Our First Investment / Mistake / Lessons Learned
Investment Info:
Small multi-family (2-4 units) buy & hold investment in Butler.
Purchase price: $62,000
Cash invested: $47,000
Our first rental property. An early 1900s brick duplex in an area close to the main street of the town (Butler PA - it's hard to call it a suburb of Pittsburgh since it's pretty far). The current owner had been using it as an office for the last 25 years and had maintained the home pretty well. It seemed like it didn't need much work at the time (but that was soon to change)
What made you interested in investing in this type of deal?
My initial analysis showed that this should cash flow $300 per month with our initial investment of $21,000 (25% downpayment plus closing costs and prepaids). It seemed like a good first investment. I kinda knew that my numbers may be off just a little bit, but just getting started was more important.
How did you find this deal and how did you negotiate it?
MLS. The day that we saw it, my agent informed me that someone else was writing an offer on the house that night and they also had another showing that night with folks who intended to make an offer as well. We made our offer knowing that at least one of the others was FHA and thus would require a more strict inspection. That said, we fell into the "highest and best" trap.
How did you finance this deal?
Portfolio loan through a local bank. 25% down, 5% interest rate for 15 years. I like that we are paying down the principal quickly, but I think we will opt for 30 year financing as we can get it going forward for the flexibility.
How did you add value to the deal?
We didn't intend to do any kind of value add, but we ended up replacing the roof, replacing two windows, replacing a fridge, residing an addition, repainting and reflooring (replacing old carpet with Allure) one of the units.
What was the outcome?
Our initial hopes of $300 monthly cashflow and $21,000 initial outlay (17% COCR) are now closer to $75 monthly cashflow and $47,000 (2% COCR). This is due to numerous repairs that I didn't notice myself before closing, code enforcement being called on the house and general mistakes of a rookie investor.
It took 1.5 months to get it fully rented and now we have one unit with a problem tenant that our PM placed that won't let people in to do repairs and is also trying to withhold rent. Yay!
Lessons learned? Challenges?
If it looks iffy, fix it. Most of the repairs that we fixed in short order we knew about ahead of time but didn't prioritize until outside elements forced our hand. Going forward, we are allocating $10,000 in up front repairs per property, no matter what. We are also looking at roofing, windows, siding with a more scrutinizing eye and treating inspection reports like gospel.
Beyond that, failure to properly account for PM, capex / repairs and lienable utilities came back to bite us as well.
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
Mars Bank was great for our financing and Wright Insurance did an awesome job lining up our coverage.
We learned a lot more lessons than the ones I had space to fill in above. Rather than let this experience defeat us we are taking the mistakes we made here and learning from them. We are in the process of closing on our 2nd investment and have taken great care to not replicate our past blunders.