Did I make the right deal?

20 Replies

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.

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.   

@Greg Scott

Thanks for the reply, sir! I will reach out to my property manager and have him make recommendations to who I should contract for the various required rehabs.

@Jacob Volin , 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...

Agree w @Greg Scott get that thing reno'd and rented ASAP with a kick *** tenant and get those checks coming in!

You put 25% down so you certainly have some equity - with quality tenants + repairs  you are forcing appreciation.  -- After a year or so you should be able to use this place and its equity as buying power for your next investment.

@Brent Coombs has good points and is certainly a golfer - but don't let him get you nervous - no one sinks it after 2 shots on their first par 5! 

No room for buyers remorse now - work on decreasing costs and increasing rents and make this puppy work.

@Jacob Volin

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!

James Carlson, Real Estate Agent in CO (#FA.100071747 )
720-460-1770

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. 

Not sure how you came you came up with 9% cap rate? $1600 per mo rent and 40% expense, your cap rate is around 7% with a purchase price of 300k. I think you are closer to 5 or 6% cap.

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. 

Erin Spradlin, Real Estate Agent in Colorado (#230019690)

numbers look off but congrats on the step and getting your feet wet. learning as you go is the key now.

What is done is done. Time to move forward.

Ideally you need $3200/month rent to stay positive but must keep Reno costs from climbing.

Best option to produce positive cash flow is to season then pull out as much equity as possible by refinancing. On a purchase like this you need maximum leverage to produce positive cash flow. This enables you to reuse your cash to generate additional returns from another property. 

One purchase may not always be a home run but by utilising your cash with maximum leverage you will come out ahead over all your investments. 

5 years down the road you sell the under producers.

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. 

@Jacob Volin 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.

@Brent Coombs

Thank you for the reply - lots of good advice in there. To respond to your due diligence question, my realtor compiled a packet of information that I needed - stuff that I couldn't manage to find out/research on my own.

@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.

Originally posted by @James Carlson :

@Jacob Volin

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. 

I considered AirBnB, but the unit is not furnished and I simply don't know enough about it as it to seriously entertain it as an option. Down the road, after this all settles down a bit, I would definitely like to learn more. 

Originally posted by @Gretchen Place :

You could save some money by managing it yourself for now. 

Thanks for the awesome info, Gretchen! Unfortunately, I don't have the time nor the freedom to manage the property (I am a cadet at the Air Force Academy) so prop managers are the best option at the moment.

While we are on the topic, if you have any good recommendations for contracting/renovations, I'd certainly appreciate the references!

Take care

@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.

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