My first two deals in the Real Estate Game (Overview / advice wanted)

[Ryan Burris]

I am still quite new to real estate with only 2 deals under me. I am making this post to give others an idea into the raw numbers of a few properties and see a breakdown as that would have helped me quite a bit. Also looking to see more seasoned investors thoughts on these deals and markets and figure out my next steps. I want to expand but am unsure at the best routes. 

Deal #1 Purchased in 2022:
Single Family home in Gary Indiana 46408
Purchase Price: 80k
Current Rent: 1000

Property Management (Vilgar Property): 10% monthly rent
Taxes:         1940 /yr | 162 /month
Insurance:    840 /yr | 70 /month
Cap Ex: 30% rough projections

Section 8 long term tenants not many issues. Cap Ex was relatively high last year due to a water line leak wiped out a good portion of the profits the Cap Ex that year was around 48%of rent since rent was lower. This year Only half way through the year Cap Ex is at only about 10%. I purchased all cash for my first deal for a few reasons. I wanted to learn and if it were to go bad id rather lose my own cash than be upside down in a bank loan. Also at the time i was worried about the 3.5% interest rates, so feel free to laugh at my stupidity there. 

CoC returns sitting close to 10% which I am happy with. There is still quite a bit of upside for this property as well current Fair market rates for Section 8 in Gary for a 3bed is 1539. Guessing an appraisal would be somewhere around the 100k mark for the property this is all speculation based on comparable properties.

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Deal #2 Purchased in Oct 22:

3/3 Duplex in Milwaukee 53204
Purchase Price 145K
Current Rent: 800/1025 (1825 total)

Property Management: Smart Asset Management 8% monthly rent
Property Tax:  1587 /yr | 133 /mo
Insurance:       1060 / yr | 89 /mo
Utilities:            1800 /yr | 150 /mo
Cap Ex: 30% projected (20% last year | 35% this year)

Longer term tenant in the one under rented unit. Cap Ex again quite high on this property, lots of repairs and issues water heater replacement, bathroom tub replacement etc. This one again was purchased all cash.

This one is hurting a bit, CoC return only at about 5% seem like repairs and cap ex issues eating me alive. if I had a loan at current rates would be losing cash each month. It is slightly under rented for the area just slowly trying to raise on long term tenants. Thinking maybe I paid too much for this property as well. Id guess a current appraisal would be somewhere 150-170k depending on how nice the units are cleaned up.

I know I am not factoring in appreciation, the plan was to purchase in cash have decent cash flow as a better means to invest money that was not doing much. Heloc / Cashout Refi after a few years and purchase more properties in the Milwaukee / Ohio areas. I do know also this short time span is always hard to tell how they are actually doing. Just wanted to share my first two deals in case it helped anyone, and get some ideas myself on next steps to expand. Let me know what you guys think please.

[Marcus Auerbach]

Quote from @Ryan Burris:

I am still quite new to real estate with only 2 deals under me. I am making this post to give others an idea into the raw numbers of a few properties and see a breakdown as that would have helped me quite a bit. Also looking to see more seasoned investors thoughts on these deals and markets and figure out my next steps. I want to expand but am unsure at the best routes. 

Deal #1 Purchased in 2022:
Single Family home in Gary Indiana 46408
Purchase Price: 80k
Current Rent: 1000

Property Management (Vilgar Property): 10% monthly rent
Taxes:         1940 /yr | 162 /month
Insurance:    840 /yr | 70 /month
Cap Ex: 30% rough projections

Section 8 long term tenants not many issues. Cap Ex was relatively high last year due to a water line leak wiped out a good portion of the profits the Cap Ex that year was around 48%of rent since rent was lower. This year Only half way through the year Cap Ex is at only about 10%. I purchased all cash for my first deal for a few reasons. I wanted to learn and if it were to go bad id rather lose my own cash than be upside down in a bank loan. Also at the time i was worried about the 3.5% interest rates, so feel free to laugh at my stupidity there. 

CoC returns sitting close to 10% which I am happy with. There is still quite a bit of upside for this property as well current Fair market rates for Section 8 in Gary for a 3bed is 1539. Guessing an appraisal would be somewhere around the 100k mark for the property this is all speculation based on comparable properties.

------------

Deal #2 Purchased in Oct 22:

3/3 Duplex in Milwaukee 53204
Purchase Price 145K
Current Rent: 800/1025 (1825 total)

Property Management: Smart Asset Management 8% monthly rent
Property Tax:  1587 /yr | 133 /mo
Insurance:       1060 / yr | 89 /mo
Utilities:            1800 /yr | 150 /mo
Cap Ex: 30% projected (20% last year | 35% this year)

Longer term tenant in the one under rented unit. Cap Ex again quite high on this property, lots of repairs and issues water heater replacement, bathroom tub replacement etc. This one again was purchased all cash.

This one is hurting a bit, CoC return only at about 5% seem like repairs and cap ex issues eating me alive. if I had a loan at current rates would be losing cash each month. It is slightly under rented for the area just slowly trying to raise on long term tenants. Thinking maybe I paid too much for this property as well. Id guess a current appraisal would be somewhere 150-170k depending on how nice the units are cleaned up.

I know I am not factoring in appreciation, the plan was to purchase in cash have decent cash flow as a better means to invest money that was not doing much. Heloc / Cashout Refi after a few years and purchase more properties in the Milwaukee / Ohio areas. I do know also this short time span is always hard to tell how they are actually doing. Just wanted to share my first two deals in case it helped anyone, and get some ideas myself on next steps to expand. Let me know what you guys think please.

What you experience in Milwaukee is pretty typical for a class D neighborhood. When you look at your insurance policy you will see that the replacement cost of the duplex is around $450,000. It was built in the 1920 and is over 100 years old, meaning that a lot of big-ticket components are past their design life. At some point you can't repair things anymore, you have to replace.

Your rent is somewhat based on the current FMV, not on replacement value, which means long term your capex will exceed cash flow. Depending on where you are in 53204 appreciation is lagging behind average. When you zoom out and look at the big picture every rental property needs a total gut rehab every 30-50 years at about $50-$80 per square foot, which will long term wipe out all your cash flow and then some if you don't have corresponding appreciation to offset.

I have been investing in Milwaukee for 15 years and it took me a while to see this pattern. If your rent would be somewhere closer to 1% of the replacement value, the long term capex picture would look differently, but that's obviously not realistic in the Walker Square area.

I know this is not what you want to hear, but case in point at one of our workshops I had an investor who has owned a sizeable D-class portfolio for almost 40 years, self-managed, self-repaired, re-leveraged to pay for capex - and he said he has basically nothing to show for in terms of retirement, so he has to keep working it.

Food for thought.