Real Data for Foreign Investor in C Class Assets in Metro Detroit

[Andrew Warner]

I thought it may be useful to some of those in the bigger pockets community who are new to investing in RE to share some actual data from “C” class properties.Given all the discussion around projecting returns from buy & hold real estate (eg 50% rule, how much to allow for vacancy and maintenance etc), sharing hard data may prove helpful for some investors.

First some background. My wife and I are small scale foreign national investors from Australia. We started investing in the Metro Detroit market in 2011 given the strength of the $A at the time and weakness of the US housing market. Our aim was to build up a level of passive income for financial independence / security. For those who don’t know, the Australian residential property market generally offers very low rent ratios (say around 0.3% or 0.4% per month), making it difficult to build up passive income.

We have built the portfolio up to 5 houses since then, having bought 6 houses and sold 1.  Our 5 properties are as follows:

Eastpointe 1 – Bought and rehabbed in 2012 for about $US36,000

Royal Oak CC – Bought and rehabbed in 2013 for about $US44,000

Eastpointe 2 through 4 – bought in one line at the end of 2016 for $US 165,000. They were purchased having been rehabbed in the prior years and with no major deferred maintenance.

Essentially going into the 2017 year the portfolio represents a group of houses that have 3 or 4 years of “wear” on them after a rehab process.

The results were as follows (by Property)

PROPERTY INCOME
Eastpointe 2	$10,838
Royal Oak CT	$10,800
Eastpointe 3	$12,660
Eastpointe 4	$11,401
Eastpointe 1	$10,620
Total Property Income	$56,319
PROPERTY EXPENSES
Eastpointe 2	$6,366
Royal Oak CT	$6,475
Eastpointe 3	$6,867
Eastpointe 4	$7,061
Eastpointe 1	$5,587
Total Property Expenses	$32,357
NET PROPERTY INCOME
Eastpointe 2	$4,472
Royal Oak CT	$4,325
Eastpointe 3	$5,793
Eastpointe 4	$4,340
Eastpointe 1	$5,033
Net Property Income	$23,962

Alternatively here is the result by expense type (and compared to budget):

	Budget	Actual	Actual to budget
Net Revenue	$48,400	$56,319	$7,919
Management Fees	$5,280	$6,636	-$1,356
Insurance	$2,958	$3,939	-$981
Taxes	$9,486	$12,092	-$2,605
Repairs, inspections	$9,000	$7,255	$1,745
Utilities, Legal Fees, Other	$-	$2,435	-$2,435
Profit	$21,676	$23,962	$2,286

Finally, here is an average breakdown per dwelling:

	Per Annum	Per Month
Management fees	$1,327	$111
Insurance	$788	$66
Taxes	$2,418	$202
Repairs, inspections	$1,451	$121
Utilities, Legal Fees, Other	$487	$41
Profit	$4,792	$399

A couple of points re the above numbers:

-We had nil vacancy over the 2017 year.We also had some back rent which got paid. The result was that we actually received above 100% of potential rent.Our total maximum rent should be $4,420 / month or about $53k pa. Needless to say this is an amazing result and will not be repeated.

-There was a mix up on taxes between us and our property manager, meaning that we had to pay some of the prior year’s taxes in 2017 – this pushed the tax expense line up.

-The Royal Oak Charter Township property had a very bad year in 2016 with tenant issues. Some of this bled across into 2017 as utility bills had to be paid from the vacant period. Also one of the Eastpoint properties has us paying about $60 / month for water under the lease, which we hadn’t budgeted for.

-I think we have a very good property manager.

Please note that this likely represents an above average year – due to no vacancy / turnover. If one house had gone vacant (say average rent of $900 / month) then the impact may have been:

-Lost rent $900 (assuming can get tenanted in one month, which would be a great result)

-Re-letting fee $900

-Utilities, mowing / snow clearing during vacant period – say $300

-Repairs prior to re-let – say $1000 (could easily be much more)

-Total cost, say $3,000.Could be more, especially if the tenant turning over was because of delinquency. By way of example, when the Royal Oak CT went delinquent there was nearly $5,000 in repair, utility and legal costs, before consideration of lost rent.

I hope new investors find this data useful in their deliberations.

[Andrew Warner]

Thought I would post another year's data.  Same 5 houses, with 2017 and 2018 comparison

	2017	2018	Chg
Net Revenue	$            56,319	$              53,140	-$   3,178
Management Fees	$             6,636	$               6,118	$     519
Insurance	$             3,939	$               3,015	$     924
Taxes	$            12,092	$               8,579	$   3,513
Repairs, inspections	$             7,255	$               4,193	$   3,061
Utilities, Legal Fees, Other	$             2,435	$                  432	$   2,004
Profit	$            23,962	$              30,804	$   6,842

...and on a per dwelling basis

	Per Annum	Per Month
Management fees	$             1,224	$                  102
Insurance	$                603	$                    50
Taxes	$             1,716	$                  143
Repairs, inspections	$                839	$                    70
Utilities, Legal Fees, Other	$                  86	$                     7
Profit	$             6,161	$                  513

So much better than 2017 (a year we were still very happy with).  A couple of points:

- No vacancy, no turnover - we are having a very good couple of years on that front...property manager seems to be doing an excellent job.

- Tax cash cost is down, but that is in part due to paying more than a year's taxes in 2017.  Conversely in 2018 there was a Winter tax bill which will now fall into 2019...so I think the tax position appears a little better than it really is on a proper annualised basis.

- Repairs way down, which is really pleasing.  This is probably linked to tenant tenure and good property management.

- No major capex - at some point this will come due (eg new rooves), but is not hurting us yet.

Hope some potential investors find this useful.

Thanks

Andrew.