My first 3 unit apartment building .... purchased at $235k with 3.5% down, seller paid all closing cost, my initial investment at closing was $9186. Exactly the same building right next to mine closed a day later and sold for $250k ....
Anyway; look at my numbers below and read explanation ...
PGI = 2470
vacancy loss = 4% 100
EGI = 2370
property tax = 309.4
homeowners ins = 156.6
repairs and maint = 10% 250
NOI = 1489
debt service: PI = 1101.6
monthly PMI 253
positive cashflow 134
After 6 months of research and looking at properties in the Chicago area, it was the best I could get. It's not easy to buy an apartment house with very little down that will cash flow. If you throw 20% down that is another story .... you will get a lot bigger cash flow but your returns will suffer .... I am going for high COCR .... I don't put to much emphasis on Cap rate. Numbers above are pretty conservative .... read further explanation .....
I am pretty good with evaluating tenants, and keeping them long term. At least with my condo. This part of town in general looks stable with long term tenants. That is why I am assuming only 4% vacancy rate. In 2 of my smaller units 1b/1b I took over tenants who have been there for 11 and 5 years. Looks like they are not going anywhere. The rents are $630 and $590 .... I think they are quite below the market and can easily be $50 higher each. I will raise them as of January of 2015. My 3rd unit is bigger 3b/1b and I rented it within a week of the purchase of the property. Including a detached 2 car garage I get $1250 rent. I was getting a lot of interest in this unit but like 75% of prospects were sec. 8 . I turned them down.
The building is in a pretty decent condition, but it's going to need some repairs. The seller stopped maintaining it since he decided to get out. Due to lack of experience and knowledge of repairs and replacements I am afraid I underestimated all the stuff that I will have to fix. Right now I am estimating about 250/month like you see above, but originally was lower. I think I should be able to pull of $134 monthly cashflow at least till I get the majority of repairs done. And then rent increase on 2 of my smaller units as of January. Overall my numbers look pretty good to me as far as returns. I bought the building for 235k ... with 3.5% down. My total initial investment including the down payment was $9186. Since the seller covered all the closing cost. Cap rate comes up to 7.6% which is not great but acceptable to me. COCR assuming only $134/month in positive cash flow is 17.5%. This return is the most important to me. ROI is about 62.5%. with principal pay down $4140 in first year. I am not assuming any appreciation. I should be able to manage with this even if I will have to throw 10-15k in repairs. That is one reason why I wanted to buy an apartment house with as little down as possible. Imagine buying it with 20% down which would be about 47k and still having to fix stuff up. And on the other hand what building is not going to need any repairs? They all need something. I personally don't trust even more those nicely renovated. What eyes can see mind believes. They look great at a glance but you have no idea what's beneath the surface. I have seen them. I think I may have underestimated the cost of repairs, especially looking at my condo which doesn't have much maintenance at all. With my last tenant renting it for 3 years and 8 months the cost of repairs and replacements averaged out to $35/month. With my 3-flat I need to increase monthly cash flow as quickly as possible, I can't be sitting on roughly $130/month. I think just increasing rents on small units should boost monthly cash flow to about $230/month. Strategies going forward:
- increase rents on small units,
- charge more money for the garage, right now I let the tenant have it for $50/month, I think I could be getting $100-$125/month,
- buy coin operated washer and dryer for additional income,
- possibility of renovating the basement in to a little studio apartment and get a 4th tenant,
- refi within 3-5 years and get rid of the monthly PMI.
How did you find this property? I am researching multi units in the Chicago area also and am having a hard time finding what will meet my buy criteria(which is currently in development). Also, what neighborhood is the property in?
@Bartek Marciniak What neighborhood in this in? It appears you used a FHA loan. You'll be living there I assume?
Couple of things.
1) Multifamily here in Illinois is a really tough nut to crack. I have looked at getting into them quite a few times and I can just never make the numbers work when I compare them to multifamily. Add in the fact that they tend to be much more management intensive and require a lot more down, I just never could take the plunge.
So the fact that you did this one with 10k down and its cash flowing something - however small - is pretty good indeed.
2) $125 seems pretty tight. But you're leaving out your principal paydown. Based on your numbers, I'm guessing you have something close to 30 year mortg for 225k at 4.25%? If so, that gives you a principal paydown of just over $300 a month.
So your return is actually about $440 a month when you add that in. And hopefully you're able to see a typical 1 to 2% appreciation (just to be conservative). Add that in and you're looking at another 250 a month or so. So thats $700 a month in actual returns on a 10k investment. Thats a great way to build real long term wealth. You just can't beat getting into a 250k property for 10k.....
Its tough on the cash flow at first. But remember, in 5 years, when your rents go up say, $50 a month apiece, that will be another $150 a month in cash flow and your principal paydown will go up another $60 or $65 a month as well. So that real return will only continue to grow..... which is the beautiful thing with buy and hold.
In 5 years, your return on that same 10k investment will actually be about $900 a month and will continue to go up from there.
Show me anything else that works that way.... It lets you pay yourself now (rent profits) and pay yourself even more later (more rent profits, more principal paydown, etc) :-)
Well done..... Sometimes its just good to get started.
btw: Are you moving in to this thing? How did you get 3.5% down on an investment property?
The property is in Ashburn. It took me 6 months to find something. As you know it is not easy to find anything with a very low down that will still cash flow. I just saw a potential in rent increase on 2 of my small units. Because they were way below the market. Also put another $2400 of my own money in to repairs and replacements. Now my small units are rented for $750 and $625. And overall returns improved with COCR at 19.6% and ROI at 55%. All operating expenses are within 50% rule, including $440/month for repairs and replacements and vacancy loss which is 16.9% of gross rental revenue.
yes Mike you are pretty good with numbers .... my loan was 230k at the start at 4%
principal paydown is a little above $4100 in the first year. Positive cash flow is $215 a month after rents increase, everything else stays the same; taxes, PMI, homeowners insurance, utilities however are a bit lower averaging at $125/month rather than $165 as I wrote in my first post. And I bumped up repairs & replacement and vacancy loss to $440/month from $350/month at first. In about 3.5 - 4 years I am hoping to get rid off PMI when my equity gets to 20%. That is assuming that the property will stay at about $250k as it appraised out at the time of purchase, or it will appreciate a bit. Getting rid off the PMI will free up $250/month staying in my pocket, and the small unit currently rented at $625/month can go easily at $700/month as we speak. It is still below the market but since I have a good tenant who's been here for 12 years now I am going to keep it at $625 for a while.
Update on my 3 unit apartment building in Chicago;
I finished my first fiscal year as of April 30th:
I had 5 months vacancy on a small unit. After changing tenants my rents are;
Big unit - $1280/month with a 2.5 car garage
2nd floor unit - $750/month
1st floor unit - $700/month
After all operating expenses and servicing the debt I ended up with $1920 positive cashflow for the first year. That gives me $160/month, about $53.30/month per unit.
COCR - 16.55%
It could be better but I guess I am pleased after all. Now in to my second year and I ran in to some problems with central air and a few other repairs. I expected to increase my monthly cashflow to $240/month. So far I am at $120/month for the first 4 months. Well, second years has just started so there is still a lot of time left, may be I will average $240/month for the year, I guess time will tell.
It was asked before but how did you get such a low down payment? Are you living in the property? I assume so since you're paying MIP...?
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