I just finished closing on my first investment property this afternoon. It is a Fourplex in Chickasha, OK. Lots of lessons learned the hard way on this one but overall I’m very satisfied with the investment.
The Property
Nice Fourplex built in the late 80s with four 2/1s, well water and septic systems. New HVAC and remodel across the board in 2014 along with tile floors installed throughout. The property was in really great shape and had been well taken care of. A few very minor repairs were needed and were performed by seller before closing. All units were rented at closing - Two long time tenants and two new tenants.
The Deal
The two long term tenants were paying $560 per month each and the two new tenants went in at $600 per month. The long term tenants know that rent will be going up soon. The property was listed at $225,000. My initial offer on the property was $200,000 and the sellers came back at $210,000. I countered at $205,000 and they accepted.
I financed the deal with an FHA loan - 30 year term and 25% Down. I paid the lender two points up front and locked in the rate at 4.5%.
The Numbers
Monthly Income - $2,320
Monthly Expenses (including PITI, 5% Vacancy, 5% Repairs, 3% Cap Ex, 10% Prop Mgmt, Water & Garbage)- $1662.59
Monthly CashFlow - $657.41
Total Cash Invested - $62,187
Cash on Cash ROI -12.69%
Cap Rate - 8.61%
Lessons Learned
I had all kinds of challenges with the lender and communication. Some of it was things I assumed were one way but were actually another. Some of it was mistakes on their end due to using two separate databases and confusing this loan with my pending HELOC (we still ended up with a mix up on which closing company to use with which loan). Most of it was last minute calls and emails with problems on verification of funds. The lending company had a reason to delay closing at every turn. Lesson - Don't use FHA loans for buying properties. In the future, I'll use hard money or private money to buy and then refinance with FHA loans (on properties that qualify) at a later date.
Figure a lot more than you hear on the webinars for closing costs, etc.. Lesson - Between points, up front escrow deposits, expensive appraisals and a ton of other little fees, when you use a conventional lender the fees add up really fast and so you need to plan on at least $10k cash above your down payment to close.
Lesson - Don’t be afraid to make offers. I got lucky and was able to make a deal on my third property I made an offer on. I was planning on having at least ten turned down before I got something bought and I’ll probably make at least ten more before I get another bought. However, if you’re persistent, it will happen.
After looking at a lot of different kinds of properties for different purposes, I settled on small multi-family properties because I like the way they’re valued. Lesson - For my purposes, the square footage, style of home, comparable sales, etc.. really don't matter. You determine what the rents are or what they should be, do the math for the cash on cash ROI that you want and that's the value. You're not really buying real estate, you're buying a small business and it should be valued as such. The seller will either get that or they won't but in multi-family, it's more likely they'll get it.
Lesson - Over Communicate. This is true in any kind of business but you are always better off to over communicate, ask questions you think you already know the answer to, restate your intentions even when you think you were clear and get everything you can in writing and explained on the phone.
The last few days of trying to close were a stressful, frustrating circus but it could have been much worse. In the end, I’m really proud that we got the deal done and I think this wil be a great long term investment for us. I hope this post serves as inspiration to others just getting started that you can do it. It will be frustrating at times. It will look like it’s going south at times but if you stay persistent and keep your cool, You Can Do It.
