Diary of my first Apartment - 5 units!

[Brent Neuenschwander]

Hi everyone, I just discovered this forum and after reading through a few posts I thought it would be helpful for me to keep a log of how everything is going with my first real estate investment: a 5 unit building that is in rough shape. I’ll try to upload some pictures shortly if anyone is interested. I’ve definitely learned a lot in the short time since I’ve purchased, and I’m thankful for any pointers or words of encouragement.

A little background and info on the property: 5 units, 1 building, built in 1935. Acquiring in a short sale for $50k cash. Contract was signed on 12/1/16 and we didn’t close until 3/3/17. There are four 1b 1b units and one 2b 1b unit. When we closed on the property, only one of the 5 units was rented. We researched the local market and found the rents to be below market, averaging about $450 for the 1 beds and $550 for the 2 bed. Other apartments in the town are going for ~ $525/1 bed and ~ $650/2 bed. The building had been plagued by poor maintenance and management for a while.

Our initial estimate was that repairs would total ~ $40-50k. We knew a new roof and gutters were needed – in fact, while waiting to close, water came in from a leak in the roof and opened a hole in one of the units. Our inspector told us 3 of the 5 units had 60 amp electric service and we planned on getting those up to 100 amps. We knew everything needed to be painted, new flooring in most of the units, as well as new water heaters. The appliances are old but functional, and we planned on cleaning and trying to get more use out of what we could, and replacing when needed. Same with bathrooms – planned on replacing a few nasty vanities/toilets/showers while cleaning others.

We closed on 3/3 and the next day went and talked to the one remaining tenant. She was on a verbal month to month lease. We offered her two options: 30 days notice and vacate, or sign a new lease with a $50 increase (up to $500/month), along with 1 month security deposit and a $125 cleaning fee. She agreed to the lease which would start in April. A few days later, we started calling contractors to try and get quotes. We had originally planned on hiring individual contractors and managing it ourselves, but rethought that after realizing our lack of experience and time might not allow that to work. It amazed us how hard it was to even get anyone to answer or return our calls. We were able to get two quotes on the roof/gutters and one quote on the interior reno. We also had some scope increase: the electrician who came out informed us that instead of only doing 3 units upgrading to 100 amps, all 5 units were actually 60 amps. I had my brother (an electrician who is now an electrical engineer) come out and confirm this. That was a big lesson learned: Don’t trust an inspector when it comes to sizing electrical service. Even though the service box might say 100 amps, and even though the main breaker at the top of the box may say 100 amps, the only way to really know this is by sizing the conduit/wire coming into the box from the meter. Lesson learned: bring along an electrician for our next inspection.

Once we got quotes back, our renovation estimates were much higher than initially planned. We had budgeted $40-50k for everything. The GC quote for roof/gutters/all interior work for the 4 vacant units was $49k, the electrical quote was $6k, and the water heaters was $4k.

Right before our water heaters were getting installed, I met a plumber at the apartments to get all the water turned back on for the 4 vacant units. The previous owner had said she had winterized those 4 units and I wanted to have running water so they could test the new heaters. The plumber turned on a valve, and about 2 minutes later the one remaining tenant ran into the basement screaming that there was water coming from her ceiling. We shut off the valve and looked at the damage – the leak seemed to be stopping and I crossed my fingers that it wasn’t too bad. The next day, got a call from her saying her ceiling was about to come down and the water was back! I drove up and took out about 6’ x 3’ of her ceiling. Although the water had only been going for ~ 2 minutes, obviously that is still a lot of water. It had initially soaked into the insulation above her ceiling. Once everything had soaked, the leaks came back and the drywall started to sag. It was at this point that I wondered what the hell had I gotten myself into. Visions of replumbing the whole house went through my head. I spoke with my wife and we agreed to ask to tenant if she was interested in leaving. We had wanted to turn her apartment also, but figured we would get to it in the fall once she moved out. Now, with a big hole in her ceiling and plumbing issues, it seemed like it might be best to have everything empty. We offered to give her free rent for April if she would agree to terminate the lease, and she agreed. We’re waiting for quotes from the GC to add her apartment to the renovations, but based on the other apartments, I’m guessing ~ $10k.

So, about a month and a half into this, things have been interesting! Right now, instead of $40-50k for reno, we’re looking at somewhere around ~ $70k! We also decided to look at painting the outside. The siding is a pretty ugly color and slightly different on two sides of the building, and just makes the place look run down. This is another thing, along with the 5th unit, that we planned on doing in the fall. We're going to have to look at available cash and see what we can swing, but I think it needs to be done. And I'm sure there will more things that pop up. All told, if I can get this place turned around and rented to market rates for around ~ $140k, I'd be happy. Actually, I'd be more than happy. At market rates, that should generate about ~ $17-18k NOI and the asset will be pretty darn nice and updated (I hope). It's been crazy/scary/stressful/exciting so far! It's neat to be doing something so different and new and I think I'm catching the real estate big bug time!

We decided to do cash for this deal, and I believe we’ll be able to pay cash for the whole thing. I know that might not be the most popular option, and looking back I may regret it, but for now I’m fine knowing that I don’t have to worry about any mortgage while we turn this building. Being our first project, it’s just a little less stressful knowing we don’t have to worry about that.

Honestly, possibly the most annoying thing with this whole ordeal has been insurance. I have a normal insurance guy I use for personal policies and he assured me it would be easy to get a policy for this. We started shopping for insurance in January and things kept getting delayed. When we closed, I still didn’t have insurance, and I didn’t get a policy until the end of March. The combination of crappy roof and 60 amps on each unit killed me. I think I spent more time going back and forth with him, other insurance companies, and underwriters than with anything else. Good learning experience!

Well this post is super long. I’ll try to keep up with it and post pics/progress and of course, any advice is always welcome. Thanks everyone!

Brent

[Brent Neuenschwander]

@ thanks for checking in - I was just up at the building a few hours ago. Lots have changed since my initial post. I got laid off from my job a few weeks after posting. This slightly changed the gameplan for us. We had planned on using our savings from my day job to build up some cash and renovate the 5th unit and paint the outside. Now, we're changing course and doing all of the interior painting ourselves. This will save us about ~ $6k and allow us to still have all 5 units updated and ready to rent. We'll wait on the outside until I can find work. One frustration I've had is the pace of our contractors. Our GC has replaced the roof and installed new gutters since I first posted, but no interior work done. I also hired an electrician to upgrade all the units to 100 amps and that has been slow as well. One thing I will likely do on the next deal is try to negotiate some liquidated damages into the contract to try and incentivize the contractor to go quicker.

Definitely learned a lot so far and I'm sure that's just the tip of the iceberg. But even with the problems we've had so far (which looking back weren't super bad) and even with going through a job loss during all this, I still plan on staying in the REI game. I'll try to find some before pics and keep this updated as the units get worked.