Cincinnati, OH - Rental Property - Theo Hicks and Joey Palmer - Went into contract phase of second investment property and looking for feedback

[Theo Hicks]

The Deal

• Property Details
  • Oakley, OH (this place has been exploding the past 5 years)
  • the street is one of the last places in Oakley that hasn't been improved (until now :) 
  • last year, one the other end of the same street, a investor bought up 10 lots for $650k (average property values were ~$100k and they are building a 200+ unit luxury apartment complex
  • There are about 5 of these types of complexes that have been built within that last 5 years (3 in the last year)
  • Any thoughts/feedback on buying rental properties near these massive luxury complexes?
• Purchase Price: $82,000 (seller pays closing costs)
• Renovations: $60,000
• Loan: 203k loan, 5% interest rate, 30 years, 15% reno contingency
• Down Payment: 25%
  • My partner only have $33k in cash for down payment which allows us to take get a $132k loan: $82k purchase price + $50k for renovations + 15% contingency ($7500)
  • My thoughts were to get the $132k loan and then add 15% contingency: $7500 @0% down, 5% interest, 30 years = $40.26 per month)
  • Additional $2,500 or more in renos will be paid out of pocket by me (credit cards) since I cannot just give my partner the extra cash for the down payment (just his name will be on the loan and we will alternate so we can get 8 conventional loans (4 each) vs. putting both our names on the loans and getting only 4)
  • After 1 year, we take a home equity loan to repay our out-of-pocket reno costs and to use to buy more properties 
  • Thoughts on this strategy?
• Unit 1 currently rents for $850, after improvements (adding central air to whole property, W/D in basement) we will rent for $950
• Unit 2: Total gut job and we will rent for $1,150

Income/Expenses

• Total Monthly Income: $2,100
• Expenses: $830.57, Saving: $315, Total = $1145.37
  • P&I: $531.45 + $40.26 (additional $7,500) = $571.71
  • Insurance: $100 per month
  • Property Taxes (yearly): $2387
  • 5% vacancy, 5% repairs, 5% CapEx (we are replacing roof, gutter, new A/C, and 2nd unit will be brand new everything) = $315 per month
• Monthly Cashflow: Before Saving: $1269.63, After Saving: $954.63
  • For our calculations, we use the before saving value because we both have full-time jobs and will be dumping a large portion of our paychecks plus cashflows from this property and other properties into an account so we will have ample fund if something were to come up)

ROI:

• Purchase Price = $82,000
• $33k (down payment) + $2.5k (extra cash needed) = $35,500
• Total Monthly Income = $2100
• Monthly Expense = $830.37
• Monthly Cashflow = $1269.63
• ROI = 12 * $1269.63 / $35,500 = 42.92%
• ROI (w/ savings) = 12 * $954.63 / $35,500 = 32.27%
• Cap Rate = 26.36%
• Cap Rate (w/ saving) = 21.75%

Additional Factors:

• As stated above, this is one of the last parts of Oakley that is being improved upon and the average home value is $199,500
• The house next door (that is the exact same as this property) sold last summer for $165,000
• With the combination of the two above, one of our exit strategies is converting the property into a single family down the road

Thank you for reading! We are really excited about this deal but would love some feedback or advice on ways we can improve!

@Joey Palmer