Diary of a Rental Property

Diary of a Rental Property

J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

I had a blast writing my Diary of a New Construction Project thread, and the feedback I got from that was great. So, I've decided to try another one...this time tracking and discussing the ongoing saga of a rental property that I'm in the process of buying, rehabbing and renting out.

A few details about this project and thread:

  • I'm not a professional landlord, and while I've had a couple rental properties in the past, they were all short-term and relatively turn-key (I didn't have to do much for the short time I owned them). This time, I'm looking to hold some properties longer-term, and the one I will be discussing in this thread will be my first longer-term property.
  • Because I expect this to be a longer-term hold, I expect this thread could continue for a quite a while. Obviously, I won't have stuff to post everyday (especially once the house is rehabbed and in service), but I'll try to follow-through for as long as possible, and hopefully until the end of the project, whenever that is.
  • I really have no idea what I'm doing when it comes to holding long-term rentals, so I'm guessing this thread will be more of a "what not to do" thread, as opposed to a "what to do" thread. That said, I'm open to all constructive critique, and hopefully advice, opinions and feedback I get in this thread will actually help me to be more successful.
  • I will, of course, post as much detail about the project as feasible, without risking giving away anything inappropriate about tenants, etc. I'll try to provide all documents, invoices, pictures, budgets, schedules and financials down-to-the-penny, so everyone will know just how well (or how badly) this project goes. Maybe we'll even get some insight into the "50% Rule" while tracking a real life project.
  • I have a partner on this project. It's a good friend of mine, and I'll likely be referring to him throughout the thread. Let's call him "Brian"...which makes sense, since that's his name.
  • This "diary" is going to start in the past, when I first found the house. I've been keeping notes in anticipation of starting this thread, and I imagine I'll be caught up to real-time in the next couple weeks. But, you'll notice that the dates on the first several posts will be in the past, and that's why.

Please feel free to ask any questions, provide any advice or give any opinions throughout the thread. I may not listen to all of them, but I always appreciate the feedback.

Now, on to the thread...

6Reply
433 views

Most Popular Reply

Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
12y

Looking forward to following along J! Now you are playing in my world! :)

See this reply in the discussion

254 Replies

Jump to latestLatest
  • Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y

    Cool. This will be neat to follow. Will your rehab for the rental be much different than for a flip?

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y

    JANUARY 6, 2014

    I'm subscribed to a local Meetup.com mailing list for Baltimore/Washington investors. The list gets a good bit of traffic from wholesalers looking to sell properties, and while I haven't found anything that meets my criteria yet, I've been hopeful that something good will come along soon.

    Today, the following message was sent to the mailing list:

    -------------------------------------------------------

    BALTIMORE COUNTY DEAL

    [ADDRESS REMOVED]

    • Bedrooms:3 beds
    • Bathrooms:1 baths
    • Townhouse:1,012 sq ft
    • HOA FEES $150 per month
    • Unfinished Basement


    Asking 67K
    ARV 110K
    Rent Comps: $1300-$1500

    Happy New Year! Here is a great potential for a quick fix and flip or it could be a cash cow. This is property is in a good quiet neighborhood. Also the community takes care of maintenance that is outside of the house.

    With some upgrading this property could easily rent for $1300-$1500 per month.

    Or you could invest about $15,000 into the property and resell for $110k and make a quick easy profit of 20k or more.

    Please click the following link for more pictures....

    [LINK REMOVED]

    More Pics Sent By Request

    For showing instructions and further questions please contact us at [CONTACT INFORMATION REMOVED]. Serious Buyers Only

    Can show the property by appointment

    -------------------------------------------------------

    Now, I always assume the numbers in a wholesale ad are inflated, but I jumped onto Zillow and the MLS, and a quick seach indicated that the ARV was probably pretty reasonable (I got about $107K). While the rehab estimate was probably a little low based on the pictures and based on the fact that the basement would need to be finished to hit that ARV, some quick number crunching indicated that it might make an average flip deal if I could get it for a few thousand less than asking.

    In addition, while I had no idea if the rental numbers were accurate, if they were, it didn't take a complicated spreadsheet to realize that this property could hit the "2% rule" and make a great rental as well.

