Lots of Updates Coming!

It's been a pretty slow year.  Not a lot happened except building up the bank account.  We thought we were about to move into the holidays without much going on but then everything happened at once.  I'll probably arrange them into single posts, but here is just a short list of the items we're embarking on in the next 30-90 days (The big range is only because I have no idea how long each one will take.
-- 2 Refinances
-- Property #11
-- Property #12
-- Property #13-17

On top of that, we have a foundation issue and a downed tree to deal with.  It's going to be an interesting 3 month period dating from Nov - Feb.  Lots more to come in the near future.

Acts of God

So one of our properties had a tree fall down very close to it.  It was close enough that it looks to have done around $500 worth of damage.  No major damage but 10 feet to the left and we might have had a duplex :)

Here is the interesting part.  The tree that fell was from a neighbor's yard.  Turns out that even though the tree was on his property, he's not liable for any of the damage or even the tree removal.  All he is required to do is remove the tree off his property and leave whatever is on our property for us to deal with.  Apparently it's an act of god (because it was weather related) and it doesn't matter where the tree was.  The only exception is if it's obvious it was negligence by the neighbor, such as he cut the tree down or it was a perfectly sunny day and the tree just fell (the law says he should have known it would fall).  But simply because some wind during a storm blew it down, it's no one's fault and everybody is responsible for their own property.

The only way we could have made the neighbor responsible is if we would have notified the neighbor that the tree was a concern. Even then from what I gather, we only have a 50/50 shot of sticking it on him.

Fortunately the neighbor is a nice guy and we think he's going to pay for the tree removal or at least half of it.

Now that we know this, we are aware of all the trees around us and if we see any that look dangerous, we now know to let the property owner know that the tree is of concern (via certified mail).  We need to take a picture of the tree and include that as well.

The Last Few Months

Well it's been ~8 months since we purchased our last property.  We're still at 10.  We've had several properties we've looked at but haven't moved on for various reasons.  Nothing really special to comment on, just typical deals that don't make sense for us.  Perhaps it's because our model is slowly working it's way out of the economy.  This time 2 years ago, we were beating properties off with a stick.  Perhaps it's time to rethink our strategy again.  Due to not buying any properties in a while, our bank account has increased "not insignificantly" to the point to where more options open us for us.

We've had discussions here and there.  I started up a real estate investor meetup group earlier this year and have learned a lot from that group.  We're already averaging 10-12 people per meeting.  This month we had 16, so that's pretty awesome.  I'm excited to see where it will go.

So as of right now, 0 properties in the pipeline, plenty of capital to work with and nowhere to put it.  It could be a very quiet end of the year or a very active one.  Stay tuned.  If anything comes of it, I'll be sure to post.  Just wanted to check in since it's been a while.  Hopefully, this blog can become very active again soon.

Analysis of the Third Kind

So recently, we came across a potential property on our Bank's REO list.  It was a set of 8 residential units (townhomes more or less) in 2 separate buildings that were next to each other (4 per building).  It was listed for $960k.  At this point a property of that price is out of the range of what we can pay down, so we'd obviously need to potentially bring in a partner or do something else creative.  But before we went down that route, the idea was to find out if it was a profitable deal or not.

So we got the financials for the past year and a half.  They only had them for the last year and a half because they foreclosed on it back in 2012 and it was in bad shape.  They rented for an average of $940/unit and 7 of the 8 were rented.  There was still a lot of deferred maintenance that had to be done in early 2014.  So I took the last 9 months of expenses and averaged them out to get my number.  I realize that's kind of dangerous, but had I included further back, I would have been offering $100k for the whole lot :)  I can always put a buffer on it anyway.

We put in the numbers as best we could get them and came up with what we thought would be a decent number.  The number itself isn't really wasn't important at the time (it was more of a ~$50k range anyway) as the first step was to figure out if we were in the ballgame.  If our analysis would have spit out $400k, we could stop there.  It wasn't a high number, but it wasn't a lowball either and we figured the bank had a good chance at accepting it.

Next, we had to hone the numbers before we could put together an official offer letter (much less a contract).  The main one being taxes.  We had gone online and looked at the county and city's tax estimator and came up with a number, but it didn't match what was paid in previous years (not even close).  It was a pretty big number and we weren't sure if the number was per unit, for each set of 4, or for the set of 8.  So we just asked the bank.  They came back with nearly $3k *PER* property.  And with that, the deal was dead.  We had about 3-4 hours of analysis into it.  Our goal was to figure out if an offer was possible inside of about 5 hours.  Obviously the contract period would have the real due diligence and a lot more time but we never got there.

