Reviewing Performance of My First RE Deal (Turnkey Rental)

28 Replies

I pretty regularly circle back and review my figures for prior deals to see if there are any tweaks I can make to improve the accuracy of my forecasted investment performance.

I went back to the figures I’d prepared to calculate investment performance on this fully recently renovated duplex in Marietta, GA. The property is walking distance to a great elementary school in a good school district. I'd had my eye on the place for years, saw the For Sale sign go up, and called on it immediately. Purchased Dec 2017; $258,000 purchase price. 25% down. Seller financed at a great rate (4.85%).

I’ve learned a few things and also have now included adjustments to account for:

  1. The cost of separating the water meter.
  2. The affect of moving that monthly water bill off my expenses ($100/month saved) and onto the residents.
  3. More accurate closing costs (my original addition of the fees was low somehow—the estimate I use generally to swag a closing cost is $4,000 for the kinds of properties I buy).
  4. Adjustment to show market-average rents for the quality/size of the units (mine are $1050 now, but will adjust to $1200 in Jan 2019).
  5. More reasonable assumption for Vacancy allowance. I have been using 8% which is too high. I’m using 4% now. Basically: 1 month’s rent lost due to vacancy at $1200/month rent divided by annual expected revenue of $28,800 = just over 4%.

So, results are attached but show overall pretty decent performance:

Monthly Cash Flow: $728.42

Cash on Cash ROI: 12.43%

I'm “reporting out to you all” on this to keep myself accountable to see how things are progressing, as well as share what I’m learning as time is going by.

The reality is: If I’d "known what I was doing" back in Nov 2017, I probably would have never thought about buying this place (Too pricey! Not a value-add!) Even when the appraisal came back low (this is the only renovated duplex in this neighborhood; all the rest are quite shabby; so comps sucked), we pressed on and bought the place using seller financing. But the result has been great—Almost effortless significant cash flow. I think there are numerous lessons here:

  1. Just jump in. Get started. Let yourself break the ice somewhere, even if the deal might not seem “perfect.” Go ahead and start taking in $300/month in net cash flow (a small win) while you are pondering how to generate $1000/month cash flow (a bigger win).
  2. Just because a place isn’t super-cheap to begin with, doesn’t mean you won’t make money on it. Sometimes it’s okay to buy a new-ish car that you can drive on Day 1, rather than a fixer-upper you have to overhaul. I need to stop fixating on super-low-end properties that need a lot of work and focus instead on the general overall potential cash flow opportunity (for my subsequent deals).
  3. There is no rule that says making money has to take a ton of work. I have the income and the credit—Maybe I should just buy more turnkey properties since I am able to?

Well, wanted to share my latest thinking and some learning/retrospective on my first deal. I've tried to attach my actual Bigger Pockets PDF, but I can only seem to add images, so I've snipped key sections of the actual details of the analysis, done using the Bigger Pockets Rental Property calculator.

Thanks for reading! Feedback requested and encouraged...

@Gloria Sheridan What did the appraisal come in at vs what did your realtor or you think it’s worth? Typically even if the appraisal is low, unless by a lot or they just use incorrect comps (like a single family to a duplex), an appraiser is usually fairly accurate. Buying a hard to comp property usually isn’t a good idea as it limits your exit strategy. That aside I do think your cash flow is fairly good. CoC is good. Any deferred maintanence? What’s the amortization on the seller financing? Is there a balloon payment? If there’s a balloon payment you may want to refinance now because if you wait a couple years you’ll be looking at much higher interest rates

@Gloria Sheridan

Good work! Thanks for the share and congrats. I hope you are able to get the additional $150 you seek in a rent bump. Way to make seller financing work as well. 

You have some solid points about value-add and "repositioning units." @Brandon Turner made BRRRR famous, now it seems it can be some of the only ways investors will buy. Sometimes you just go with a good deal.

A few things I'd like to ask/comment on:

1. Please touch on the cost/process for separating the water meter?

2. I agree that 8% is conservative on the vacancy (for multifamily), but I would much rather have conservative underwriting than underestimate a December move-out and a unit that sits vacant for several months.

3. I noticed you do not include property management as an operating cost, which is what a lot of investors (and self-managers) do. You are not wrong, I just prefer to underwrite the cost in there and effectively pay myself.

4. What were the terms of the seller financing you came to? 
 
Most importantly, good job reassessing the deal after some time. It will lead to further success, as you mentioned.

