This is the first property in a series (1 out of 9) of acquisitions that resulted from a couple 1031 exchanges. If this is your first time reading this post I suggest you read these few prefaces first.
- The inspiration to go for cashflow vs appreciation
- The introduction to the 1031-O-Rama: 2 -1031s, 9 properties, in 5 months to convert my Seattle portfolio to cashflowing (low appreciation) boring rentals
- Why ladies and gentlemen I went out of state AHH SO SCARY! Sight Unseen SO WILD I KNOW!
This property was put into service in October of 2015 (I know a little behind but I’ll catch up in the next few months). I acquired the property from a marketer that makes connections with the rehabbers in certain markets and finds buyers such as myself who are typically located in low rent to value ratio locations (this does not necessarily mean high-priced locations) such as California, New York, Hawaii, Seattle, Portland, and basically the coastal areas where all the cool kids what to actually live. Marketers have their place if the buyer is totally clueless but once you purchase a few of these properties the marketer really does not offer much value. The only thing I see that they would offer would be someone to be the bad guy role in a negotiation but many of the marketers are buddy-buddy with the rehabber because of their business relationship and won’t stick their neck out for you. As the buyer, you need to take ownership of the due-diligence process and negotiations because that marketer is not a licensed agent and does not have a fiduciary responsibility to you.
Check out my previous post for a bit more context. My goal was straight cashflow so Memphis and Birmingham were at the top of my list as opposed to Atlanta/Texas which seemed to trade off some cashflow buffer for appreciation potential. I was comfortable going with a seemingly grungier city because I was going for cashflow (rent/value). A wise mentor of mine told me once “the security of your investment in a market correction is how much cashflow/buffer there is from between your rent minus expenses… when bad times come, how much can you lower the rent to ride out the bad times.” I think most people get wrapped around in analysis paralysis over the plethora of data such as crime stats, employment trends, population trends, etc. Those indicators tell part of the story but for me the reason I moved forward was just talking to a couple of people who were (not referral based salesmen) investors with disinterested agendas that said “dude, just buy it (from the right people), it just works”. If you have ever heard the saying “stand on the shoulders of giants” that’s what I did – if it worked for these other investors then I’m just going to start where they left off – after all every month I delayed action I lost a potential $200-300 of cashflow. In the end, maybe it’s just because of my personality, I chose Birmingham because I heard so many podcast ads for Memphis and saw all the investors going there.
I apologize, it has been so long that it’s hard to remember (again I will get better at this, scouts honor), but I can’t really remember much because there were really no huge exceptions in the due-diligence process. I did a 3rd party inspector that I got off a referral from other investors. Remember do not take a referral from anyone on the sellers side as that is a huge red flag for their integrity due to the conflict of interest. A big difference in my growth as an investor is running these processes together with the lender’s parallel process and being able to effectively negotiate additional renovations or contract terms. Looking back I probably over paid a few thousand at least more than I would have today with my experience because you just can’t read about this stuff. Also it’s worth noting that you always should connect with a few property management companies and interview them early in this period. In addition, use them to validate your rental numbers and property location.
I paid cash for the property initially because it was the sellers terms. I would never it do it again this way since I basically waived my right to a property appraisal. The next step was to refinance the property with a convention Fannie Mae mortgage to pull out most of my initial investment. We had a lot of trouble getting the property to appraise for the value due to the technical processes of the appraisers. Finally, after the third try I finally got an appraisal number that I was able to live with, but the damage had been done and I had to have all my cash tied up in the deal for 2-3 months. Lesson learned was to always have a financing/appraisal contingency to ensure that the property that you buy appraises and that what you pay is what it is worth. This is another example of a standing on the shoulder of giants, when you are financing from day 1 the bank owns 75-80% of the home via the mortgage and they are doing their due diligence too via the title work and appraisal. Therefore use the banks process as your friend. I got a lot of help from my lender in this transaction as they were the ones behind the scenes working the appraisal issue. This the difference between going with any big bank lender and a lender that works exclusively with investors. Again the golden rule is to always go by referral by another investor.
After the smoke cleared I was out of pocket $27K and had a $50k mortgage. The interest rate was a little under 5% but that does not matter. Sophisticated investors do not look at interest rate and the amount of debt instead they focus on cashflow and effect on net worth because after all who cares if your interest rate is 8% if the deal is returning 20-40%.
After all the closing issues got taken care of everything else went pretty smooth and the property got filled by a nice family. Here are the numbers:
5 Rooms/3 Bed/1Bath, 1 story, 1008 SF
The Story: A nice suburban home in the Center Point area. The property was picked up as a distressed seller and rehabbed
$875 Rent per month
– 10% Property management
– In the first 18 months I have less than 400 dollars of repairs total
– $395 Mortgage/Interest/Insurance/Taxes (PITI)
I typically get $300-400 per month after expenses. Please note: Make sure you are saving 30-50% at least in reserves for cap ex, expenses, repairs, vacancy. I have had good luck these first 18 months however the law of averages will catch up.
Knock on wood – it really does not get any better than this property because in the first 18 months of ownership I have experienced no vacancy and only $300 of repairs. 🙂 So yea things are pretty boring on this one.
Link to the lively the BiggerPockets Peanut Gallery
2015 Metrics: 22.4% Total Return = 18+2.7+1.7
- Cash on Cash %: 18% = 5000 (cashflow) / 27000 (out of pocket)
- Mortgage Paydown %: 2.7% = 750 (principal paydown) / 27000 (out of pocket)
- Tax Breaks %: 1.7% = 500(25% x depreciation write-off) / 27000 (out of pocket)
- Appreciation = ??? I don’t really care but this can potentially be a lot
- Inflation = ??? I don’t really care but with all the bailouts and artificially low-interest rate this can be plenty
SPC GIT ‘ER DONE PLAN:
- Just do it. Every month of not placing your money into something you lose a potential $200-300 per month. Homes aren’t getting any cheaper and every day you risk a stock market crash.