    I immediately emailed the wholesaler and asked if I could see the property. She said we could tomorrow at 3:00pm, which worked for my wife and me, so we scheduled a meeting for tomorrow afternoon.



  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Gerald K.:
    Cool. This will be neat to follow. Will your rehab for the rental be much different than for a flip?

    Hey Gerald,

    Stay tuned...I have a feeling I'll go into more detail about that than you care to read... :-)

  • Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    12y

    Looking forward to reading more...as a buy and hold landlord, I could write a book about my adventures in Trenton ;) Hmmm, not a bad idea, thanks J!

  • Jessica H.Pro Member
    Flipper/Rehabber · Easton, PA · Member since 2013 · 224 posts · 36 votes
    12y

    Excited for this thread as we also are kind of dealing with the same thing. Waiting with anticipation for the continuation....

  • Real Estate Investor · Austin, TX · Member since 2013 · 50 posts · 6 votes
    12y
    Looks like a great deal!
  • Flipper/Rehabber · Virginia Beach, VA · Member since 2014 · 74 posts · 31 votes
    12y

    J Scott

    Very excited to read this new venture. I just heard your podcast on BP a couple days ago and have been following your blog on your site. I have been knocking out a few blog posts a day. Im on house #5 and I must say its good stuff and it is awesome that you are so candid and transparent with all the numbers. I'm leanring fast and you have played a big part in that.

    Ryan

  • Brandon TurnerPro Member
    Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
    12y

    Looking forward to following along J! Now you are playing in my world! :)

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Brandon Turner:
    Looking forward to following along J! Now you are playing in my world! :)

    Yup, that's why I started this thread...I'm hoping you'll hold my hand through this entire deal and not let me screw up too badly...

  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    12y

    I'm with Brandon ... this one will be even more interesting to me than the spec build, although that one was quite interesting too.

  • Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    12y

    I'm also looking forward to this thread :)

  • Middletown, NJ · Member since 2011 · 108 posts · 22 votes
    12y

    You mentioned that all your previous rentals were short term. What about this property makes you interested in getting back into rentals?

  • Investor · Odenton, MD · Member since 2012 · 105 posts · 9 votes
    12y

    I'm looking to modify my buy and hold model. The hardest part of all this is identifying the best areas to invest in and those to stay away from.

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Mike D.:
    You mentioned that all your previous rentals were short term. What about this property makes you interested in getting back into rentals?

    Hey Mike,

    I'm not a big fan of being a landlord. That said, I'm looking for some longer term investments and I'm not finding anything else that I'm comfortable with. On top of that, my wife is big on holding long-term rentals and my partner is interested as well. So, I'm out-numbered.

    The last piece of the puzzle is that we recently moved and are likely to stay in our new location for quite a long time; we knew that where we previously lived we wouldn't be there long-term, so we likely would have sold them off quickly anyway. It's easier to hold long-term knowing we'll be living here long-term.

  • Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    12y

    @J Scott

    @J Scott - looking forward to getting the details here on your thread. It's also reassuring that there ARE deals that go out on the Meetup that are legit. I guess I'm so conditioned by the "if it's a smokin' hot deal it won't see the light of day (buyers will be running for it)" mentality that I usually gloss over a lot on the Meetup listserv.

    But I also know that has a lot to do with my inexperience and fear.

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y

    JANUARY 7, 2014: WALK-THROUGH / PICTURES

    My wife and I met the wholesaler at the property today...the sellers were there as well. The house was owned by an older woman who passed away, and her daughter and son-in-law were looking for a quick sale.

    We did a quick walk-through (I never like walking through with sellers in the house), and everything seemed very straightforward. It was a 3/1 (all on the second floor) built in the late 1970s, with a living room, eat-in kitchen area, small galley kitchen and walk-in pantry on the main level and an unfinished basement. The first two levels were just over 1000 square feet, and the basement (which was very clean) was about 500 square feet.

    The townhouse is in an HOA community, and the HOA is responsible for all exterior maintenance. The roof was less than 5 years old, the vinyl siding was in great shape and despite all the recent snow, the walks were perfectly clean and clear (all a good sign). On the interior, the house was in very good shape, though it needed a full cosmetic renovation. The HVAC was less than 10 years old, the water heater was less than 4 years old, and the plumbing/electrical all looked to be in good shape.

    Doing a quickly analysis (which I'll detail in my next post), I determined that I'd need to buy the house for about $58,000 to have it hit my minimum profit target as a flip. And while I didn't have any rental information yet, I was pretty certain that the $58,000 number would allow it to be a profitable rental as well.

    My wife and I walked outside with the wholesaler and told her that we'd need it for $58,000 for it to work for us (she had mentioned a sale price of $67,000). She said she'd talk to the sellers, see what she could do and get back to me.

    About an hour later, she called to tell me that $58,000 would work, and would send a contract over in the next 24 hours along with all the title company and closing information.

    Here are some pictures of the property:

    In my next couple posts, I'll walk through my initial flip and rental analysis, including the rehab budgets.

  • Nicole A.Pro Member
    Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
    12y

    What town in Baltimore County is this?
    Have you hopped on Zillow (or other site) to see if anything for rent shows up? Craigslist maybe? Or, simply try to talk to neighbors. Or, look up the owners of neighboring properties and contact them.
    Good luck!

  • Involved In Real Estate · Member since 2011 · 10 posts · 2 votes
    12y

    Looks like a good deal! I'm just starting out in Baltimore but looking forward to learning as much on the Investor side as possible thanks to advice on these forums. I'm an agent in the Bmore area now and want to become a Realtor/Investor but in the learning stage now.

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Nicole A.:
    What town in Baltimore County is this?
    Have you hopped on Zillow (or other site) to see if anything for rent shows up? Craigslist maybe? Or, simply try to talk to neighbors. Or, look up the owners of neighboring properties and contact them.
    Good luck!

    Hey Nicole,

    This is in Reisterstown...

    After I looked at the property, I jumped onto the MLS to get an idea of market rents in the area. I'll detail what I found and the analysis in my next post...

  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    Wow 2% rule outside of the city, I'm impressed.

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Ned Carey:
    Wow 2% rule outside of the city, I'm impressed.

    Maybe less after rehab and real market rent numbers...we'll see... :-)

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y

    FLIP / RENTAL ANALYSES

    Now that I've seen the property and have the rough numbers, it's time to do my analysis and decide if I'd rather flip this one or hold it as a rental. Here are my assumptions for a flip:

    Purchase Price: $58,000

    Resale Value: $107,000

    Rehab Cost: $25,000

    The rehab would consist of a full cosmetic renovation, plus finishing the basement and adding a full bath.

    The analysis looks like this:

    With a $12,000 profit, this is a marginal deal, though it's easy and low priced enough that I'd be happy to do it if there weren't other options. But, with this one, renting seems like a very valid option, so let's take a look at those numbers.

    In terms of market rents, my investigation has indicated that we could be anywhere between $1100 and $1400, depending on several factors:

    - Retail or Section 8

    - Finishing Basement or Not

    - Adding Another Half or Full Bathroom

    I believe that if we stick with retail renters (not Section 8) and only do a cosmetic renovation without finishing the basement or adding a bathroom, we're probably at about $1100 in market rent. On the other side, with a Section 8 tenant, finishing the basement and adding another full bath, we should easily be at $1400.

    In fact, my wife talked to an agent who is listing an identical unit with a finished basement and bathroom for $1400, and that agent said that they got 10 section 8 applications the first weekend. We're not opposed to renting Section 8, and in this part of the county, it appears there's a couple hundred dollar premium for renting to Section 8 tenants.

    That said, if we were to rent Section 8, I'd want to do less rehab, not more (to avoid more costly damage from tenants). This would mean not finishing the basement. I believe that if we add a half- or full-bath but don't finish the basement, we're probably looking at about $1250-1300 in rent from Section 8 (let's say $1275 for this analysis).

    My gut tells me that do a full remodel, finishing the basement and adding a bathroom won't add enough in rental rates to justify a retail renter, so I'm ignoring that analysis.

    Before we jump into the analysis, here are the assumptions I'm using:

    FINANCING

    My financing assumption is using a portfolio lender with the typical terms I've seen:

    - 15 Year Amortization, 5 Year Balloon

    - About 6% Interest

    - 65% LTV (Based on Purchase + Rehab)

    It's possible I won't get financing or the terms will be different, but I believe this is the most likely scenario, so that's what I'm using for my modeling.