Keep in mind, the bank was selling them as a lot of 8 only (not individually), but they were individual residential properties as the city was concerned.  Had it been an 8-unit complex and classified as commercial, it might be a different situation.  Unfortunately, I think the bank is going to be stuck with these properties for a long time as the best number we could come up with that would make it profitable to the level we would need would be in the $300k range and while the bank may be willing to part at a low price, they aren't stupid :)

Our 10th Property/Unit

So we've reached that milestone of 10 properties/units (all SFR's).  We started this journey back in April of 2010 with the purchase of our first property on seller financing.  It was 10% down and we got 6.5% from the bank 6 months later and paid off the seller note.  Today, Property 10 is 5% down and 5.5% interest.  We've come a long way in 5 years.  10 properties, 2 states, and a LOT of learning.

Our 10th property is our best performing one by far.  The numbers are really insane.  Below is what we're looking at.:
-- Area: OK.  Not great, but not bad either
-- Purchase Price: $37,000
-- Down Payment: 5%
-- Property Management: 10% fee monthly
-- Rent: $750/month (You are reading that correctly).
-- Taxes: $900/year
-- Insurance: $300/year
-- Vacancy Rate: 0% (It's already rented upon purchase)
-- Money put into it: $0 (Upon inspection there is nothing for us to do).


Here are the results from my analysis spreadsheet:
Cash on Cash Return: 170.15%
Debt Coverage Ratio: 2.378
Vacancy Breakeven: 44.43%
Operating Expense Ratio: 23.33%
BreakEven Ratio: 55.57%

Capitalization Rate: 18.65%
Gross Rent Multiplier: 4.111
Net Income Multiplier: 5.362
LTV Ratio: 95.00%
Monthly Rent to Value %: 2.03%

Cash Flow: $331.20/month
5-year IRR (using 2% appreciation): 175%
10-year IRR (using 2% appreciation): 172%

Present Value: $11,678
Net Present Value: $9,328
Profitability Index: 4.97

Pretty crazy stuff huh?  We've never seen numbers this high.  And yes, we are only $2k to get $330/month in return.  100% of our investment back in just over 6 months.  Of course these numbers don't include unexpected expenses, but since it's already rented and we don't need to do any maintenance up front, we'll just take them as it comes.

I'll put into perspective.  One of our houses we bought for $95k.  It cash flows just under $300/month.  This house is a little more than a third of that price and it cash flows BETTER.  Again, I'm still in shock but hey, maybe we are pretty good at this real estate thing!

A single insurance carrier

We currently have 9 properties.  Since we started with just 1, that means we have been adding insurance by the way of individual policies.  Currently we have 3 different carriers.  Now that we have 9 properties we've been looking for a single insurance carrier for our current and future properties.  Our goals started out like this:
-- A single carrier
-- A single monthly payment
-- The ability to add/remove properties easily (Phone Call or E-mail).  Online portal is even better but not required.
-- The same coverage even when a property goes vacant between tenants.
-- Pay less or the same as we do now for similar coverage.

With our target for 2015 still being SFR's, we're looking at adding between 5-10 properties this year.  Once you reach the 10 property threshold, one starts to think about the complexities of your setup.  While there are many areas that we wish we more streamlined, we are tackling one at a time.  The thought process is, "How can we make managing 100 properties/units not much more difficult or time consuming than 10 properties/units?"  100 properties will of course require more time than 10 but how much more is magic number.  We don't want it to be 10x more, we want it to only be 2x-3x more.  This is how you scale and this is how you grow.

We feel the first place we did this well was with our bank.  We have a single bank that is loaning us money and a single online portal for managing it all.  Our next step is insurance.  We recently signed up to be insured through NREIG (http://www.nreinsurance.com/).  It actually met all of our required an optional items.  We had been looking for a while and when we stumbled across them we finally found our solution.  We're in the processing of switching over now but the process has been extremely easy.  So far we're satisified.  We can now easily add/remove properties, get proof of insurance, and insure our entire portfolio (whether 10 or 10,000 properties) in one single place.

So I wonder what we'll move on to streamline next?  Any thoughts are greatly appreciated :)

Venture into true Turnkey

So one thing I did not mention (at least I don't think I did) is we decided to venture into true turnkey to test the waters.  Our last 2 properties were purchased as turnkey properties from a firm in Memphis.  I won't name them for now but will talk some details.

If you've read previous posts you probably know that all 3 of us have full time jobs, young families, and we really aren't in the business of anything except buy and hold (rent) properties that are pretty much ready to rent.  We've also said anything more than a couple of thousand dollars of work (which is pretty much nothing beyond some painting, new locks, new carpet, etc) isn't what we're interested in.  You could say our first 7 properties were "turnkey" properties because they were pretty much ready to rent when we bought them.  Most required less than $1k worth of work before renting.

There are companies that specialize in full service turnkey operation for rental properties.  The quick overview of a turnkey company if you aren't familiar is that the company buys properties in need of a lot of repair for a low price, rehabs them, and sells them to people at a profit (think flipping) but there is usually a property management arm that also finds renters and manages them as well.  All the buyer has to do is inspect the house (if you want) and purchase it.  The aim is mainly at out of town investors and those who want very little time invested.  Some people think it's a scam.  Some people love it.  Some people have had horrible experiences and some have had great ones.  It's a mixed bag out there depending on who you ask.

