Real Estate Investing Update Aug 2016
We decided to take a month long "Work-ation" and head back to my home state of Massachusetts to visit family, friends, and check up on my real estate, property manager, and find some deals. It's also why I haven't been posting many updates or checking out other blogs as much.
It was great to get away from the Dallas heat, but the Massachusetts humidity is pretty bad too. It's been a great trip, but I'm ready to go back.
Finding Investments can be Hard
So, now that I'm back in my old stomping grounds, I figured I'd pick up a few properties. I've been saving up and I was totally ready to buy in to 10 or 15 units this summer. Unfortunately though, I discovered how local real estate really can be.
I didn't get to buy those 15 units, but I did find one really great deal.
Real Estate is Local
Everyone talks about how hot the real estate market is. News, TV, and just about everyone I know talks about the hot market. Where I'm from though, I don't think the market is really that hot. It's more of a luke-warm.
I live near Dallas where a property will list and sell in one day with 7 offers and go for 10% above asking price. Where I'm from, properties are spending about 100 days on market and selling for about 3-8% below asking. Granted, prices are still up 25% in the last couple years and the average days on market are coming down, but this hardly constitutes a "hot market".
But, sellers believe it's a hot market, and act like their properties are gold. I had a hard time getting sellers to respond with showings, some agents and sellers didn't even show up to the scheduled showing! It's no wonder why their property has been on the market for 300+ days in this "hot" market.
I was able to look at plenty of properties and put out several offers. Finally, I was able to negotiate a really great deal.
Investment Property Analysis
So check out the basic details of the deal on the spreadsheet.
Basically, it is a completely mismanaged rental property with way below market rents. I own 4 other properties in the same area so I know exactly how much should be charged for rents.
The units are in decent condition though and only a little work is really necessary. I think little if any work is really necessary to raise rents to market value.
You'll notice I did the analysis with Capitalization Rates instead of doing a Comparative Market Analysis. Generally a CMA is used for 1-4 unit properties while large buildings would be valued on an income approach.
Since it's more than 4 units but still pretty small, I think the appraiser will use a hybrid approach. I think he/she will use cap rates but verify the price with comps to make sure they line up.
Comps in this area will show a way higher value more in line with the ARV (after repair value) I have listed. So, regardless if the appraiser goes with the lower value derived from cap rates, or the higher value from comps, I will be paying market value or below.
I made some assumptions about the cap rates as well. I noticed that cap rates near major metro areas seem to be around 6% while in their surrounding smaller cities may be higher around 8%. This appears to be true in Massachusetts at least and Dallas as well.
I'm buying into a suburb around a small city. Though properties are listed at 8% cap rates in my area, I went with a more conservative 10% for my resale value. If I sold it and cap rates were lower, I would just make more money.
My Plan to Stabilize the Property
Upon purchase, I plan to move every tenant over to a written agreement (they are all verbal right now) and have them on month-to-month agreements. Also, I will raise every unit by $50 and one of them by $100. This will immediately increase it's rent from 2,025 to 2275.
I will then do some work to make the commercial unit rentable and put it on the market well below market rents. My goal is to just get it full asap and then negotiate an agreement where rents are lower in year one and raise in year two and three.
The commercial unit will be on the market immediately, and then I'll rotate through the other units in order to minimize the vacancies. I'll vacate and update the 5 bedroom apartment first (unit 1). It needs the most work but it will also provide the largest bump in rent.
By rotating through the units, I'll keep my cash reserves high and keep the cashflow mostly positive, except for repairs of course. Though I won't earn too much in the first year - around $4,000 (once you add back in repairs), I'll be set up to earn $20k+ every year after the first.
Real Estate is Unpredictable
When I came back to Massachusetts, I had two properties I wanted to buy. Each were 9 units and the combined cost would have been around 700k. I expected them to add around 40k per year to my net income.
Instead, one was a complete dog that needed a ton of work and was way overpriced. The other one had an indecisive seller who couldn't let go. Neither deal worked.
I saw this deal on the market but I didn't even consider it. I don't particularly like the street that it's on (for no reason, just my personal bias). I was getting ready to leave Massachusetts empty handed, and a friend convinced me to go look at it.
So, instead of buying two properties I had originally planned to buy, I found a deal for around $150,000 on a street I originally just disregarded and it will provide more than 20k per year. So for less than a quarter of the investment, I can make half the money.
In absolute dollar amounts I'm going to make less than my goals. Instead I will be earning double the rate of return than I originally set out to get. It also leaves a ton of money left over that I can use to buy more property, pay debts, or whatever else I want to do with it.
I'm super excited about this deal and can't wait to actually purchase it!
A Time for Change
It was also a time for change for me - I had to give up leadership of my Infantry Company in the National Guard. It's normal though - A commander only is in charge for 2-3 years then is given a new assignment. My time is over.
It's kind of like a breakup with your girlfriend; it totally sucks, if you had a choice you wouldn't leave, but at the same time you are relieved to suddenly find yourself free. Now I can focus more on my own family and investments.
2016 is a year of change
This new property, giving up my command, my wife getting pregnant, and deciding to travel to China next year are causing 2016 to be a big year of change for us!