Alright folks here it is!
You want the details huh? Well, you’ve come to the right place. Here is the full breakdown of my second investment property for anyone interested in the nitty-gritty details of residential investing in the midwest from out of state. If you’re reading this as a new investor, I hope it serves as a more in-depth analysis of what a deal actually looks like. I know how frustrating it can be not having the whole picture. Hearing the success stories and the basic numbers only goes so far. Here is the rundown on a real deal that took place during September 2017 in Cleveland, OH. Skip ahead for the numbers or get comfy because this is going to be a long one.
You’ll find before, after, and progress photos here. (Google Drive link)
The backstory:
In October 2016 I decided to stop talking and start doing. My real estate portfolio wasn’t going to build itself, so I bought a plane ticket to Cleveland, OH. I’d never been before. I didn’t know a single person in the state. And I had never owned a property. I was 25. But the internet told me it had cheap houses, one of the highest global crime rates, and awesome rental returns, so I did what any wise investor would do and spent all my savings on a rundown out-of-state rental property. And I paid all cash.
Impressed? Well, think again. It cost less than a lightly used Toyota minivan. I paid $25,000 for my first property. Total. Yes, apparently that is a thing.
It was an absolute disaster at first but turned out great in the long-run. That’s a story for another day, though.
Anyway, after taking the plunge and just going for it, I got pretty burned out on the first deal. But when the dust settled and the rent checks started rolling in, I started looking for property number 2. Having spent all my spare cash on #1, and not having the ability to get bank financing, I had to track down some private money (also a story for another day).
Having built some credibility on the first deal, I found an investor and just needed to find a deal. Here’s the deal I found…
About the property:
In the eastern suburbs of Cleveland, OH, the property is on a corner lot on what is arguably one of the nicest streets in the suburb of North Collinwood. It’s a 1930 built 2,400 square foot up/down duplex with 2 beds and 1 bath in each unit and a detached 2 car garage. The suburb itself has a mixed reputation. It’s certainly not one of the nicer parts of town, but has beach club access to Lake Erie and is in close proximity to the local arts district and plenty of bars, restaurants, and shops. It’s been owned by one family since it was built and you can tell. Everything works and is in great shape. No damaged cabinets or damaged woodwork to be found!
Closing the deal
My original cash offer was around $70k pending inspections and with appliances included. And a 3 week closing window. We went back and forth and settled on $76k, which is where I expected it to land. I mailed an earnest money check for $500 which proceeded to get lost in the mail. Learning this a couple weeks later I mailed another check, but it wouldn’t arrive until the other closing docs were put together so they just sent it back to me. Technically I didn’t pay earnest money.
I went into the deal expecting to inherit one tenant while one unit was vacant. I knew I would have to raise the rent eventually, but planned on deferring that cost. Nope, the tenant wasn’t on a lease and decided to move out when the property sold since she was a family friend of the owner. Upon learning this I filed a contingency that the tenant must be gone and the property in broom clean condition upon closing. It pushed back closing a couple weeks, but it worked out and actually fit my schedule better. I booked flights for the date of closing, setup utilities to transfer, lined up insurance, got an inspection done, got my loan documents together, worked with my agent to get quotes, recruited/hired my friend to fly out with me, and probably did some other things that I’m now forgetting. Two days before closing my agent did a final walkthrough
THE NUMBERS
I tried to include the most accurate numbers, but don’t hold it against me if I messed up a few calculations!
Costs
Asking price: $87,000
Purchase price: $76,000
Closing costs: $1,125
Due at closing $75,300 (after property tax adjustments)
ARV: ?
Okay, here’s the thing. Cleveland is still a cold market so there are not many good comps. And you can’t really measure value by suburb in this part of town since it’s so “street-by-street.” This is not something you will understand without physically being in the neighborhood. I repeat, you will not truly understand property value in Cleveland without going to Cleveland.
That said, the single family across the street sold last year for $120k. That’s reassuring. And another good duplex comp sold recently for $90k. What I paid might be way too high for some people that know the area. But, it’s a very unique property in great condition and it’s worth every dollar in my opinion. My first property was $35k including rehab and it rents for almost as much as this will, but this property is significantly nicer. It’s all relative anyway. This property would sell for over a million in Seattle, but it might be worth nothing in certain suburbs of Cleveland.
After the updates are done I like to think I could sell the thing for at least $100k in a couple years. Hopefully closer to $125k. With $1,500 in rents coming in and less than $700 in expenses, I’m sure I could find a buyer. $800 a month in turnkey cash flow anyone?
If you’re thinking, “but Zillow says it’s only worth ___” then listen here. Properties in Cleveland sell for what someone is willing to pay, not what a computer algorithm comes up with. Anyway, I’m planning on holding onto it, so let’s move along.
