst experience I had with this building. There were some bad ones but wow... Contractors... Get it together... The carpet guy and the painter were easy wins for me. The carpet guy I found through my realtor because he also owns rentals and the painter I've been working with for years, so I was happy to give him the business. My general contractor on the other hand, not such a happy ending here.
I've been working with the same general contractor for about 3 years now. He's always been a little off on his work but good help is hard to find so I tolerated it. When I offered this building to him, I thought he'd be ecstatic. Most of the work that needed done was going to be going to him. I thought he'd be happy to have months of secured income. I guess not. He came out, didn't take notes and refused to give me a quote for weeks. That was enough for me. I let him go permanently.
I contacted 9 general contractors to come give me a quote on the first unit's work. Half, HALF, didn't even bother to show up to give me a quote! Of the half that did show up, either their quote was astronomical or they didn't give a quote at all and I never heard from them again. This was probably the most soul crushing part of this process. I had work, I had money, what I didn't have was someone with skill that wanted to do the work...
I finally found someone eventually who did passable work and the price was cheap too. He wasn't my first choice but at least he knew how to do the work.
Once I had all the contractor quotes I was able to extrapolate them out across all the units and saw that my initial estimate of 15k-20k was right on the money. The quotes brought me to 17k leaving some room for surprises. Let the rehab begin!
The Rehab
Okay so the game plan was, fix an empty unit in 30 days, move an existing tenant into it, rinse and repeat until all units are done.
Unit 1
The first unit was actually pretty uneventful. We had a full 30 days to get it done and everyone was scheduled with enough time to get the work done without stepping on each other. This is when the general contractor woes began.
This guy was extremely lazy. He would show up for a couple hours, do a couple things and leave exhausted. It was hard for me to sit on my hands and watch this. I'm a big believer in let them prove to me they can't be trusted though, so I gave him the full month to do his work. The end of the month came and he had finished about 95% of the work I needed him to do. It wasn't perfect, I was annoyed that he didn't get it all done, but maybe he was just warming up. So I decided that I would give him a second chance. The carpet, paint, and appliances went in without a problem. So we got the first tenant moved down into their new unit on schedule and moved on to the second unit.
Unit 2
The second unit we rehabbed was in far worse condition than the first. The contractor team was warmed up now and everyone was chomping at the bit to get in there and do their job. Even the lazy general contractor seemed motivated to start. He swore to me he'd be done in two weeks.
Much like the first unit, the month came and went. Everyone hit their deadlines. Except for lazy general contractor of course. He sent me a message a couple days prior to his deadline telling me everything was done. So that weekend I went in to do an inspection of his work. I guess he anticipated that I wouldn't? Here's a list of things I found...
- He installed tiles under the bathroom sink with no grout... You could see them if you looked on the sides of the sink
- He installed a door handle with no latch
- He installed a countertop without bolting the sink to the countertop, the countertop to the cabinents or the cabinents to the wall.......
There were a couple other things but this was enough for me to let him go. Fortunately I anticipated that he would let me down so I had enough time to fix these things. We got the tenant moved in on time and it was on to the next unit.
Unit 3
Unit number three was going to be an exciting one. The tenant scheduled to move into it needed the unit to be section 8 approved which meant the unit needed to be ready two weeks sooner than the others for the inspection process. On top of this, I now no longer had a general contractor which meant I would need to do the work myself. I'm not one to back down from a challenge so I pulled my big boy pants up and got to planning.
Now, I'm a software engineer these days. If it doesn't have a keyboard then I probably haven't touched it in the last 8 years. There's a reason I hire contractors. Here's a list of a few of the things I needed to do over a two week period, after working a full time job.
- Change outlets
- Change light fixtures
- Change fans
- Gut a kitchen
- Gut a bathroom
- Install cabinets and countertops
- Install a toilet, a floor, a vanity
- Fix holes in walls
- Paint trim
- Cut and hang doors
Youtube is your friend here. I thought this was a tall order for me but as I said before, I don't back down from a challenge. So I got my KanBan loaded up and started doing work. (You can see my actual active kanban with all my work items here)
At first it was slow but only because I didn't have any tools and I was critical of every cut I made. I wanted to triple check everything before I did it so I didn't get hurt and didn't ruin material. Once I got my feet under me though (and about $600 in tools) I was up and running. This was probably the best experience I had on this building.
I not only finished all of the repairs prior to the deadline, but I did them all WAY better than the previous lazy contractor, under budget and I got it all done in a single week!!! Unit 3 got approved by section 8 and the tenant moved in on the 1st of September as scheduled.
Unit 4
Unit 4 should be my victory dance, right? My cost was reduced a ton, I discovered a new skill set, I no longer needed to rely on general contractors, I had a ton of sweet new tools and I had a full 30 days to rehab the unit.
WRONG
Unknown to me, the tenant that I had just moved into Unit #3, had fleas.... A LOT of fleas. So many that they wanted to carry you off into their flea castle to meet their flea leader who would then decide if I were to live or die. It was horrible. Mind you, I was in Iraq. I trained Iraqi police to go into the worst parts of Iraq, I also inspected their prisons. I've smelt and seen things that my nose and eyes will never recover from. These fleas were BAD.
Being the DIY guy I am, I went up to Lowes and bought what I considered to be the nuke of insecticides. I got the purple flea cans. It said one per room so I bought enough for two per room. I also bought this powder that you could spread around that claimed to kill everything with more than four legs. I dawned my respirator and started spreading powdery death.
PRO TIP: Check particle size on filter before using chemicals. If you make the same mistake I did, you'll know because you'll start to vomit in your mask uncontrollably.
After the poison was down, I gave it a couple days to take effect. I went back in expecting mass flea genocide but found the fleas had rallied their brigade and was forming for a second assault on me. It was time to call the pros. I gave Orkin a ring. They came out and put down their poison. The guy gave me some advice and told me to vacuum every day. I've been keeping up with this for a couple weeks now and it seems to be working. I also had him treat the new unit that I had the infected tenant move into just to be safe.
That brings me to today. The repairs are just about done. I have to put the kitchen together and take the trash out but unless something unforeseen happens with paint and carpet contractors, we're going to finish ahead of schedule.
Final Numbers
So the project came out almost exactly on budget. I budgeted 20k for the project, I projected it would take 17k and in total the rehab costed $20,244.00 so about 1.2% over budget. Not bad considering the scope.
The rent is exactly where I predicted. Each tenant was happy to sign a 12 month lease at 550 a month. When I get the last unit leased it will be the same bringing monthly income to 2200 a month.
The principle, interest, taxes, and insurance came to 909 a month and water is about $160 a month. So total monthly expenses with capital expenditures, landscaping etc etc comes out to about 1250 a month. This means that the NOI for the building is about $950, or 43.2% of gross, a month when fully rented next month.
Total invested into the property as of today: 22.5k down and 20.1k in repairs for a total of 42.6k
Annual cash on cash return: 26.7%
Lessons Learned:
- Don't quit. Even if the task seems like it's out of your wheel house, try and you'll probably surprise yourself. I certainly did.
- ALWAYS leave room in the budget. There was no way I could have expected flea extermination, having to buy tools after firing a contractor in the middle of the job, and other hidden gotchyas along the way.
- Tenants require strong leadership. Bad tenants can sometimes be great tenants with proper leadership.
- Be flexible. **** happens.
Some Before and After Photos: