Experiences of a "Relatively" New R.E. Investor, Part Four

I'm back with the fourth and final installment of this series.  After finding BiggerPockets, I realized that I needed to change my investing strategy.  Up to this point, I was completely satisfied with purchasing a Single Family Residence (SFR) after every military move.  I suddenly realized that this would not get me to my financial goals in the timeframe I wanted.  I needed to change…and fast!

My first step was picking a market.  Though I lived in Illinois, I felt that the taxes were slightly prohibitive.  In addition, I was very determined to find a multi-family residence (MFR).  The opportunities in Illinois were slim at best.  However, looking right across the river, I saw many wonderful prospects in great old St. Louis.

The next step was performing market research. As I mentioned in My Last Blog, there were many aspects of St. Louis that made it great.  But I was also made keenly aware that areas could change drastically street by street.  Also, east and north St. Louis, in large part, could be considered war zones.  Therefore, I narrowed my search to MFRs in South City.  From there, I chose a price range of between $50k – $150k for 2-4 unit MFRs.  Most properties that met that criteria fell near Tower Grove or within the “State Streets”.  For anyone familiar with the state streets of St. Louis, you know that most middle income individuals tend to avoid them.  Further, the conditions there do in fact change drastically from street to street: you can go from a B- neighborhood into a D- neighborhood in a single step.  So, I had to proceed with caution: knowledge is power.

Looking back no further than 6 months, I noticed that most comps for MFRs in these two areas were going for about $20/sqft.  Many of the properties I looked at with my realtor were in pretty bad shape. The gambit ran from structural issues (e.g., foundation, roof, mold) to cosmetic.  I made offers on about ten homes, all at about 70% After Repair Value (ARV), contingent on financing and inspection. 

To be honest, I'm still unsure about what the true "ARV" is for most of these areas.  It really seems that most properties are being bought at "investor" prices, meaning established ARVs are not in place.  If I'm mistaken, this could bite me in the future.  I decided to move forward anyway as I believe informed risk is ok. 

Three of these offers were accepted with prices ranging from $50k - $60k: one of them was a duplex and the other two were 4-plexes.

Inspections revealed that two of the properties needed new roofs, and one would need sewer work at a cost of between $10 – $20k.  In my mind, this killed these deals.  The final property, one of the remaining 4-plexes, would need some tuck pointing and cosmetic work.  The owner countered at ~60k: this equated to $15/square feet, or 25% below what I considered market value.  I accepted.

Here are the numbers:

- Purchase Price: $62k (the appraisal came in at 65k, but that was due to the work needed; I'm assuming the actual price in as is condition is closer to $80k)

- ARV: $110k-120k (estimated, I think the jury is still out on this one)

- Down payment: $18k

- Expected repairs: $35k (originally anticipated $20k, but the rehab was

much more extensive than I anticipated…whoops!)

- Rent: $1700/month (I can probably raise this to $2000/month)

- PM fee: $170/month (10%)

- MX: $170/month (10%)

- Vacancies: $170/month (10%...the property management company is averaging 5%)

- Reserves: $85/month (5%...I may need to raise this as the building is 90+ years old)

- PITI (Loan Principal, Interest, Taxes, Insurance): $425/Month

- Cash Flow: $680 /month

- Cash on Cash Return: 15.4% (originally projecting 21% - Pesky repairs! AH!)

All in all, not a bad find.  I have to remind myself that this deal still has the possibility of getting worse.  I still need to get two more estimates for the tuckpointing and roof work.  I’ve budgeted $20k for this, but you never know until the repairs are complete.  However, I've left myself room to make a decent return regardless.

What really bothered me was a post reply by @Bob Hines : Tuckingpointing and roofs add virtually no value to a property.  He is essentially telling me that I’m throwing $20k into the wind…. Sigh.

Got to get better, but overall, I'm happy with this deal.  I plan to do one more deal before the year is up.  Fingers are crossed and double crossed!

Thank you all for reading.  I look forward to hearing from you.