I’ve talked with many people about how one of my favorite side hustles is real estate investing. I feel that real estate is a great way to accelerate ones path to financial independence. I have made dozens and dozens of offers, and closed several real estate deals. I have learned so much, and continue to learn with every deal. Some deals go smoothly, while others were a bit rough, and one that was a complete nightmare.
I’ve decided to share my experiences with a brand new listing and how I determine if it will be a good investment. We’ll examine all the numbers, and calculations. I’ll walk through the process I used to make an offer, and when it’s accepted. We’ll then follow the entire process of any rehab, preparation for rent, getting property management involved. Hopefully, with some work we’ll have a successful rental property, earning positive cash flow.
In my weekly check-in with Jess, my Real Estate Agent and a valuable member of my team, we were discussing my search criteria, and what properties I’d like to narrow my focus on. After talking with Jess I think I found my sweet spot for buy and hold rentals. My two most successful rentals are townhomes within the same association. These are relatively lower HOA fees, lower taxes, and lower insurance. The purchase price of these properties have been in the $132k-$142k range. We took a look what was in the MLS, and sure enough, there was another new listing for a townhome in the same association my other two are in. Could this be a stroke of luck? Maybe? Let’s dig in this property.
I looked over the info, and then plugged in numbers into a rental property calculator at BiggerPockets. I use this for analyzing all my deals. I sometimes analyze dozens of deals a week.
Let’s take a closer look at the final report from BiggerPockets:
I start by plugging in the purchase price. I may run several reports based on different scenarios. I then add the market rent. This Is the income I’d receive. Since I have two other properties that are very similar I set this at about the same. I also compare rentals of the same location, number of bedrooms, and square footage on sites like Zillow, Rent-o-Meter, and Renters Warehouse. This comp (comparable) rent was $1,495. This may fluctuate a bit based on time of year, and comparable rents in the area. Because this unit has three bedrooms, I may be able to up the rent a little more.
I then start to subtract the expenses.
First, I look at taxes, easy to pull historical tax records, and the current assessment from the county website. I grab that number and plug it into the calculator. For this property the annual property taxes is $1420.
I calculated approximate maintenance and repairs, capital expenditures, and vacancy rate at about 12%
I then calculated about 5% for my management fee. I had negotiated hard with my management company. So I have a flat fee per door for management.
You’ll see that the P&I, (principal & interest) or what some refer to as the Debt Service, Is about $525 per month. This is what I’ll have to pay the bank every month (or…have my tenants pay for me) I’ve already sent the property address to my lender for pre-approval letter. This letter just states that based on my credit score, and current assets & debt to income ratio, I’m pre-qualified to purchase this property. This is then passed on to my Agent.
I used an estimate for my monthly insurance of about $30. Yes, $30 Per Month!
I kicked this address over to my insurance agent who quickly sent back an estimate. This is another reason why these townhomes are my sweet spot. Because the HOA (home owners association) has additional hazard insurance held for the structure. My landlord/rental insurance policy is fairly inexpensive. Speaking of HOA, for this particular association the monthly fee is $174/month. This includes garbage, and all exterior maintenance including snow removal and lawn care.
With this rental property the tenants will be responsible for the setup and paying any additional utilities such as water/sewer, natural gas and electricity. So my expenses are kept at a minimum.
After all is said and done, this rental property will have positive cash-flow of $393.16. You can see on the report that the Cash on Cash return on investment, or ROI of my down payment is about 13% return on my money. That’s a pretty good return, I think. I base this on the performance of index funds that follow the S&P 500 would have an approximate 8% return over time. This is not an absolute or definitive thing. I’m not an investment professional or advisor or anything. This is just my opinion.
I‘ve estimated repairs for this property of approximately $5,000. This is included in my total cash needed up front. As I discussed with Jess, who had looked over the property while I was traveling for my day job, this unit was in as good of shape as my other two units in the same association. She mentioned the stairs would need new covering, and probably a coat of paint throughout. I did uncover some minor water damage that will have to be addressed, but didn’t seem to be too serious. I’ll also be replacing the carpet in the basement. All of this, I believe can be done under the $5k repair cost I had estimated.
After I electronically signed the PA (Purchase Agreement) I had Jess setup an inspection. I’m an advocate of always having an inspection. I like that in the state on MN, if there is anything uncovered that was not disclosed in the Purchase Agreement, the buyer can back out of the contract. For example, I had looked at a duplex in which the entire lower level had been under water, but the seller hadn’t mentioned that at all, and was not in the disclosures. SCARY! I then need to get earnest money over the title company. Earnest money is like putting some money upfront to prove I’m serious. There isn’t a defined amount. I typically do around $5k. Keep in mind that this is put towards the down payment at closing. I feel that this amount does kinda represent how serious you are and can make for a a stronger position. For example, if there were multiple offers on a property, you could choose to have a higher Earnest Money.
The highest and final offer I could afford was 135,500.00. One thing that I sometimes have hard time with, is understanding that EVERYTHING is negotiable. As my Agent has said, she had drafted some crazy deals! With this one, I really didn’t really negotiate too hard. The list price started out at $138k, I offered 129,900 and I’d pay closing costs. They countered with an offer stating that 135,500 was the lowest. I countered back stating that I’d only pay 1/2 of the closing costs…. and the next day. They said, “Nope.” Even if I did pay all the closing costs this purchase was a good, cash-flowing opportunity.
Another day passed, and Jess send me a txt stating my offer was accepted.
It’s like you hurry up and wait!
Inspection, and appraisals were scheduled, and closing was approximately six weeks out.
The Appraised value of the home came back at approximately the offer price. And and the inspection was fine. One thing to keep in mind, this inspection is different than the rental license inspection that is required by the city. I filled out the Rental License Application and payed the $500 one time fee because this dwelling has never been a rental in the past. If it had been, the fee is $110 for this particularly city. Upon the city receiving my application for license, they automatically scheduled an inspection. These are typical safety things that should be addressed. I’d like these things taken care of in my rental properties anyway, so it’s good to go through them. For example, the dishwasher was plugged in through the floor, and in a power strip that was zip tied to a gas pipe. WTH!! A typical workflow, is the city sends you a list of all items that needed to be addressed and with it a secondary inspection.
We took ownership and my son and I walked though the property while noting and prioritizing all the things that need to be fixed, replaced, and what not. During this time my 20 year old son, and his 21 year old buddy were thinking of moving out on their own. Yup! You knew where this was going, haha. They had asked if they could rent this property from me.
I had gave this some consideration, and negotiated that I’ll reduce the rent, and my son will be responsible for the ongoing management. Obviously, any major maintenance and repairs I’ll be responsible. I did allow my son, and two friends to move in and live rent-free for two months if they agreed to paint and do some of the light rehab. So far, so good… And, in case you are wondering yes all three signed a lease. 😉
Since we are self-managing, or actually having my son is managing the unit, I didn’t need my management company and wouldn’t be paying that fee. I had used TenantCloud to manage my units, e-sign lease agreements, and collect online payments in the past. So using this platform, I had drafted a basic annual lease for my son and his friends, and ensured that they each had a TenantCloud account and electronically signed their lease.
We have completed much of rehab, and are now just waiting for estimates on the flooring and carpet. There is some landscaping that can be done inside the fence near the patio in the back. But it’s January in the Midwest, so that will wait a few months 🙂
Thanks for following along! Until the next property, happy investing!