    EXPENSES

    Here are the expenses as I predict them to be:

    The property taxes are verified, the insurance is verified, the maintenance/repairs is estimated, the utilities are estimated, I don't expect any advertising or administrative costs, the PM fee I'm assuming will be 10% of the gross rents, the HOA is verified ($150/month) and the CapEx is estimated. Because the HOA covers all exterior costs (roof, siding, windows, lawn care, snow removal, etc), I expect that my CapEx is reasonable at $300/year -- normally I would assume about 2-3 times more.

    In terms of vacancy, I'll model that as 8.3%, or about 1 month per year. I'm not sure if I'll rent Section 8 or not, but if so, it could take 45-60 to place a tenant, and I image the typical turnover is 1.5 - 2 years. So, I think one month per year is reasonable.

    Note also that, depending on where the rent falls between $1100-1400, my total expense ratio (given rent loss and capex) will be between 50.1% and 58.3%. So, my numbers are likely to fall on the high side of the 50% rule -- this is likely due to the monthly HOA expense.

    Given all that, here are the three rental scenarios I'm running:

    1. Cosmetic Rehab, No Basement or Second Bath, Retail Renter

    Assume $7000 in rehab to get into rentable condition.

    2. Add 1/2 or Full Bath, No Basement, Section 8 Renter

    Assume $12,000 in rehab to get into rentable condition.

    3. Finish Basement, Add Full Bath, Section 8 Renter

    Assume $20,000 in rehab to get into rentable condition.


    Note that the Cash Flow and ROI numbers reflect both the scenario where we outsource the property management and where we do the property management ourselves. We plan to do it ourselves, at least at first, so it's important to get an idea of both set of circumstances. Also note that the "Total ROI" number is basically just the Cash-on-Cash ROI number, with principal pay-down included in the return (it doesn't include depreciation or any other tax advantages).

    Based on the numbers in the analyses above, it's clear that the first scenario (minor rehab and rent to retail renters) is the worst choice, financially speaking. The second two scenarios are very similar in financial results, but considering that #3 involves more rehab, higher cash outlay, more likely higher repairs costs upon turnover, etc., the scales are likely tipped in favor of scenario #2.

    For this reason, and for now, this is how we're leaning.

    In my next post, I'll detail my rehab estimate for our anticipated rehab scenario (#2 above).

  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    @J Scott

    Now you wander into our world :-)

    Have you given thought to hold timeline (10, 15, 20+ yrs)?

    Will you be placing all utilities in the hands of the tenants? Directly or indirectly via a separate utilities agreement? {Section 8 would be an influencing factor here}.

    You could plan for scenario 3 now, but only execute as far as scenario 2 and then use a future vacancy to finish. You will have a better understanding of what you can command in rent and your tenant pool which will factor into whether/when you complete the full basement.

  • J ScottPro Member
    Moderator
    OP
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Roy N.:

    Have you given thought to hold timeline (10, 15, 20+ yrs)?

    Will you be placing all utilities in the hands of the tenants? Directly or indirectly via a separate utilities agreement? {Section 8 would be an influencing factor here}.

    You could plan for scenario 3 now, but only execute as far as scenario 2 and then use a future vacancy to finish. You will have a better understanding of what you can command in rent and your tenant pool which will factor into whether/when you complete the full basement.

    Hey Roy,

    I haven't given much thought to timeline, but I imagine it's 5+ years, and hopefully 10+ years. I've said that before and then changed my mind, so don't believe anything I say when it comes to timelines... :)

    I imagine I'd have the tenants put the utilities in their name; in this county, the water companies can't lien the property (I don't think), so there's not much risk of having the tenants do it themselves. Though this is definitely something I need to investigate, especially with Section 8 tenants.

    And I completely agree about planning for #3 now while executing #2. Eventually, we'd do a full renovation and finish the basement, but that could be right before we sell it.

  • Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    The property taxes sound pretty low. Does Maryland have any type of homestead tax where it will go up now that it's not owner occupied, or will they stay that low?

    Do the other townhouses around there only have a bathroom on the second floor? In my area, they almost always have a half bath on the main floor. I'm surprised they built it that way in the 1970's.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.