3rd Duplex - First Off-Market Deal, 36.9% First Year Total Return

[Kyle Thomas]

I hope this post helps some of you out there apprehensive to put together a deal without knowing how to do everything up front.

I bought my first deal and waited a year to do my second deal because I didn’t know anything about creative financing. After learning about it thanks to BP, I had the funds and found my third deal before the second one closed. This presented a problem as the bank didn’t like the idea of me simultaneously financing another property, so I hurried the process and delayed the third from going to the bank.

I found this property on Craigslist. I saw the listing after combing the site several times a week. I called the owner immediately. She said that there was another interested party that had looked at the property. We moved quickly to look at the property and make an offer. She thought she might be able to get more than my max of 65k, but our value became clear when I asked her if the other party had a contract, settlement company, financing arranged or cash to purchase, etc. This was how I was able to get the deal: taking care of everything in an expeditious manner while having or finding the answers I didn’t have. For instance, I didn’t have my own contract, but I knew that a good attorney could help me with this.

The seller had recently lost her husband. She knew very little about the property because this was his project. Additionally, she didn’t respond to calls or emails for days on end, so just getting the contract signed was daunting. I had to take some heat from the banker and other parties that were trying to get things done, while at the same time being patient with a seller who was clearly having tremendous personal issues after the loss of her spouse.

The property was a duplex. We purchased it for 65k. One unit was vacant and the other was rented for 575. I knew the market rent was 750. My only other experience inheriting tenants at this point was on a fully occupied duplex. One unit was rented at 750, market rent, and the other was rented at 580, not market rent. The below market rent held a below market tenant that was almost a disaster, but that’s another story. I estimated that I could successfully increase the rent to 675 or end up with a vacancy for a month that would then end up renting for 750 a month. I projected a 19% cash-on-cash based on the as-is rent and a projected 650 on the vacant unit. The cap rate was just over 11.

Fast forward a year and the results are in. The tenant moved out after we gave them a 2-month notice that the rent would increase 100. It was a relatively smooth process compared to the first property we bought. The vacant unit was our most difficult to date. It was my partner’s greatest objection to this property. It took us about six weeks to rent it if I remember correctly. The tenant told my property manager that he plans on dying in it, so we hopefully won’t be repeating the renting process again during our ownership. The cash-on-cash came in at 29%; the total return was 33.5%.

The most valuable part of this property comes from the value-add. Using our going in cap rate, we added $24,364 to the property value, or 36.9% in the first year. Since the property is stabilized with market rents, it would be more appropriate to lower the cap rate as a lot of the risk has been removed from the asset, so this is probably a conservative valuation.

This purchase led to our current strategy: finding hybrid value-add opportunities that are off-market. We find the best properties are held by guys that are electricians, plumbers, engineers, etc. because they take care of these properties above and beyond what the landlords in the area do, driving down repair and capex expenses. We also find that there are quite a few properties that fit this description, which is another reason why we think this is a scalable strategy.

Let me know what everyone thinks or if you have any questions/comments.