My first property

12 Replies

My first property and first post. 

Just closed on a brick 4-plex ranch, two bedrooms each, fully rented with good tenants. 

Paid $115,000 with a 4.5% 30 year loan. 

Gross Schedule Income is $24,500 with rents currently below market and tenants pay all utilities. 

With healthy reserves set aside for maintenance, I'm projecting cash flow of over $13,000 per year. That leaves me with a project 16% cap rate and 60% COC (by asking the previous owner to bring a large chunk to closing)

That cashflow would allow me to pay off the property in 5 years flat, but I plan to roll those profits into downpayment for more properties just like it. My goal is to get to 20 units within the next 3-4 years, which should provide the start for a "early" retirement at age 30 ;) 

This blog and website has been a HUGE source for my inspiration. Thank you all for your contribution. 

Originally posted by @Brian Faulkner :

Braden Jobson how did you find the property?

On the MLS actually. I spent 6 months looking for a property and this was the best deal I found that was still in a safe town. I still have a lot to learn for sourcing properties using more creative methods.

sounds like a good property with great returns!

since the rents are below market, are you raising the prices sometime soon or are the tenants locked into a long term lease?

@Braden J.  Congratulations on your first deal. It looks like you not only got a decent price, but favorable finance terms as well. Financing can make or break a deal and it looks like it made yours a great one.

Are you excluding debt service from your cash flow calculation? I think the chances of this property showing a $13k NOI on $24.5k in gross rents is doubtful even excluding debt service. You may want to redo your calculations.

@Josip Galic  Thanks! Rents are currently 6% below what I'm seeing as average. I haven't decided if I will raise rents. 

@Matt Morgan  Debt was included in my Cash flow calculations. Here's how I broke it down. 

$24.5k Gross Rents

5% vacancy rate

$5,244 Annual Debt service

$3,155 Taxes + Insurance

Self Managed

ZERO utilities. All utilities including water and trash are paid by the tenant. Separate meters for everything. 

Considering the property was fully renovated with all new appliances and utilities only 3 years ago, I'm factoring $1500/yr for maintenance, only time will tell if more is needed.

This leaves me with $13,043 Cash Flow. 

If I raise rents to at market rate, then I will be at $14k Cash flow after all debt service, expenses, vacancy rates, taxes and maintenance. That would be a 16.7 cap rate. 

Obviously this is my first property, so if I'm missing any numbers I would greatly appreciate the insight! 

Thanks!

Congratulations! It looks like you did good. I'll wait for the more seasoned guys to chime in if you missed anything. I'd be interested to learn also.

@Matt Morgan NOI is technically $19,095 as I currently have it projected (NOI doesn't include Debt Service). $24,150 (gross rent) - $1,250 (5% Vacancy) - $4,655 (total operating expenses, including taxes, insurance and maintenance) = $19,095 (NOI) -$5,244 (debt service) = $13,851 Cash Flow.

@Braden J.  

 Congrats on your first deal! Did you use specific search criteria when waiting for the right property to appear? If so, could you share some insight? My goal is to purchase my first property as well in 2015, so I'm always looking to learn how others got to the point of purchasing their first. 

@Jeff Formeller  I personally wanted a 4 unit all brick ranch property that consisted of 2 bedroom apartments that rented for approximately $500 each.  That's rather specific for my area, so I didn't have too many properties that fit those criteria.  I looked at a ton of properties and just happened upon this. Other than that, there was nothing else I did in order to find it. I just got lucky I think with the condition of the property and everything. The last owner bought it as his first investment property and way over improved the place, he didn't enjoy being a landlord so he sold it 3 years later. 

Originally posted by @Braden J. :

@Josip Galic  Thanks! Rents are currently 6% below what I'm seeing as average. I haven't decided if I will raise rents. 

@Matt Morgan Debt was included in my Cash flow calculations. Here's how I broke it down. 

$24.5k Gross Rents

5% vacancy rate

$5,244 Annual Debt service

$3,155 Taxes + Insurance

Self Managed

ZERO utilities. All utilities including water and trash are paid by the tenant. Separate meters for everything. 

Considering the property was fully renovated with all new appliances and utilities only 3 years ago, I'm factoring $1500/yr for maintenance, only time will tell if more is needed.

This leaves me with $13,043 Cash Flow. 

If I raise rents to at market rate, then I will be at $14k Cash flow after all debt service, expenses, vacancy rates, taxes and maintenance. That would be a 16.7 cap rate. 

Obviously this is my first property, so if I'm missing any numbers I would greatly appreciate the insight! 

Thanks!

 Braden -

Thanks for breaking down the numbers. A few thoughts:

The taxes/insurance number seems extremely low but I guess it's not out of the realm of possibility in Ohio. Consider that a win.

Vacancy rate seems low. I think a safe number to use is 8%. This assumes one vacant turnover month per 2 years and one month's rent lost every two years due to lease up fee. To piggyback off of that, you should always include property management in your evaluations so lets add 10%.

I would say your maintenance number is short by about half at least. Consider this: Lets be conservative and say you need to put $600 into a unit upon turnover every 2 years. Thats $1200/year right there. ($300/unit/year) Then lets say you have $150 in miscellaneous repairs per unit per year. Another $600. Then lets assume your roof is 10 years old and has another 10 years left on it. A new roof costs $10,000. That means you need to save $1,000 a year for the next 10 years in order to afford it. I could go on but we're at $2,800/year being conservative and not accounting for any other capital expenditures either. You get the picture.

Are you responsible for any lawn/landscape maintenance? What about snow? 

In my experience, water is almost always the responsibility of the landlord in multi family housing. If rents are below market, it is to compensate for the fact that tenants pay their own utilities. Raising rents could cause turnover when tenants realize they can pay the same rent somewhere else and not have to pay water on top of that. Just food for thought.

I calculate NOI at 14,2xx.

All that being said, it sounds like you got a killer first deal. Well done man. 

@Matt Morgan  thanks very much for the insight! All of that makes a lot of sense, especially saving for the roof. I'm adjusting my numbers to account for everything you mentioned. Thanks!! 

@Braden J.   nice looking property.....I looked it up on the auditor website. ;-)

Are they normal rentals or Section 8?

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