All Forum Posts by: Max Householder

I had been meaning to post a recap of year one for our first investment property and finally got around to it...in April. Anyways, here goes. 

In November of 2016 my wife and I purchased a 4-family investment property in south city St. Louis. After concluding our first calendar year of owning the property, I thought I would share the results. I found posts like this to be helpful when I was first learning about investing in real estate, so hopefully someone on here can get something out of it.

Our goals were to cash flow $100 per month per door, have a cash-on-cash ROI of 12%, and achieve a total return of 20%.

Purchase price: $179,900
Our loan is a 30-year fixed rate residential mortgage at 4.25%
25% Downpayment: $44,975
Mortgage Payment (Principal & Interest): $663.75

Operating Income
$26,435 scheduled gross rents (4 units)
$(1001) vacancy
$600 garage rent
$11 interest
$26,045 gross operating income

Operating Expenses
Property Management (10% of gross rents): $(2543)
Leasing fee for new tenant placement: $(550)
Sewer: $(1397)
Water & Trash: $(1232)
Lawn care/mowing: $(350)
Gas & electric during vacancy: $(228)
City occupancy inspection aka government extortion fees: $(183)
Maintenance & Repairs: $(3594)
Property Taxes: $(2009)
Insurance: $(983)
$(13,069) gross operating expense

Net Operating Income: $12,976
Mortgage P&I: $(7965)
Cash Flow Before Taxes: $5,011
Cash-on-cash return: 11%
Equity Accrued: $2275
Total Return: $7286
Total ROI: 16%

We hit our cash flow number almost exactly at $104 per door while our ROI and total return came in a little under our projections, but pretty damn close. While not a screaming deal or a homerun, we were ecstatic with the results after one year. Having a quality property manager on our team helped make this a great hands-off investment that fit our family's lifestyle. Real estate investing really does work if you know your numbers and find a property that aligns with your goals! We hope to acquire several more small multi-families in the coming years.

Cheers and good luck in your investing!

Max

Lastly, new investors often ask what to estimate for expenses. After 1 year owning this property, we now have one year of data! These numbers are as a percentage of scheduled gross rents. I did not include the garage rents since the garage accrued no expenses and not every property has one.

Vacancy = 4%
Operating Expenses = 50% and breaks down as follows:
Property management: 10%
Fixed expenses (property tax, insurance, water, sewer, trash): 21%
Variable expenses (maintenance, repairs, lawn care, leasing fee, gas, electric, inspections): 19%

Yeah, just MLS listings. I keep saying I'm going to start looking off-market, but I haven't done anything toward that yet.

@Megan Greathouse I have seen you post before about marketing for leads. How is that working for you?

I think the influx of out of state buyers is because of where we are in the market cycle not necessarily because people are being misled. The coastal markets are played out and if the best an investor there can do is a 3 or 4 cap, then a property in St. Louis at a 5 or 6 cap looks amazing on paper. I think most local investors would shake our head at the "on paper" numbers knowing the nuances of this market, but for an out of state investor struggling to find yield, it's a sensible play. Plus, from a capital preservation standpoint, if you think the market in say LA or NY is topping out, then cashing out near the highs and parking money in St. Louis for a 5% return makes sense if you think the property values at home might take a 50% haircut. That level of volatility is less likely here in St. Louis where it's kind of steady as she goes, even during downturns.

I share your frustration  @Megan Greathouse! We've been eager to get into a 2nd property, but have either been outpriced on most and then outbid when one is in the ballpark. The most recent one we looked at was in a great area and the units were very nice, but the building had easily $30-50k in capex coming due within 3-5 years. Going by our numbers, we thought they were overpriced by at least 20%, but it still got multiple offers over ask within a day. 

Looking to buy and hold long term, I'm comfortable sticking to my numbers and waiting it out. In the meantime I'll just keep stacking investment capital and hopefully if/when these folks don't end up making any money on their overpriced buys, I'll be there to scoop them at a discount!

