So last week, I talked about how we purchased a package of 97 houses all at once. Let me follow that up by letting you know how we purchased a single 4-plex. Ok, not nearly as exciting, but I think this case study is a lot more practical for a newbie investor. (Pro tip: If you are just getting started, do not attempt to buy a package of 97 houses all at once.)
This particular deal was one of the first properties we bought after we arrived in Kansas City back in 2011. I had just been here three or four months, when I came across this 4-plex in Grandview—a working class suburb of Kansas City. It was vacant, but listed for only $55,900. At the time, I didn’t know much of anything about Grandview. So that is where my investigation began.
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Evaluating the Area
It wasn’t long ago that Grandview was considered a morbid place to invest. Indeed, it found itself at spot number 8 on Forbes list of “America’s 10 Fastest Dying Towns.” As it noted of Grandview, “With few buyers, and no one moving in, home prices have dropped to $78,000 at the median level, off from $122,000 in 2003.”
But things had changed.
First came IHOP (not the pancake place, but the International House of Prayer). The controversial megachurch had planted its roots in Grandview and revitalized the city. Then came the announcement of two massive developments just south of town: a new Honeywell plant slated at $500 million and the similarly priced Centerpoint-KCS Intermodal Center. Both were going to bring in thousands of jobs, along with many more support jobs.
Grandview was becoming revitalized.
That being said, this property wasn’t in a particularly good part of Grandview. It was old housing built quickly and cheaply to serve as military housing for the now defunct Richard-Gebaur Air Force Base. But the area still had pretty decent occupancy, and Grandview has a relatively low (or at least not high) crime rate.
Evaluating the Property
The property was not in bad shape, but each of the units was very small. What was good about it was that it had central air, and all of the furnaces and A/C compressors were in good shape (a rare sight for vacant multifamily). In addition, there were no structural or electrical problems, and the roof was fine.
But what was obvious is that the property looked awful from the outside. It had these huge, ugly aluminum windows in front and plain light blue vinyl siding that looked about as tacky as could be. So I decided to upgrade the windows to vinyl (and there weren’t very many, so this was a small expense), build up the bottom and put some black trim underneath, and add some window shutters for exterior appeal.
Here’s the before and after pictures:
The interiors needed carpet and paint and countertops, but not much else. The only other notable problem was the way the kitchen was laid out, which made it so you had to squeeze past the refrigerator to get by. This made the ktichen look tiny. But that was easily fixed by just replacing the regular-sized refrigerators with apartment-sized refrigerators. These were one-bedroom apartments, after all.
So we put all of this together and came up with a rehab budget of about $15,000.
This property was owned by a small bank and was listed on the MLS. But luckily, it appeared there was a mistake made on the listing, as there was a “special tax” listed for the same amount as the property taxes. This may have scared a few potential buyers off.
But it sounded very strange to me and my agent, so we looked into it and were able to verify this was a typo. Listing mistakes are not uncommon, so keep your eyes out for them. Anyway, we offered $42,000 and were able to come to terms at $44,000.
Then we began our due diligence (something you should never skimp on). During this, we scoped the sewer line and found that it was not just broken, but actually broken under the street (which adds a lot to replacing a sewer line).
We got a bid that came in at $9800. So we re-traded and asked the bank to take that off the price. They came down $7,000, and we agreed to meet them at $35,000. That’s $8,750/door if anyone’s counting!
Once we purchased it, I looked around for another contractor and found one willing to do the project for $6,800. So we replaced it and then fixed up the rest of the property.
By the time we finished, we were all into the property for about $57,000, or less than $15,000/door.
It Ain’t Over Until You Manage It
We’re buy and hold investors, so our next step was to rent it out. Now, this actually didn’t go very well for the first two years we owned it. During that time, while we had good equity in the property (we had it appraised at $90,000), we actually lost money on it.
The problem was that it didn’t rent for very much. At first, each unit only rented for $395/month, although the tenant paid all of the utilities, including water. (We have since increased it to $450.) Properties with very low rents are hard to cash flow generally because the fixed costs and maintenance will eat up your cash flow. Indeed, I would be very much hesitant to own any apartment unit that rented for $400 or less or any house that rented for less than $600 a month.
What turned this around was diligent screening. Bad turnovers were killing our margin. It takes a long time to make up for new carpet, paint, and all the other little things that go into a turnover when you are only making $395 a month and have a $395 deposit (or even $450). So you need tenants who won’t trash your unit. Early on, we were too desperate to fill the place up so we let in poorer quality tenants.
But it’s better for a property to be vacant than filled with a bad tenant. Once we got more patient and tougher on screening, the property turned around, and today it cash flows very well.
So while this may not be the most exciting deal in the world, deals like it are quite common. And enough of these kinds can get you far on the road to financial freedom.
Investors: Have any questions about this deal? Have you ever purchased a multifamily property?
Let’s talk in the comments section below!