New partnership, new deal! Combing forces in an expensive market

[Jordan Barnes]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $780,000
Cash invested: $195,000

My partner and I had been hunting for a multifamily in the greater Seattle area for about 7 months. We had started in Kitsap County but found it lacking in cash flowing properties that wouldn't require a larger influx of capital (lots of 30's and 40's builds) and we did not want our lack of experience to ruin our first deal together. Shifting markets to Snohomish, Skagit and Whatcom county (I-5 Corridor) we got very specific and upped our price point and minimum cash flow requirements. This was a game changer. Our agent, Brian Alfi at Windermere, is a true pro and eventually found this 3:2 1200sqft per side duplex in a nice neighborhood near a golf course right off I-5 on a cul de sac. The deal kept getting better, both sides being rented for $2200 each and one having a large government rental incentive. This side had even been there for four years already. We ended up buying it because it cash flowed $687 after earmarking 20% of rents for PM, CapX, and maintenance. Shortly after one side moved out (this was expected as they were almost complete with the house they were building) and we had to fill our first vacancy. The rental moratorium had just been lifted so we were able to bring the existing side to market rents less a little discount, $2420. We filled the vacancy quickly and realized a much larger demand than research indicated. The second unit closed at $2570. It has now been 8 months of $1173 cash flow plus 12% PM cost that we pocket while self managing and $500/month from CapX/maintenance that is being banked with the rest of the income because my partner and I are siding with the strategy of snowballing the rental income. Without the need to live off the cash flow we want it to compound so in 6 years ($20,076 plus 3% increase per year) we will have enough passive capital to buy another cash flowing property. All the while this one continues to cash flow and compound, and the new one will be taken down without having to touch our own savings.
It has not been all sunshine and rainbows however, one side needed a bathroom reno due to rot so we leveraged our network to complete the project for about $4000. Since we placed the new tenants ourselves as our first attempt, we did not screen properly. They have not missed rent yet or been late but one roommate disappeared over night and we were too lenient on the replacement roommate. Now they want to terminate their lease early. This is not the worst scenario as they are moving out amicably and we don't have to do cash for keys. We collected a very large deposit at move in that we will likely keep and now we will be able to update the floors and paint the interior at the start of peak rental reason, rather than the end of it. So not all is lost! A great learning experience and an appropriate amount of stress on our new partnership proving that we made the right choice on who we went into business with.
Looking forward to the next project! I hope this is encouraging for those of you in the Seattle area that you can find deals, albeit slim pickings, but they are out there. Happy hunting!

What made you interested in investing in this type of deal?

My partner and I felt comfortable with our surrounding market in an asset class we knew well.

How did you find this deal and how did you negotiate it?

The MLS is not a ghost town if you can stomach paying over, just make sure it still cash flows with 25% down. We actually lost the first bid but our agent and lender knew the listing agent, giving us the first call back on a multiple offer situation.

How did you finance this deal?

Traditional financing of 25% down 30 year mortgage. About three weeks prior the feds had just raised investment rates but we stayed the course, always sticking to our criteria just adjusting the factors.

How did you add value to the deal?

The property ended up being very close to my work giving us an easy opportunity to self manage and save on that cost. We also knew the end of the moratorium was coming because of our network and staying on top of the reports coming out. We were able to raise rents very quickly, and a lot.

What was the outcome?

Strong cash flow. Reinforced partnership. added bonus of fast equity build due to market, but also because we bought intentionally close to I-5.

Lessons learned? Challenges?

Use a PM for tenant placement. This was a our biggest lesson. But also when you are close to finding a property to buy after what feels like an eternity, be sure to breath. Excitement can be distracting and there were stuff we definitely missed. Even big stuff our inspector missed!

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Brian Alfi at Windermere and Dan Keller at New American lending! True pros with all the connections and knowledge an investor could need.