Buying a cheap property OOS - Case Study
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
25% down for 150k HML @ 8%. Outlay = 50k.
Monthly interest = $1k/month
Pro forma valuation = 625812 = 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.
$186k sale price
=$36k back to me/partner.
Out of the 50k investment, we lost $14k and didn't make any profit on monthly cash flow.
-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!