Second Buy and Hold Purchase

[Kyle Thomas]

I wrote about my first buy and hold purchase almost a year ago. I can link to it if you find this post helpful.

My second purchase was much more involved than my first for two main reasons: I learned more about investing from BiggerPockets and my foot was broken. I was home from work for several months and had plenty of time to invest. 

I found the second property on the MLS just like I found the first. I learned several things from my first purchase that I wanted to capture in my second one. I buy properties in a tertiary market, so it was critical that it had to be a value added deal. At the least, I knew I wanted to hit the two percent rule on the front end and be two units or more. There aren't any properties like this available, so I combed through at least 50-100 deals and looked at about 10-15 before I found one. The first lesson from this is that you have to look at EVERY available property. I had skimmed past this duplex many times because the front of it didn't look great. It was actually as simple as a little worn out paint on the bottom of the foundation that made it look unappealing. The property also had to be in an area with a high inventory of possible future properties since scale is a very important consideration to growth.

Once I took a look, I saw that the numbers could work if I could get it for 80k or under. We settled on 77k. This was possible because we had a great realtor who is an investor himself. The utilities were split, except for the water and sewer. Each unit had three bedrooms (or two since there were walk-through bedrooms on each side) with one bathroom at about 1400 sqft a side. I underwrote it to 750 in rent/side, 10% vacancy, management at 5% (that's low for most management), and capex and repairs at about 250/month. The cash-on-cash return was just over 18% with a total ROI of just over 21%.

I financed the property using a conventional residential investment loan and wrapped 2% of the closing costs to lower my capital outlay. I had a small minority equity partner with a family member. I won't go into the creative financing in this post, but it's important to learn the laws and how to find potential partners. This enabled me to almost simultaneously move into my next deal. The interest rate was just over 5 with a 30 amortization and no origination fees from a local, portfolio lender.

We bought the property vacant as this is often desirable because you get to screen your tenants and train them your way. We ended up putting several thousand more into the property to get it ready, but as BiggerPockets taught me, I was conservative with my pro forma, so the actual rents came in at 775 and 795. I was also conservative enough to have enough cash flow for an unsuspected new roof (insurance covered most of it) and water heater that had to be done throughout the first year, just to name a few things. This is probably my favorite purchase, but has come with some unexpected capital expenditures. This demonstrates why you absolutely have to have capital or access to capital for reserves in the first year or two before they build organically. We still managed to cash flow at about 15% in the first year. I think over the next 5 years that we will comfortably be at a 20% cash on cash. 

We also learned considerably more about management and operations, which I'm happy to talk about if anyone is interested. We lived in Virginia and the property is in northern Pennsylvania if that expands on the logistics of managing a rehab and tenant placement of a new property as a new investor. 

If you have any questions, insights, or feedback, please comment below as there's always something that gets overlooked or could be improved upon. The most important thing to me is to take action even if you make a few mistakes.