Deep dive: My first investment property in Portland Oregon

[Alyssa Campbell]

People generally buy an investment property for one of two reasons. Either they are hoping for cash flow or banking on appreciation. I don’t have any delusions about knowing how to time the market so I decided to go for the cash flow approach. I looked at hundreds of properties before I found one that provided the cash on cash return I was looking for.

From what I had read, a 10% cash on cash return was a good target for Portland, Oregon. The market here seemed especially difficult to turn a profit on so I learned to hone in on a few budget breakers beyond the sale price: taxes too high, HOA fees, rent too low and properties with deferred maintenance (lots of stuff needing replaced).

I finally found my diamond in the rough in late 2016. The property was a newer build townhome with two separate living quarters and no HOA. Say what? Yeah, and the realtor who listed it didn't put any of the keywords investors are looking for in the ad. Had they had put any words like "cash flow", "rental", or "legal ADU" it would have been game over. As it was I ran the numbers after it had been up only a day and we put in a full price offer of $250,000. We believed the second unit being functional and legal placed the value closer to $280,000 so already we just jumped into $30,000 in equity.

This google spreadsheet is how I ran my numbers. Feel free to use it and make it your own. It was what made it possible for me to quickly analyze the return on hundreds of properties. The purchase price was $250,000 and I assumed I would roll 2% of the closing costs into the loan. The closing costs are generally 5% of the total sale price so I assumed the other 3% not wrapped in my loan would be out of pocket.

Investment properties generally need 25% down so with an interest rate of 3.5% I could see I would need around $71k for closing. This townhome could be divided up to be a 2 bed/2 bath and a 1 bed/1 bath. Two bedrooms in the area went for around $1500 a month and one bedrooms for around $900. I included utilities in my rent price and landed on $2,573 per month.

My assumptions

• 2% annual rent increase
• 5% vacancy
• $3,700 for property taxes annually
• $370 per year for insurance
• $500 for maintenance & repairs annually (this is very low because it was a newer unit and my husband and I would do the vast majority of any work needed)
• $4,152 per year for utilities which included water/sewer, gas, electric and garbage
• I added in $3,000 a year cost to borrow. I did that because to get the money for the down payment I did a cash out refinance on my home and $3,000 was much my home’s mortgage raised by. 
• Revenue of $2,573 - (Mortgage of $865 + $977 expenses) = cash flow of $612 a month

The annual cash flow looked like it should come out to $7,341 the first year and grow every year after. That made it a projected cash on cash return of 10.32%. That doesn’t include appreciation. The cap rate came out to 6.93%. What’s even cooler is if I wouldn’t have included the cost of borrowing my down payment in the spreadsheet it was telling me I would make a 14.53% cash on cash return.

For my market I felt like it was a home run. Since purchasing the townhome 4 years ago we believe the property is now worth around $350,000 and we have been averaging closer to 14% cash on cash per year. It turns out is was a pretty good buy, however, given the housing laws in Portland that are complicated and burdensome I don't think I'll be buying here again. 

I am a novice and learning as I go so if you see any blaringly obvious errors in my numbers or approach please let me know. Thanks! 

[Dan H.]

I think you made a fine 1st purchase, but I would recommend against your rationale for the lower maintenance costs (which is really maintenance and cap ex).  Here is why:

• No matter how new an item is, its lifespan starts when put into service. You want that lifespan costs to be estimated evenly over the expected lifespan otherwise you have spikes for the expensive actuals. You really are pushing into the future an increased cost rather than level loading it. So your COC is 10% now, but in 5 years when items are not as new you COC takes a hit as maintenance/cap ex increases. Not the way I would suggest trying to estimate your return.
• You time is valuable.  Even if it results in lower financial cost the real cost includes your time.  Having a pro forma that depicts your time as being worthless is not a good pro forma.  I want my pro forma to be accurate even in the event of expected circumstance changes.
• It does not scale well.  Sure you can do most of the repairs on 2 units, what about 10 units (about when I gave up)?  20 units?  25 units?  You want your pro forma to be accurate as you scale.

For similar reasons my pro forma always includes PM whether we PM ourselves or use a professional PM. Our time is worth compensation. Circumstances can change and we may need to use professional PM. At some point if you scale enough, being the PM is difficult. We are mid 20 units and have 6 with professional PM (2 STR and 4 LTR). So we self manager ~20 units. It is consuming more time than I would like.

Congratulations on getting a fine start on your Re investing.

Good luck