Dogtown is a great area that's walkable to Forest Park with easy access to both 64/40 and I44 so I would think this development would do well, even with rents in the $1200-1900 range. If you already own in Dogtown this is probably great for future rent growth and appreciation. I think the Field Foods aspect is a big plus as currently residents would have to drive to Richmond Heights, Maplewood, or Southwest Garden to get to a Schnucks or Shop'n Save. Fields is a little higher end, but I would think it would do well there. IMO the grocery-retail-apartments all in one footprint is a nice model for redevelopment in urban areas where currently it's difficult to locate a big box style store plus parking lot, etc..

I know a lot of people gripe about gentrification, but it's great for the long term viability of a neighborhood. I'm sure the owners of Seamus, Felix's, Heavy Riff, and the like won't be complaining about 100 upper-middle class customers plopping down across the street.

I'd be curious to see this broken down by zip code. I live in the city and anecdotally there has been a lot of turnover in my neighborhood (63109) with dozens of homes going up for sale the last 12 months and all have sold quickly and at increasing prices. Now maybe that's renters buying homes and not new people moving in, but it seems like growth/redevelopment in south city has gotten stronger and stronger each year I've lived here. All that said, losing 550 people isn't a mass exodus, especially when you look at what Chicago is experiencing. 

I second @Peter MacKercher as a good PM in St. Louis. Their fee structure is very straightforward and aligns their goals with that of the owner, i.e. when I make money as the owner, they make money as the PM and when I'm not making money, they're not making money. 

I don't know which PM you had been working with, but it sounds like their cost structure lures you in with the 8% fee (many of the better PMs charge 10% of gross rents) but then they hit you with all the ancillary fees like charging to "manage" the property while it's vacant. That's complete BS. IMO, if the unit is vacant they should be hungry to find you a quality tenant, not collecting $100 while it sits and you lose money. That is not an alignment of goals.

The $100 minimum means their base fee on your $1,200 is actually 8.33%.

If your scheduled gross rent is $14,400 ($600/month x 2 x 12)

Minimum PM fee -$1200 ($100 x 12)

Re-lease inherited tenant -$395

One-month vacancy -$100 PM fee (and -$600 from your gross revenue)

Fee to lease new tenant -$395 (you didn't mention this, but I imagine they would charge at least as much as the re-lease)

So right there you've got $2090 in PM fees on $13,800 gross = 15%

Now over time those lease-up and vacancy management fees will even out as tenants stay longer than 1 year, but if you just wrote in 8% for management, you should almost 2x that to get to reality, at least in year 1. 

Especially at the lower end of the market with rents in the $400-600 range, a PM is going to lose money at 8%, maybe break even at 10% and their profit is going to come in that 10-15% range. I want my PM to make a profit, but I want that profit to come out of the profit I get when they've increased my revenue and lowered my expenses and I want to understand exactly what I'm paying for, how much, and why.

Mogul Realty manages our 4-family in south city and we've been extremely satisfied with their work. Would definitely recommend them, but I don't believe they work in North City. Sorry, I read the post too fast and just saw St. Louis City.

If you're in the County, the assessor's page has a comparable sales area where it lists comps that you can compare by price, $/sqft, etc. In the city, probably ask a few agents to pull comps since many areas can be very block-to-block and if you don't understand the nuances of each neighborhood, comparing two properties within a mile or a half-mile as the crow flies may lead you well astray in terms of value.

Shelter Insurance will write a policy for the cash value, basically the appraisal amount. The premium is much more reasonable! If there is ever a total loss, you'll be able to recoup your equity and pay off the loan which is all you really need with these very old properties. It would never be feasible to rebuild them like-for-like.

As far as the tack to take with your partner, every successful real estate investor I've heard on any REI podcast, and I've listened to hundreds and hundreds of REI podcast episodes at this point, they see their tenants as a key part of their business, almost like a partnership or a valued employee, which really they are, they're the engine of your success. Without good tenants you're going to struggle. I have never, ever, ever heard an investor talk about their growing portfolio of 100s of units valued at $10s of millions and say yeah, we just throw a sloppy coat of paint on everything and slap down a floor, screw it, they're just rentals you don't have to live there. The conclusion I've drawn from all those interviews is that it's impossible to be a successful landlord with a negative attitude like that toward tenants. Just my 0.02