General expenses:
- Property inspection: $425
- Flights/bags/ground transit for 2 people: $600
- Service main water valve: $389
- Service 2 furnaces: $200
- Paint materials both units: $370
- Cost of hiring friend who came along and worked 3.5 days: $500
- Total random home depot materials including light fixtures, electrical gear, primer, brushes, locks, light bulbs, tools, drywall, tape, etc: $1,820.
- Total: $4,304
Unit 1 - Down
- Paint labor bedrooms, bath, and kitchen: $0 (friend from out of town did it for free)
- Installing fixtures, switches, outlets, cabinet knobs, doorstops, blinds, towel racks, bathroom mirror, caulking, etc: $0 - did it myself.
- Estimated cost if contracted: $1,500
Unit 2 - Up
- Labor to strip wallpaper, repair drywall, sand, prime, and paint full unit (contracted out): $1200
- Installing electrical outlets/switches/fixtures: $125
- New electric stove: $200
- Refinish bathtub: $300
- Pull carpet: $250
- Total: $2,075
Estimated short-term costs (<1 year)
- New roof Spring 2018: $8000
- Gutter cleaning and repair: $300
- New Floor in kitchen (estimate): $500
- Total estimated costs: $8,800
Year 1 non-recurring costs to make it rent ready: $91,979
Estimated mid-term costs (1-5 years)
- 2 new furnaces: $5500
- 2 new hot water tanks: $2000
- Misc: $1,000
- Total: $8,500
*After the tanks/furnaces get replaced the building should be rock solid for 10-15 years at least, assuming no major disasters.
Monthly expense breakdown:
- 5-year private money balloon loan on $87k over 20 years: $574
- Property tax: $215
- Insurance: ~$100
- Water bill: ~$60
- Sewer bill: ~$40
- Garbage: $16
- Rental registration: $6
- Lawncare: $40
- CapEx: $100
- Vacancy: $75@ 5%
*I’m self-managing, therefore I’m not yet factoring in property management.
Monthly Totals:
Projected rent: $1,500 ($750/unit, but will shoot for $775 initially)
Expenses: $1,226
Cash Flow: $274/month
Cash on cash return: infinite (more or less)
ROI based on $18,000 yearly at $91,979 initial cost: 19.5%
NOI: $3,288
About the loan:
I don’t qualify for bank financing since I’ve moved countries and jobs so much in the last couple years. This property is effectively 100% financed with other people’s money. I’ll be paying for additional costs as needed, but I wrapped most of the immediate rehab costs into the loan.
The loan ($87k five year balloon @5% amortized over 20 years) means I have 5 years to refinance or sell. At the 5 year mark I’ll owe roughly $73k and will have paid about $20k in interest, plus $14k of the principal.
I have the ability to pay the loan off at any time with no penalties, which I intend to do.
The loan documents, or more specifically, my promissory note (loan terms I negotiated) and mortgage (security device to give my lender first lien on the property. Ohio uses mortgages for private deals over a Deed of Trust) were done by none other than @Timothy Murphy III here on BP. Thanks Tim :)
These are not necessarily great loan terms for many investors. It makes sense for me because I can’t go to the bank, but it’s worth noting that I don’t recommend my strategy to other investors. Especially the new ones.
My strategy is the slow and complicated version of what can be done much easier with a bit of savings and leverage. Since I did not traditionally finance this deal, it is not necessarily a great deal from an investment standpoint. I think this is important to realize because the idea of investing with other people’s money is tempting for the new investor. Though, it is a major headache and risk for not a ton of money, relatively speaking. Assuming the property is worth $100k, if I sell in 5 years, I’d have spent about $120k (with interest), I would net roughly $94k after commissions, and owe about $73k at that point. That’s $22k over 5 years, plus $16.4k in net rent. Hopefully, this property is on track to make almost $40k over the next 5 years. That’s not bad since I’m not spending anything up front. Though, I wouldn’t use this strategy if I had bank financing.
But here’s where it gets good if you’ve got a real job and some savings, unlike some of us. This is AKA the traditional route. This is just an idea of what the deal could look like with a standard 25% down investment property loan (This is not fully accurate since banks might not loan on this property due to the rehab needed, it’s just an example). This is probably closer to what a first time investor can expect.
Down payment on $76,000: $20k (rough estimate with closing costs)
Actual loan amount: $56,000
Rehab costs: $16k
Monthly rent: $1,500
Monthly loan cost: $305
Other expenses: $652
Total monthly expenses: $957
Monthly cash flow: $543
Yearly:
Down payment + rehab: $36,000
Income: $18,000
Expenses: $11,484
Cash flow: $6,516
Cash on cash return ($6,516/($20k down+$16k rehab)) = 18%
Why I did the deal?
For my personal situation and goals this deal makes plenty of sense, but it’s not for everyone. I’ll take an extra $250 a month in exchange for the drama of being a landlord if I don’t have to put much of my own money down. I’m happy and my lender is happy, but that may not be the case for you. I plan to refinance this property in a couple years to increase my cash flow a couple hundred dollars a month and then hold onto it indefinitely.
