Did I make the right deal?

Question

BP community,

Earlier last week, I closed on my first investment property, a duplex for 330k (25% down, conventional loan for 30 yr @ 4.875%). One unit is currently unoccupoed, and the other unit has tenants until their lease runs out in May 18. Comps in the area are renting for $1200-1600, and they are currently on a lease for $1100/mo.

According to my spreadsheet, with normal numbers, my cap rate could be anywhere from 9-14%. However, after purchasing the property and getting some more information that wasnt in my due dillegence packet/never came up in the closing process, the cap rate is looking like it is going to ballpark in 7-9%. I have plenty of money in the reserves set aside for CAPEXs and to avoid defaulting any payments. I know that I am going to take a little haircut by not having tenants while I renovate, but I am more worried about maintaining positive cash flow overall. I hadnt thought would cut it this close in a hot market like Colorado Springs! I guess that's just nature of the beast.

I plan on utilizing the time I have now with the vacant unit to make some minor renovations (I'll probably contract out most renovations due to time restraints). With the unit improvements and a quality property management in place, I can hopefully grow my net rent revenue and increase cashflow.

Again, it is my first duplex, so part of me is just glad that when the new numbers were inputed, they weren't negative. However, the other side of me is nervous that this property just wasn't as good of a deal as I had hoped. If you have any questions/if I wasn't clear enough, let me know. I'd love to hear what everyone says.

Andrew Cameron · Answer

My question is what did you miss in your due-diligence?  And what can you change in your process to make sure it doesn't happen again?

James Carlson · Answer

Account Closed

Congrats on taking a big step. Maybe it wasn't perfect, but damn so many people sit on the sidelines forever waiting to find the perfect deal. You are likely going to be fine, and even if it doesn't, what's the worst that happens? You lose a little money? You're going to get some good lessons for that money and will be better equipped next time.

All that said, have you considered Airbnb? It's more time-intensive if you manage it yourself, but in Colorado Springs, Airbnb is a good way to juice your rents quite a bit.

Good luck!

Brent Coombs · Answer

Account Closed, I guess that's why someone invented the "1% Rule", to make it easier to see this type of problem, before deciding whether it's worth submitting an offer!

ie. Even if rented at the maximum @$1600/m, the 1% Rule suggests you shouldn't have offered more than $320k. [BTW, what's a "due diligence packet"? Didn't you research too?]

And just to be clear, being a "hot market" makes it harder to find positive cash flow, not easier.

Hopefully for this purchase's sake, the market will remain "hot" for years to come.

The real test as to whether it's a "deal", is putting it up against recently sold comps!

"Par for the course" means: boring! You're looking for Birdies, Eagles and Albatrosses! All the best...

Bill S. · Answer

Account Closed taking action and making mistakes is how we learn. You still are ahead of many and in 30 years you will laugh at how little you paid for the property.

Account Closed · Answer

@James Sestito

You're right, remorse and regret are worthless at this point! I certainly plan on utilizing the equity in the property to help finance future deals, which as @Thomas S. so eloquently put, is the best option to produce positive cash flow.

I'm going to get it professionally done and start renting as soon as I can.

Gretchen P. · Answer

Overall it doesn't sound like a home-run, but it certainly isn't a dog either. Maxing out your rents is the best strategy now, so do some renovations that make it a little nicer than others in your area, but be careful too. You could save some money by managing it yourself for now.

I have a house/cottage property in the Springs and close on another one today. Rents are rising, and if you make sure the property is in good shape upfront and find good tenants, you should have very little management. To give you a perspective the house/cottage property was purchased in March, for $212K, I renovated the front house and did some landscaping and exterior work for 18K, and get $995 for the cottage and $1175 for the front house. The property that closes today was $280K and I expect to put around $20K in improvements, rents should be around $3275/mo total for 3 units. Both were 20% down at 4%. Tenants pay water/sewer/electric, I pay trash.  Good luck.

Erin Spradlin · Answer

Piggybacking off @James Carlson, you could also hire out property management (to a super host or to a company). In this case, you won't see as many returns as you would without it, but it's totally passive then and the short-term rental rates are stronger than your average long term renter.

Derrick E. · Answer

Heck yeah. As others have said, no time for buyers remorse at this point. You did the most important thing and that was pull the trigger on the investment.

I'd recommend getting that vacant unit renovated ASAP, don't mess with trying to save $500 doing something yourself and taking an extra 2 weeks to get it done lol.

I think you will be fine with this deal long term. Was it a "deal?" not really, but it was a bust either. I know your market is hot, maybe that is a deal in your area.  Either way, best of luck and stick to the plan.

Greg Scott · Answer

Jacob:

Congrats on taking the first step.  That is the most important thing.

We all make mistakes, but yours wasn't a big one if the property still cash flows.  Thumbs up for  having adequate reserves.   Time will solve that minor bump in the road and you will never look back.

A few suggestions.   1) Be sure to rehab the one you have vacant ASAP.  Don't try to do it yourself unless it is super easy and quick.  Time is money.  Hire a contractor, get it re-rented, and start cash flowing.

2) Learn as you go.  You may learn it doesn't make sense to rehab the 2nd unit in which case you can sign your tenant to another year.   Or, you may get such a huge rent bump, it may make sense to let your lease expire and do an even bigger rehab on unit #2.

Keep moving forward.

Account Closed · Answer

@Thomas S.

Would you mind explaining your strategy of refinancing a bit? I am familiar with the strategy as a whole, but would appreciate if you could apply to my case specifically with typical numbers.

Did I make the right deal?

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