My Seventh Investment Property, my first 4-plex

052742_900_Wescott_FrontI owned three investment properties at this time, and was preparing to buy another.  I saw values going up considerably, and thought it might be worthwhile to buy another rental property.

My investment portfolio was growing pretty good, and I had slightly over $500K in it.  I wanted to put it to better use.  I really wasn’t sure what I wanted to do.  I lost out on the previous sheriff’s sale property, and did not want to work forever.

I went to a “Think Big” seminar, put on by the Learning Annex, which featured Donald Trump, George Foreman and many others.  It got me thinking.  I signed up for a few Starter Sessions with different vendors.  You know the ones that give you a free taste, and want thousands to continue.

I was really interested in the Real Estate courses, so I signed up.  It was very eye opening.  I started to look further at investment property education.  I learned how to analyze property, and understand what a decent return is (negative cash flow is bad).  I looked up hundreds properties on line, and did a financial analysis on them as practice.  I ordered several ‘kits’ from the different midnight vendors and returned them in 30 days to get my money back.  I joined the local Minnesota Real Estate Investors club.

So, I started.  I began researching the local foreclosures.  I sent mailings and did presentations to people in foreclosure in hopes to get an investment property I could purchase.  I helped many people understand the situation that they were in, but I still did not find any properties.

I did find a Realtor and started looking at foreclosures in a condominium complex close to where I lived.  These were not ‘normal’ condos; the property was built for investors.  All of the buildings were 4-plexes, thirty of them, 120 units total.  Some of the 4-plexes were split into actual condos, and sold off.  All were three bedrooms, some were one bath, some two.

As I started looking at them, I realized there was a considerable amount of work to put into them.  I did the analysis, and found they were about $100K too high to make any money on as a rental.  I made some offers, but I was always the low-bidder.  I was close once, only off by a bit.  My offer was $312K, and it sold for $316K as I recall.

I did learn just a bit after that offer.  I had no ties to my Realtor, so I thought why not go through the listing Realtor.  It would be what is known as a ‘Hogger’ in the Real Estate sales world.  The sales person would then get a double commission, and would make every attempt to get my offer through.  So I made contact with the sales person, and started a business relationship that continues to this day.

So, many of these 4-plexes in this complex were in foreclosure, buyers paid too much, and did not know how to manage investment property.  It was a Section 8 neighborhood, so maintenance costs were eating up the revenues.

I was finally able to make an offer on a building that was accepted.  It was a REO property, and it was bought in rough shape.  The pipes were frozen as were the water heaters.  I could see some of the split pipes.  No appliances were in the building.  I paid $316K with 25% down.  It eventually costs another ~$60K to get the place up to speed.

It wasn’t a bad price, the property sold just three years earlier for $430K, and probably $100K was put into it by the most recent owners, before they went broke.  It cash flowed almost $1,000 per month, and had an 8.6% cap rate, gross rent multiplier of just under 7, the debt service ratio was over 1.6, and a cash-on-cash return over 11%.  If I managed it myself, it was a 14%+ return.  A great deal over all; but I knew I just paid retail.  I knew there were better deals out there.

I finally had another rental property, and my tenant count would double as soon I could fill it.

What thoughts did you entertain when you were buying a property, either for your residence, or an investment property?

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