My Tenth Investment Property and Fourth Four-Plex

Investment PropertyAll of the investment property I was purchasing in the recent years was in the same apartment complex.  They cash flowed great, but there was quite a bit of deferred maintenance in them when they were purchased.    There were pros and cons to owning in the same complex.  One downside is the properties were all in the same place.  What happens to the neighborhood, happens to your investment.

There were a lot of pluses though.  In an HOA, the more property you have, the more votes you have.  With three properties already, I had 10% of the votes as there are only 30 votes in the HOA.  Since I was already in the process of cleaning up the neighborhood, I was elected president by a unanimous vote at the annual meeting.

The properties are built almost identical, so there are economies of scale.  All were built in 1984 and 1985, so they generally meet modern building codes.  There are no lead paint issues.  They have copper plumbing and plastic drain lines.  When you do maintenance on one, you can do multiple things.  Collecting rents is easier too.

I had already purchased three of the five properties that had become available in the complex in the past two years.  The previous owners were all going broke due to their mismanagement of tenants, and failure to understand the business of land lording.  I started looking at this property quite a few months before I purchased it.

It was purchased in 05/2006 for $417.5K.  It was improved quite a bit from the purchase; new kitchen cabinets, new carpet, some new fixtures and floors.

It started on the market in 09/2007 as a regular sale, for $539K.  It dropped to 350K as a short sale in 12/2009.  That was too much, as all of the other sales in the area for identical buildings were ~$270K.  There were renters in it, never a great thing for a foreclosure property.  I think there was an even offer that could not deliver and close on the property.

The redemption period had expired, and the property went back to the bank.  It was going to be a REO property.  I was talking to the Bank’s real estate agent on a regular basis, wondering what would happen to the property and when to put in an offer.  The bank was way slow, and they were trying to get the renter out.  The bank offered “cash for keys”, and the renter agreed.  But then he reneged on his end of the deal, and stayed longer.  Eventually, he was evicted.

Once we knew the property was going to be on the market soon, and what the likely price was going to be, we submitted a $220K cash offer, no contingencies or inspections, on 11/18/2010.  The property sat, and the bank paid for heat, water, winterization, and replacing a shower valve that was leaking.  Towards late February, the property finally went on the MLS.  By that time, our offer was already in the bank’s hands and we had a strong recommendation from the selling agent.  The bank originally listed the property at $252.5K and countered us at $245K.  We immediately accepted the counter.

We had our offer ready, and in the banks hands, before most of the public saw it on the MLS.  By already knowing what the properties potential was, we did not have to analyze the deal.  We already knew what we were getting.

Knowing your market is a major key to getting great deals.  Waiting for the public MLS means other “insider” investors have already passed on the deal.

I went in as a partner on this one with my live-in girlfriend of 20+ years.  She didn’t have much real estate exposure in her portfolio, and was watching me manage the other properties.  She was almost in on other buildings, and decided to make the jump on this one.  She put in $35K to help with the down payment.

So, once the deal was sealed, we immediately applied for a mortgage.  We only had slightly less than four weeks to get funded.  It was a cash offer not a mortgage, so as a backup, we had the cash available.  I never want to use cash if I don’t have to.  The down payment was already $73.5K, plus some closing costs, so we only needed another $171.5K if it came to that.

For a mortgage, you need an appraisal.  The appraiser came out, but the water in the building was shut off, and the building winterized.  Although the heat was still on…  In order to get a mortgage appraisal these days, everything has to work.  The property needed to be un-winterized, there needed to be running water.  In February in MN, it is still cold.  Since it was a cash deal, no appraisal is generally needed, so I had to spin the story with the realtor a bit to get the appraiser access.  If we backed out, I would have to pay for not only the appraisal, but a new winterization, and for the Appraiser coming back for the second time to check the water.

I had been in the building several times, so I knew about some water leaks, specifically one upstairs water heater was leaking quite a bit into the lower unit.  I met the appraiser at the building, and turned on the water in each apartment as he went through.  I also turned the water back off after he left.  You never want to leave a vacant building with the water on.

The appraisal passed, and we had mortgage funding.  The property closed on 3/15/11.  There was quite a bit of work to do.  New water heaters, new water shutoff valves, lots of paint, carpet cleaned, some appliances, new locks, some new light and plumbing fixtures, some windows, bathroom tiling, etc. It took maybe another $25K – $30K to get it ready, plus a bit of sweat equity.  The first place rented on 6/15/11 and the final unit was rented on 9/15/11.  A new roof was put on in 08/2013.

Back in 2011, this property was in the ‘hot’ section of the complex.  It was on the back side where all of the action seemed to happen.  By working on the property for a few months, I was able to determine a few problem residents that needed to be moved out.  I had a video recorder going much of the time I was not there; it was interesting to see what happens in a Class D neighborhood.

I spent couple of over-nights there to see what was happening when I was gone.  I saw a resident from another building come and go several times throughout the evening for 15-20 minutes at a time.  It was obvious he was a drug dealer meeting his customers at the local park.  The cops had me watching a second property from a distance.  They were interested in a well-dressed ~30 year old guy that drove a Cadillac and lived in one of the worst units in the complex.  Nothing ever happened to him, but he did move out a few months after I bought this property.

So all in all, it was a win.  ~17% cash-on-cash return, cap rate of 11%, Gross rent multiplier of 5.4 and a debt service ratio of 2.35.  Factor in ‘free’ management, and it is a 26%+ cash return.   I was able to further clean up the neighborhood, and increase property values.

 

What is your experience with rental or investment property?

 

4 Replies to “My Tenth Investment Property and Fourth Four-Plex”

  1. Well, as I already have said, we just rent the basement of our house. That’s been enough rental work for us for now! I would like to have a stand-alone rental house or condo in the future, though, and my wife is totally on board with it. Now that I know you are a MN blogger, I wish you described what cities/neighborhoods you were talking about in these posts, but I know it would be meaningless to 99.9% of your readers.

    I’d be curious to hear your thoughts about buying super cheap houses in questionable neighborhoods (i.e. Frogtown) and renting. I actually rented in Frogtown for a year with some friends and I think sometimes if you get good renters or even residents it can really turn a neighborhood around. Might be an interesting topic for a future post?

    1. I sent an email separately with some specifics.

      Lower quality neighborhoods can be great too, you just have to know what returns to expect. Here is a post about what returns should be in those neighborhoods.

      And this one

  2. Interesting!! We are strongly considering real estate investing as a large part of our portfolio, so thanks for the good info here. Can’t wait to read more! Huge congrats on your real estate successes!

    1. Thank you for the comment!

      I have just over 50% of my NW in RE. It really had made a great difference, of course it took a lot of seed money to accumulate. And some hard work. Feel free to ask any questions.

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