All right everybody, I wanted to update you on my RE adventures.
I posted a while ago about buying a cheap property out of state and what it's like and the numbers behind it.
So my portfolio as of today sits at 15 units, all OOS. It's down from 23 at the peak.
I bought an 8 unit for 200k outside downtown Cleveland, OH. Neighborhood is a C-/D+ neighborhood and I had inherited tenants in it. During my inspection, it didn't seem like a bad building and had good bones. The plan would be to increase rents to $625/unit with section 8 programs and renovations.
I went under contract in late October 2020 and closed end of Nov right around Thanksgiving.
Purchase - 200k
Monthly rent roll $3500 (8 units @ 450-500/month). Pro forma rent roll = $5k
Cash outlay:
25% down for 150k HML @ 8%. Outlay = 50k.
Monthly interest = $1k/month
Pro forma valuation = 625*8*12 = 60k top line rev
Expenses = 50% or 30k NOI
Valuation = 30k/9% cap = 330k.
Refi 70% at 330k valuation = $231k cash back
Major expenses had come up like a plumbing bill of $600, pest control $1200 here and there. Trash was another big problem and residents from other houses in the area would dump it over there.
My interest was 1k/month
Months 1-3, we had made minimal cash flow ($100-500/month), but then we had 2 evictions around March 2021. Vandalism happened and my windows were broken from old tenants. It was expensive to maintain and issues were happening. Rent collection was hard and it's hard to evict people. I was putting money in with new appliances and renovating 1 unit and painting common areas.
Around April, I had 2 decisions to make.
Bet on the quality of future tenants and try to turn the building around for a clean BRRR. Or I could sell it and cut my losses.
I put it on the market for 225k and ended up getting an offer for 190k. Over negotiations, we settled on $186k net w/4k seller credit.
Money:
$186k sale price
-$150k HML
=$36k back to me/partner.
Out of the 50k investment, we lost $14k and didn't make any profit on monthly cash flow.
Lessons:
-8 units is too small and the risk/reward ratio was too small. The rent to price ratio is fantastic and I've got a 14 unit 20 minutes away that I picked up for 375k that brings in 7k gross.
-The neighborhood I had to do better due diligence on as it turned out more of a D- neighborhood. There are plans for the neighborhood to be revitalized by the city, but COVID delayed construction and progress. I am willing to pay a premium to be in a better neighborhood.
-Spreadsheet math ≠ real life. Things will go wrong even if you budget for additional unforeseen expenses.
-The previous owner didn't do ANY tenant background checks or credit history. He just used it as if it was his personal piggy bank and didn't care how they paid rent. Unchecked tenants meant a lot of wear and tear to the property + bed bugs.
-Understand the tenant base and some of their problems you'll anticipate. My PM was awesome about it and tried her best to find good deals for appliances/renovation.
Overall, I'm very glad I took the plunge into it. Sure, it sucks to lose money but it'll serve me well in the long term. It's a very expensive lesson from the school of hard knocks. Luckily, I make a fair amount at my day job so it's not a huge hit financially.
I have a 14 unit in a great C neighborhood and I found an awesome team. My 14 unit is being renovated and I should be able to BRRR it. Buying a 40-50 unit in the next 6 months!
Thank you for your post!
I'm a 26 year old in southern California sitting on 185k in equites, and have the long term financial goal of building out a RE portfolio. Cap rates near me are pretty unimpressive, so I was also looking OOS, but have been worried about the logistical difficulties this would cause and hoping to avoid the overhead and risk of a PM.
Have you had a good experience on your 14 unit property?
Sorry for delayed response, but 14 unit has been way better.
Bought for 375k, found a really good team and it's a nicer area, spending about 50k for renovation and should be worth 600-650k or so.
Thanks for posting. Intern with 20k. Possible for me to start RE investing?
First of all, good job saving that much. Wait a bit. Try to get to around $80-100K first. Also want to have an idea where you're living longer term. What I'd advise you do is buy a two flat in your market, live in one and rent the other out. You'll get better rates/financing because you live in the place. Then after a couple of years, move into another (maybe 4 flat??) and do it again. So long as you are fine moving often, you can build up a pretty nice portfolio with much less $ this way. I did not do this, but know many that have successfully.
Househacking is a pretty good way to get started. I've been thinking of doing it myself, but it's hard or even impossible in a place like NYC.
nah, 20k honestly isn't worth it. save up some more money by creating a business or something.
I would only start with 50k to be honest.
Interested in hearing your experience with management companies and finding the right one. I also invest in real estate and what stops me from going OOS is the management side
Find areas that are either seasonal or metropolitan to invest in as those tend to have more management companies. There are bound to be good ones if there is competition, look for reviews.
I flew to my market and interviewed 3 that I really liked. You need to make sure your PM and your contractors like each other as they're going to be the ones that are working together.
My PM is pretty good but it helps that I have more than 10 units so it gets me discounts. Definitely speak with other real estate investors and have a list of questions.
What’s your involvement day-to-day or month-to-month in the maintenance/rent collection/eviction etc. given that you use a property manager? How much are you paying the PM? How do you source your deals?
How hard is it to find financing once you have 5+ properties? Do you go through the same banks every time?
I'm not involved on the day-to-day, everything is farmed out to the property manager. My partner audits the numbers for rent collections and make sure everything is okay.
Deals - I had a broker bring me stuff, but I plan on buying more deals in the future with partners - for future deals, I'll just cold call some owners.
Depends on the size of the properties - anything multifamily >$1m has been really hard to get financing on. I've had to pay cash for some of the deals and get creative with financing.
I was curious where you typically look for deals? I've been interested in finding something, but there aren't a ton of supply for lower united properties close to my city from what I've looked.
Just brokers historically, on my next acquisitions, I'll cold call myself.
Out of state deals are great.
If you look hard enough you can find 4plexes for 8%cap rates.
I'll run down a deal I did while being a Canadian:
12-unit multifamily building
Bought this property off-market with no brokers involved (saving me 4%)
Bought at a 8% cap rate
Location: Wisconsin
Financing i-rate = 3%
Down payment = 15%
Total ROI (after all expenses, + taxes) = 16% in Cashflow annually.
Was a value-add deal where I made some changes physically to the property + got in new tenants with good backgrounds.
After this my cap rate rose to 9.1%
How were you able to find this deal off market and how were you able to put only 15% down? most banks/lenders i speak with are asking for 25-30%. Did you use a mortgage broker?
Where in WI is this? You can find 8% caps all day in the Midwest, but I find in Class B areas, they're mostly going for 7% caps right now.
How'd you only put down 15%? Most lenders I speak to are looking for 25% min down payment.
Good stuff though, thanks for sharing!
Illum neque ad non harum et aut. Ut eos magnam et enim molestias sed voluptas. Unde consequatur praesentium quod delectus aut minus. Officia qui eum ipsum quam est officia. Maiores earum totam aliquam occaecati quia iure possimus.
Veritatis quis veritatis illo beatae inventore. Ex molestias dolorem perspiciatis quaerat rem. Ut harum id molestiae molestias sint.
Vero ipsa sequi aut adipisci quo consectetur. Ullam numquam est non corporis ut ut. Tempora nobis consequatur facere officiis dolore rerum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...