If you’ve ever thought about investing in real estate, read on to find out how we did it, how much money we made and our mistakes along the way.
In a previous article, I discussed how we started investing in real estate… I talked about our worldview, why we decided to go into real estate, and the series of events that led to our first rental. If you haven’t read it, I would advise you to start with it first.
Our first rental property – Duplex
Our very first rental property was a duplex, built in the 1960s. Both sides were 2 bedrooms, 2 baths and 1350 square feet each. It was in a transitional area – good schools, and I would put this area on B-, but on the other side of the road from this area there were several low-income apartments.
How we found the property
We bought it in early 2013. It was an MLS (Multiple Listing Service) listed foreclosure. In the period from 2012 to 2013, the real estate market in our area was just beginning to heat up. It was auctioned at $ 120,000, and we overestimated the asking price, knowing it was undervalued.
At the time, my wife did not have a real estate license, so we used a realtor who helped us find investment properties. We searched for several months and made several offers, but nothing came of it. When I saw this property, I realized that we should jump on it. Duplexes in our area are quite rare, and even less often they bring cash flow.
There were a few more offers, some entirely for cash. We were a little fortunate that we were dealing with a bank that only cared about the total. We offered $ 130,000 and I think we barely outperformed the other offers.
Good deals are a little harder to find these days, but there are some great new platforms out there like Suspension which are focused on providing real estate for rent throughout the country.
Although I have not purchased anything through Roofstock yet, I have an account and I am following the market. If you are looking for an easy way to find a property to rent, I would recommend checking them!
Why did we buy it
I think it’s always important to have a good reason for every property purchase. Otherwise, it’s easy to get carried away with buying something just because you can’t wait to get started, or want a project, or just don’t want to miss out.
For us, we set our criteria in advance, and the property corresponded to them:
- 10% cash on cash back
- monthly rent of at least $ 1000 per month (proxy to avoid bad quarters)
- at least $ 200 per door after deducting expenses.
It was actually a great starting hotel for us, although we didn’t know it at the time. One side of the duplex has already been completed and the tenants wanted to stay. They were paying a non-market rent of $ 800 a month, and we agreed to keep their rent below market, but raise it to $ 900. Their side was generally in good condition, but almost everything was original (kitchen, bathrooms, etc.).
The other side of the duplex proved to be a disaster and needed a major overhaul. But with one tenant, they mostly covered the mortgage, and we renovated the other side.
When we did our calculations, we knew it was a good deal and easy to execute. rule 1%… Even if one side was rented out for $ 900, we thought we could rent the other side for $ 1,100 once we got it repaired, which would bring in $ 2,000 a month.
Numbers (on paper)
I have already spoken a little about numbers, but here they are in detail. We ended up closing at $ 128,600 with an additional $ 5,000 rebate from the seller. Upon inspection, we found that it required foundation work (at least we thought so at the time) and negotiated concessions based on this and a few other things.
We bet 20% and borrowed $ 102,880 at 3.75% per annum. I wish we could get these terms today! Including insurance and taxes, our monthly mortgage payment was about $ 900.
We received $ 900 for the rent on one side, and from the calculations in the area, we thought we could get $ 1,100 on the other side as soon as we got it repaired. We received offers from contractors and thought that the repair of the free side would cost about $ 30,000.
By including taxes and insurance in our mortgage payments, we also wanted to factor in our job, maintenance and capital costs. We decided to act on our own to avoid these costs. I honestly don’t remember which numbers we used in our calculations, but we usually assume that there will be a 1 month vacant apartment per year (about 8% of the rent) and maintenance / capital costs are 15% of the rent. boards. So, if we could get a $ 2,000 rent, after spending, we hoped to get a cash flow of $ 640 a month. ($ 2,000 – $ 900 mortgage – $ 160 vacancy – $ 300 maintenance / capex).
With a down payment and closing costs of about $ 30,000 and an additional $ 30,000 to repair one unit, we would go all-in for $ 60,000 and generate $ 7,680 in cash flow per year. almost 13% on cash back! And on top of that, we get a reduction in the mortgage balance as tenants are slow to pay back our principal as well as any fees.
