After 1 year since becoming a member on BP I’ve finally closed on my 1st rental property (4-plex). With this post I hope i can help someone who is new and is considering their 1st purchase get passed paralysis by analysis and pull the trigger! Like most newbies with no money and no experience I was attracted to wholesaling. I closed a couple deals, but I never fully committed to it and my results for the hours I was putting in was subpar. The end goal was and continues to be obtaining cash flow through rentals.
The Numbers:
4x 2 bed / 2 bath 1,000 sq ft units
Purchase Price- $175,000
Appraised at $215,000
Term- 25 years
Interest- 3.625%
P&I- $856.79
Taxes- $358.83
Insurance- $195.00
PMI- $119.00
Total mortgage payment- $1,529.62
Water- $225.00
Vacancy (5%)- $125.00
Repairs (5%)- $125.00
CapEx (5%)- $125.00
Gross Rent (3 units) - $1,875.00
Almost all expenses are covered by the rental income. I plan to submeter the water and transfer that expense over to the tenants. The city quoted me $550 per meter, it seems low from what I hear submetering prices range but if if that’s the true price I wont hesitate to make the change. I increased the rent from $600 to $625 and signed a new month to month lease with 3 of the tenants. I plan to continue increasing rent steadily as average market rent in the area is $750.
How I Found the Deal:
I listened to every podcast twice, some even more! I read the blog at least 3 articles per day every morning. I read at least 50 books from topics ranging from real estate to psychology and autobiographies of successful entrepreneurs. It hasn't been easy and I truly believe that without the right mindset I would have quit before I got started. I attended the local REI, reached out to investors, brought them deals and asked specific questions after doing thorough research! Once i built enough savings from wholesaling and my W-2 job I focused on finding the property matching my exact criteria. A 4-plex in the part of town I was renting in (5 minutes from work and my daughters daycare), $100 cash flow per door, 1.5-2.0% rule, at least 15% equity at the time of purchase. A detailed focused goal is a powerful thing my friends!
After making many offers matching my criteria I received repeated NO's. I stayed with it. As I was doing the due diligence for a 4-plex I found the neighbors 4-plex was being held under an LLC doing some google searches the LLC was tied to a local attorney's office. After speaking to several assistants and waiting on the line I finally got the owner on the phone. I asked him several questions of how he ran his units as far as utilities, rent and such as I was considering buying his neighbors property. He had no idea, he simply responded with "Well, make me an offer on mine!" Then I hit the ground running with the due diligence and ultimately bought his property.
What I Would Do Differently:
-Include a Buyers Finance Contingency. I could have lost my earnest deposit as the deal almost fell through a couple times.
-Have owner and tenants sign an Estoppel Agreement. I’ve had some questions about the security deposit and appliances. The previous owner said neither he nor I would be responsible for the security deposits given to the previous owner before him as these tenants have been in their units for many years. But as I understand I could still be on the hook for this!
-Round up and over estimate all expenses and negotiate an even better deal to account for surprises. After the appraisal the bank came back and renegotiated the term to 25 years. I pushed back, but they weren’t budging. That was an extra $100 of my cash flow gone.
-Have at least another 10K aside from your 3.5-5.0% down payment for closing and a starting reserve. This might be a no brainer but for some reason it didn’t register with me.
Thanks for reading and please let me know if you have any suggestions or tips for this newbie! Much love for everyone in the BP Community.