@Stephen Jeffers The 25% down payment came fundamentally out of a severance payment I received from my old company. (They moved my job to FL; I didn't want to move and didn't want any other roles there, so I took their generous severance payment.) I knew that payment was coming in early Jan 2018, but I need the funds in Nov/Dec, so I took out a 401k loan even though I knew that 401k loan would become due as soon as I left the company (12/31/17). But I had 90 days to pay it, so I was just basically was moving the money around to meet my needs.

Gloria did the seller give you a 30 year fully amortized NOTE on this.. if so that is one huge atta girl.. 

you saved probably 4 to 5k just in loan fee's if not more.. does not affect your fico etc.. 

I think once you own these 3 to 5 years then you can recast and see where your really at.. when it comes to vacancy and turn over costs etc.. 

I suspect you self manage right ???  so no PM fee  no mark up on repairs etc.. that is also money to the bottom line..

@Luka Milicevic I agree about the owner financing! It was so easy! Now I know to look for that feature when I'm shopping for properties. I also now will ask the seller if that is something they might be interested in doing and I kinda try to sell them on the benefits of it (for both parties).

Re: Splitting water meters--I've done this now in two municipalities in the Atlanta Metro area. I am finding a good estimate is $1375/meter. [City of Marietta $1350. City of Dallas $1200 x 2 + required adjustments to the original meter = avg $1400 per new meter.]

DO NOT FORGET to account for the incremental cost for your own plumber to come run the line(s) from your new meter(s) to the actual unit(s). Any work needed on your own property is incremental $$$. The plumber/backhoe work in Dallas was an additional $3137. Total cost in Dallas, GA to add 2 meters: $4200 + $3137 = $7337. Ouch. Payback period: Just over 18 months (water bill is ~$400/month). I'm following the Buy & Hold 50 years strategy, so I can live with this.

New meter in Marietta, GA will pay back on about same time line, even though the monthly water/sewer bill is way lower.

A couple months ago I bid too low on an individually metered 6-plex in Dallas. Now that I know how much it costs to install the new meters, I'm kicking myself. I could have bumped my bid by only $2K and won. Soooo stupid! Well, now I know to check for separate meters and consider that in the value of the property accordingly.

See my other reply for comments on the private note.

@Jay Hinrichs The private note is 4.85% on $193,500, amortized over 30 years, but with a balloon payment at the end of 10 years. I agree that the savings on going with private lending is huge--Makes a big difference for new/small investors like me. One of the comments in this thread recommends that I go ahead and re-fi now so I can switch to a longer note at the current rates which are still quite low. That is good advice and I will give that some thought.

You are correct that I do my own property management right now since my unit count is still manageable and my units are in decent condition (not much breaking down). I use Cozy.co; 80% of my residents pay their rent online. There may come a point when I want to hire a PM company, but right now the opposite is happening: I'm having people ask me to handle property management for their properties. Sooo, I may just let that keep building up and see what happens.

Originally posted by @Gloria Sheridan :

@Jay Hinrichs The private note is 4.85% on $193,500, amortized over 30 years, but with a balloon payment at the end of 10 years. I agree that the savings on going with private lending is huge--Makes a big difference for new/small investors like me. One of the comments in this thread recommends that I go ahead and re-fi now so I can switch to a longer note at the current rates which are still quite low. That is good advice and I will give that some thought.

You are correct that I do my own property management right now since my unit count is still manageable and my units are in decent condition (not much breaking down). I use Cozy.co; 80% of my residents pay their rent online. There may come a point when I want to hire a PM company, but right now the opposite is happening: I'm having people ask me to handle property management for their properties. Sooo, I may just let that keep building up and see what happens.

 I suspect you must be licensed broker in GA to manage for others correct ?  

Nice work.. not sure about refi.. most folks don't own properties more than 7 years .. even though they say they will never sell.

few things happen they get burnt out landlord syndrome and sell or they get an offer they cant refuse and sell or they want to scale and roll up into bigger units and they sell..

@Caleb Heimsoth   The appraisal came in at $195,000 which is reasonable compared to the other properties in the neighborhood IF you'd never actually entered any of them to make comparisons....All the other duplexes in this area are in need of maintenance and updating. Every single thing in this duplex has been replaced as of 2014 due to a fire on one side. Basically everything inside is new--wood floors, systems, kitchen appliances, sprinkler system added, new vinyl siding, etc. My strategy is 50 year Buy & Hold, but I do still hear you about it making me nervous that the appraisal came back so low. The seller paid $240,000 for the place in Mar 2015, so I didn't feel like I was way over-paying.

Zero deferred maintenance on this duplex. The only thing I went ahead and improved were the exterior security lights.