RELATED: How to invest in real estate with no money (really)
Real numbers (cold, harsh reality)
In fact, we were new to real estate investing and didn’t know what we didn’t know. And in the beginning, we made some costly mistakes. We got into this knowing that we would make some mistakes and have to learn along the way. (Or at least I think my wife was a little shocked by my initial incompetence …) Most of our mistakes were minor and provided a good opportunity to know what to do better next time. Unfortunately, there was one big mistake that cost us a lot, and I wish we didn’t have to learn the hard way.
Mistake # 1 – underestimating the amount of deferred service
We knew that the house was not well maintained and that many of the major systems were outdated (HVAC, water heater, roof, etc.). But they were in working order, so I figured there was still life in them, so we decided not to replace them beforehand.
Shortly after our first tenant moved in, the water heater started leaking and we had to quickly replace it. Having to do something as the emergency repairs will cost you and it will cost us almost double what we should have paid to replace the water heater. Shortly thereafter, we decided to replace the water heater on the other side before that happened, which cost us $ 800 instead of $ 1600.
We did use HVAC units for a few years, but spent quite a bit on maintenance and added headaches with tenant calls to try and keep them running. In the end, after a few years, we replaced both devices at the same time for about $ 10,000. Luckily, we had good cash flow and still made a profit for the year even with that. But in hindsight, we should have been more prepared for some of the big capital expenditures and have taken care of them ahead of time.
In addition, the property is constantly experiencing drainage problems due to the way the land is arranged and we have spent quite a bit of money trying to fix this to prevent water infiltration. I hope our last fix is the last, but this is another area that we definitely haven’t planned on spending thousands of dollars over the years, and which we pay a lot more attention to when buying a new property.
Mistake # 2 – don’t buy a flat roof house!
I will just say that I will never buy a house with a flat roof again. This is a service nightmare.
The duplex has the usual sloping tiled roof in the middle, but the roof over the bedrooms is flat. One side was relatively trouble-free, but the other seems to leak almost every time a storm happens, no matter how much repair, patching, and re-application of resins has been done. We have applications for restructuring the frame and adding a ramp to the roof to fix the problem once and for all, but it will be very expensive. If we decide to keep this house for a long time (more than 20 years), we will probably bite the bullet and invest in this renovation.
Mistake # 3 – managing contractors
We met with several contractors, got a few offers, found the one we liked and saw that it worked well. We signed a contract and paid him 50% up front (I think you can see where this goes).
It all started out smoothly, he progressed quickly and did quality work. But suddenly the work slowed down. He was never there, nothing was done, and we could not reach him when we tried to call. When we did get in touch, he assured us that everything would return to normal, but his promise never came true.
After a few weeks, we eventually drove to his house and ran into him. He had a story about how he injured his hand, and this and that. Soon after, he completely stopped answering our calls and left the city. I guess what happened is that he fell behind and used the next job to pay for the previous one, and it was us (and possibly others) who were eventually caught with the bag.
In total, we lost about $ 15,000 due to this contractor. for the work we paid him for, but he never finished. We have learned from our own bitter experience what every investor should learn – never pay a contractor more for work than was done.
Fortunately, we have learned our lesson and now we have a stronger contract that details the payment schedule and what needs to be done before the next payment is made. We found another contractor who completed the job and he really helped us on our next few projects.
Where did we end – still a happy ending
Although we thought we were going to go all in for about $ 60,000, after our mistakes, the increased lead times and costs, and some other repairs that came along in the process, we ended up investing about $ 83,000.
All in all, for our very first attempt at investing in rental properties, it still turned out to be an excellent cash-flow property. Over the 6 years that we have owned it, we have received on average about $ 11,000 in cash flow + principal payments per year, and it has increased in value by $ 120,000. If you look at this in terms of overall return, our initial $ 83,000 yielded an average annual return of 21-24% (depending on whether you use CAGR or IRR), compared to an average return of 12% for the S&P 500 for the same period. a period of time.
In fact, our biggest problem right now is that real estate has risen so much that taxes are rising much faster than we can raise rents. The day may come in the near future when there is no point in renting it out anymore and we will sell and use the cash elsewhere. But this is the best problem a real estate investor can face!
Have you ever thought about investing in a rental property? What’s holding you back? Let me know in the comments!