If I had the cash and ability to get financing I’d have financed it from the start. This post was intended to be an example of how one might get creative to break into real estate if they don’t have a big bankroll.
Aside from the numbers, if you want to know about a day in the life of an out of state, fly in/out, self-managing landlord, here is the other side of the story…
Day 1: Kickoff day. My redeye flight landed about 7am, or two hours before the title company opened the day after Labor Day and was set to record/finalize the property transfer. At about 9am we found out they wouldn’t be able to get the deal done until 4pm. So, day 1 of rehab was fully spent sitting around planning. I viewed the property (as a spectator), but I legally couldn’t do anything yet. I made a quick list and set off to home depot for supplies. I also went to my other property where I had stored my tools, clothes, etc., from the last trips. Got the keys around 4:30pm and was so worn out that the rest of the night was putting together a game plan, having dinner, drinks, and straight to bed.
Day 2: Freak out day. Looks like there were more issues than I thought. Nothing major, fortunately. But the little stuff adds up. I found out about all the issues with new locks, shower rods, cabinet pulls, and all the stuff that doesn’t show up on an inspection report. Back to Home Depot. At least it wasn’t nearly as bad as the first property. I had to constantly remind myself of this.
Day 3-4: Met with @Michael Rodriguez and @Ian Kurela to talk some real estate and tour the property. Met a few neighbors, had my go-to rent-ready-rehab coordinator come by, got a plumbing quote, had my painters get started upstairs, and continued on rehab with my buddy whom I flew out from Seattle. Day 3 my friend @Paul Dorn arrives early and we go house shopping with our agent. I’m mostly just giving opinions since I’ve done a whopping 1.5 deals at this point, but it’s his first deal and trip to Ohio.
Day 5: Early trip to Home Depot for some last minute electrical gear we forgot. My friend gets it installed and heads off to the airport (I flew him out from Seattle and paid him hourly since I’m still building my list of reliable contractors). At this point I’ve got the rest of the day to wrap up any work before heading home. I know I won’t finish both units, but am determined to get the first floor done. But we all have dinner plans and tour around the city with my friend/agent to see the fun side of Cleveland. Apparently, there is more to do in Cleveland than shop at Home Depot!
Day 6: After the friends leave at about 11pm, Paul and I get back to work finishing up paint and cleaning out the down unit. Since we had to leave for the airport at 4am, we didn’t have time to sleep. We just powered through the night and got it done. We brought out the last of the trash bags with our luggage. I snapped a few after photos and that’s it.
What we accomplished in 5 days
The reason for flying out was really to save a few bucks and do the whole sweat equity thing. I had time before starting a new work contract so it made sense for me. During the short trip my friends and I painted most of the downstairs, installed all new plugs, switches, light fixtures, fans, blinds, cabinet knobs, locks, rewired the bathrooms and added mirrors/proper lighting, caulked bathrooms, repaired drywall, ran a new wire to the second floor stove, replaced shower heads, painted vents, installed curtain rods, and cleaned out the basement. I’m sure I missed a few things. The upstairs unit was still being painted when we left and is still a work in progress at the time of this writing.
Post-Cleveland
With a full-day layover in Denver catching up with a friend, we didn’t get back to Seattle until late. Then the next morning I started a major new consulting contract. It was a full week on-site, which is why this post took a week to get done.
The property has been photographed and should be on the market soon starting at $775/unit. Though, I’m really shooting for $750.
What happens now?
Now that one unit is done and the other is still getting ready, I’m having my local general contractor/neighbor plug away at a few things. I’m also hiring a rent-ready rehabber/property manager to get the place fully up to speed. It still needs to have carpets pulled up, some fixtures installed, a tub refinished, and a few other exterior things that aren’t as urgent. Hopefully, it will be ready by the end of the month.
My agent who helped me buy the house is screening tenants and I’ll be managing the property for the time being at least. Once leases are signed and utilities are transferred it should be smooth sailing for at least a while. I do expect to replace some big-ticket items in the next couple years so I won’t be surprised when I get the call that the furnace went out. Not being ready for something like that can be a big setback for a new investor, but I’ve budgeted it in.
Onto the next deal
With two down and many more to go, I’m hoping to keep scaling up. This will certainly involve partnering up with other investors. I’m already talking to a couple and am open to any partnership that can be a solid win-win.
I’ve gotten familiar with the local market and have the flexibility, time, and energy to manage deals. If you’ve got something to add, then comment away, send me a PM, or give me a call so we can talk about it.
If you’ve got more questions or want to learn more, also feel free to give me a call.
I hope if this post helped in one way or another to the other investors out there looking at the midwest markets!
Whew, ok that’s all for now. Comment away