See my other reply for details on the seller financing, but 30 yr amortization with a balloon payment at 10 years. I appreciate your suggestion about possibly refinancing now because interest rates are likely to be much higher 10 years from now. I had not really thought about that yet.

Originally posted by @Gloria Sheridan :

@Jay Hinrichs I better look into needing to be licensed in GA to do property management for others, stat!

 ya I think you get a license work for a broker who allows you to do PM  then in a few years you can get your own brokers license.

Massive fines and trouble if your caught managing properties without a license.

So lets get this straight. You paid $60K over appraised value so you are down $60K to start with (not whit standing the seller financing) You get about $700/month (is that real, did you include capex reserves, vacancy etc?) so it will take you the first 7 years before you are actually back to even. If you sell next year you lose over $60K (selling costs). I am struggling to see why this makes any sense at all!

Originally posted by @Anish Tolia :

So lets get this straight. You paid $60K over appraised value so you are down $60K to start with (not whit standing the seller financing) You get about $700/month (is that real, did you include capex reserves, vacancy etc?) so it will take you the first 7 years before you are actually back to even. If you sell next year you lose over $60K (selling costs). I am struggling to see why this makes any sense at all!

 Anish I think her point was that the comps were properties in massive need of repair.. and that her property was perfect.

Just like when we buy in the mid west.. and the appraiser pick up a vacant as is house that sells through a wholesaler for 20k but the turn key out fit is selling the same house on the same street for 75k... one is rehabbed one is not.

I think that was what she was saying...  although in ATL 250k for a duplex depending on the area can be high or just about right.

@Anish Tolia Yes, I’ve accounted for those anticipated costs (snips of the BP worksheet showing all my  assumptions is shown in the original post). I’m using a 5% reserve for Repairs & Maintenance and a 1% reserve for Capital Expenses (since everything is new). While I did put down 25% at purchase, I don’t see how I’m not making a net profit on Day 1 and forward. Fully renovated duplex, already rented to reliable, pay-on-time residents, where I haven’t had to spend anything except mowing the grass. I have no intentions of selling. I’m certainly open to feedback— What did I miss? That’s the whole point of my posting this deal detail is to learn from others. Thanks,

@Gloria Sheridan

Thank you for sharing, I was looking at doing it on an apt complex until I saw how much it cost. It is EXPENSIVE!!!!

Sounds like the terms you got on your owner finance loan is incredible. Good for you. 

Yeah, I never understood why it like seems like everyone just pulls an areas vacancy rate numbers out of thin air and when they are known to the 10th of a percent plus can fluctuate year to year.  4% here might be more accurate than 8%...in many areas I see sellers claim that flat 8% and then you check and it is in the mid teens...These rates for vacancies and the average vacancy duration are researchable. Good luck! 

@Matt R. While I've started with a reasonable estimate (1 month empty out of 12 months = 8.3% vacancy), what I plan to to do is keep track of what the vacancy rate is actually trending toward in my area / for my properties and just be realistic about it. No need to be overly pessimistic or optimistic--Just calculate what it actually is, and use that as your assumption going forward.

Originally posted by @Jay Hinrichs :
Originally posted by @Anish Tolia:

So lets get this straight. You paid $60K over appraised value so you are down $60K to start with (not whit standing the seller financing) You get about $700/month (is that real, did you include capex reserves, vacancy etc?) so it will take you the first 7 years before you are actually back to even. If you sell next year you lose over $60K (selling costs). I am struggling to see why this makes any sense at all!

 Anish I think her point was that the comps were properties in massive need of repair.. and that her property was perfect.

Just like when we buy in the mid west.. and the appraiser pick up a vacant as is house that sells through a wholesaler for 20k but the turn key out fit is selling the same house on the same street for 75k...  one is rehabbed one is not.

I think that was what she was saying...  although in ATL 250k for a duplex depending on the area can be high or just about right.

 That may be true. But the fact is that if she needs to sell, she cannot because it would not appraise for the next seller as well. I have bought the Midwest homes you speak of and values can vary by 50% depending on condition. But even the fully rehabbed turnkey ones I bought have appraised at the buying price. If they had not I would have negotiated the price down or walked.

Originally posted by @Anish Tolia :
Originally posted by @Jay Hinrichs:
Originally posted by @Anish Tolia:

So lets get this straight. You paid $60K over appraised value so you are down $60K to start with (not whit standing the seller financing) You get about $700/month (is that real, did you include capex reserves, vacancy etc?) so it will take you the first 7 years before you are actually back to even. If you sell next year you lose over $60K (selling costs). I am struggling to see why this makes any sense at all!

 Anish I think her point was that the comps were properties in massive need of repair.. and that her property was perfect.