We've done a lot of research on these types of companies and introduced ourselves to one of them in Memphis.  With our time being limited, we decided to see if this kind of property purchase could save us time and still bring in decent returns.  We've decided to test the waters with 2 properties.  It's a small investment and if it turns out horribly we've just learn a good lesson (without it being too expensive).  At this point, we've already purchased the 2 properties.  Below are the details.

When we looked at their properties, we analyzed (on paper) a lot of them.  Some of them didn't fit in with our numbers and we were honest with the company on our goals and what we were expecting out of it.  Every property we analyzed, we came back with an unofficial offer on what made the numbers work.  When we both agreed on a property, we wrote up an official offer letter and contract and started the process.  Keep in mind, we still due the same due diligence on these properties as we would if we found them ourselves.  We made sure the numbers worked.  We had the property professionally inspected, an appraisal happens, we get title insurance, etc.  We cut NO corners.  Doing this minimizes the risk that everyone out there seems to be so scared about.  Sure we might make 10-20% less cash flow than if we found the properties ourselves but we knew that going in and were willing to accept it if it saved us time.

All in all, we spent about 30% of the time purchasing these turnkey properties than we did when we found them ourselves.  So the time aspect worked for us.  The next big step was finding out if they could deliver what they promised.  Long story short, they did.  Not only did they rent out both properties for the rate they advertised, they signed 2-year leases.  The first property took ~45 days to rent and the second took ~5 days to rent.  We don't have any fantasies that 5 days will be the norm but our goal was set at 60 days so both exceeded our expectations.  One of the benefits of the turnkey property is since they are the PM as well, they can start looking for a tenant well before closing.

We're only a couple of months into it and we have no real track record with them yet.  There are still some things to be seen but everything looks very positive so far.  Seeing as how we are already rented, that's 90% of the battle.

This post isn't meant to encourage anyone to go out and do this, but only to lay out that so far our experience has been very positive.  ALWAYS ALWAYS do your due diligence.  No matter what you may try as long as you don't cut corners, if a deal is bad, you'll catch 99% of them in the process.  No one is perfect, especially us, but we've always been diligent and 9 properties in it hasn't failed us yet and when (notice I say when, not if, because everyone has a bad deal at some point) it does, the damaged should be severely minimized and we can chalk it up as a lesson learned and keep going strong!

What to do in 2015....

So all 4 properties mentioned in the last few posts are all closed and rented.  2014 taxes are done.  Property taxes are paid.  8 of our 9 properties are now rented.  It's time to begin 2015.  We've got a lot to think about.  SFR's have been treating us very well so we've got to decide if that's our future path for now or if it's time to move in a different direction.  We've got several potential refinances we can do and with our cash flow per month we've got the funds to drastically increase our unit count.

We're over halfway to a million in property.  That's something I honestly didn't foresee happening this quickly but we're looking to be there in late 2015 or early 2016.  It's a very pivotal year for us and the company.

Stay tuned as I suspect there will be lots to discuss as we go through 2015.

Update on properties and a funny appraisal

So it's a little more than 45 days for all 4 properties.  When all said and done, we're looking at ~3 months.  3 of the properties were purchased before Christmas and the last one is taking a little while longer.  We're only a few days out to close.  Everything is finally done and we just need to actually close.

This brings me to the part of the funny appraisal.  The appraisal for this last property came back about 15% less than where it should have.  It was really bad, just laughable.  I won't mention specifics as this is a public blog and I don't believe in publicly shaming anyone.  The comps used were awful.  Keep in mind, I'm the buyer.  A lower appraisal is in my benefit, but neither I nor the bank believed the appraisal was valid.  It was so bad, I'm pretty sure the bank will be having the appraiser taken off the list.  For those of you confused....while the bank can't determine who gets what property they can have appraisers removed from the list so they don't get any future appraisals.  I don't want this appraiser getting my property when I do become the seller, so I hope the bank gets this person removed.  The bank essentially through the appraisal out and said they'd loan me on a higher number without making me pay the difference.  The seller and I came to an agreement on a number that the bank agreed on as well.  It's actually the first time I've ever experienced a bad appraisal like that ad the bank lending on a number higher than the appraisal.  I'm sure I'll have many more firsts as we go throughout my career but this one was just interesting.

Our plans now are to get all of our properties rented.  Only 6 of the 9 are rented.  Once all 9 are rented, we'll go back down the path of getting more properties.  2 of the 3 are the 2 newest ones we just purchased.  We have 1 property where a tenant (our longest one) just moved out.  We're hoping by March 1st, we'll have them all rented.  Once that happens, we'll do another valuation and see where we are on cash and potential revenue and make a determination on what to do with the rest of 2015.