Just like when we buy in the mid west.. and the appraiser pick up a vacant as is house that sells through a wholesaler for 20k but the turn key out fit is selling the same house on the same street for 75k...  one is rehabbed one is not.

I think that was what she was saying...  although in ATL 250k for a duplex depending on the area can be high or just about right.

 That may be true. But the fact is that if she needs to sell, she cannot because it would not appraise for the next seller as well. I have bought the Midwest homes you speak of and values can vary by 50% depending on condition. But even the fully rehabbed turnkey ones I bought have appraised at the buying price. If they had not I would have negotiated the price down or walked.

fully understand not trying to validate her position on why she paid what she paid.. but it does look like the numbers work. and you know buy and hold investors they are never going to sell so selling usually does not enter into their mind when they buy.. for me I am looking to sell before I even close the buy LOL..

Originally posted by @Jay Hinrichs :
Originally posted by @Anish Tolia:
Originally posted by @Jay Hinrichs:
Originally posted by @Anish Tolia:

So lets get this straight. You paid $60K over appraised value so you are down $60K to start with (not whit standing the seller financing) You get about $700/month (is that real, did you include capex reserves, vacancy etc?) so it will take you the first 7 years before you are actually back to even. If you sell next year you lose over $60K (selling costs). I am struggling to see why this makes any sense at all!

 Anish I think her point was that the comps were properties in massive need of repair.. and that her property was perfect.

Just like when we buy in the mid west.. and the appraiser pick up a vacant as is house that sells through a wholesaler for 20k but the turn key out fit is selling the same house on the same street for 75k...  one is rehabbed one is not.

I think that was what she was saying...  although in ATL 250k for a duplex depending on the area can be high or just about right.

 That may be true. But the fact is that if she needs to sell, she cannot because it would not appraise for the next seller as well. I have bought the Midwest homes you speak of and values can vary by 50% depending on condition. But even the fully rehabbed turnkey ones I bought have appraised at the buying price. If they had not I would have negotiated the price down or walked.

 fully understand not trying to validate her position on why she paid what she paid.. but it does look like the numbers work. and you know buy and hold investors they are never going to sell so selling usually does not enter into their mind when they buy.. for me I am looking to sell before I even close the buy  LOL..  

Yes. I am starting to unwind my Midwest position now. I'm seeing 50-60% appreciation over the last 4-5 years of holding plus significant pay down of mortgage plus some residual cash flow. Not what I expected or planned for but nice to have! Overall total return will be close to 3X on cash in.

Originally posted by @Jay Hinrichs :
Originally posted by @Anish Tolia:
Originally posted by @Jay Hinrichs:
Originally posted by @Anish Tolia:

So lets get this straight. You paid $60K over appraised value so you are down $60K to start with (not whit standing the seller financing) You get about $700/month (is that real, did you include capex reserves, vacancy etc?) so it will take you the first 7 years before you are actually back to even. If you sell next year you lose over $60K (selling costs). I am struggling to see why this makes any sense at all!

Anish I think her point was that the comps were properties in massive need of repair.. and that her property was perfect.

Just like when we buy in the mid west.. and the appraiser pick up a vacant as is house that sells through a wholesaler for 20k but the turn key out fit is selling the same house on the same street for 75k... one is rehabbed one is not.

I think that was what she was saying... although in ATL 250k for a duplex depending on the area can be high or just about right.

That may be true. But the fact is that if she needs to sell, she cannot because it would not appraise for the next seller as well. I have bought the Midwest homes you speak of and values can vary by 50% depending on condition. But even the fully rehabbed turnkey ones I bought have appraised at the buying price. If they had not I would have negotiated the price down or walked.

fully understand not trying to validate her position on why she paid what she paid.. but it does look like the numbers work. and you know buy and hold investors they are never going to sell so selling usually does not enter into their mind when they buy.. for me I am looking to sell before I even close the buy LOL..

@Jay Hinrichs, exactly... I'm in Cleveland and I do both. I also help out of state investors pick up turnkey properties. Most of these SFRs that are being picked up for $50k will be worth $50k still 10 years from now. But that's not what they're purchased for. They're purchased because for $50k you're getting $1,000 a month in rent, and that is phenomenal.

@Gloria Sheridan You have done very well in your first deal A lot of investors (myself included) did not fare Well in the housing recession but the lessons we learned made us invest smartly in the last few years You have mentioned shabby duplexes in your neighborhood. That’s a value add play for you Start grabbing those up with sELLER OR CONVENTIONAL financing whenever available. make this neighborhood your farm area of rental properties. Definitely you won’t need to sell and create a fabulous passive income

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