Finally pulled the trigger on my first investment property after a 5-month search. The search originally started in Tallahassee, FL; went to Detroit and finally landed in Cleveland.
In Tallahassee, the seller and I couldn’t concede on $2K to strike a deal which would have landed a 12% cap rate. In Detroit, the seller was firm on their pricing and I decided against the purchase after visiting Detroit (ghost town) and learning that the tenant was a delinquent payee. I was advised of the deals Cleveland presented and decided to take my ambitions there.
The first property I took under contract was in very bad shape, habitable but still in bad shape. By visiting the property I learned that the website photos were far from a reflection of reality. Luckily, I visited the property before closing…huge sigh. After dealing with unresponsive seller agents and my agent severing ties due to my interest in contacting the seller agents to expedite the process, I decided to pursue the DIY route.
I work off realtor.com considering it has the most up-to-date listings off the MLS. I established my screening criteria which is multi-families listed between $10K-$20K as I'm looking for cash flowing tenant occupied properties that require little repair. Prior due diligence indicated that multi-families listed under $10K are in need of a full rehab or significant repairs.
In March, I found a triplex listed for $15K where two of the units were occupied generating $840/mo. Additionally, there was a longstanding tenant whom acted as the Property Manager. The seller and I agreed on a $14K purchase price with the seller contributing $750 to my title costs and property inspection. The contribution was justified as I elected to forego the use of an agent which means the seller did not have to pay a buyer’s agent commission. Here are the numbers:
Purchase Price: $14K
Cash Paid at Closing: $13,165 (deduct closing cost contribution, owner’s pro-rata taxes and the current month’s rent, security deposit)
Insurance: $1,416 (Travis Swain assisted me with my policy, I highly recommend Travis as others have on BP – big thank you to the community as it is a hassle finding insurance on these older properties)
Maintenance: $2,220 (Using the property RSF although prior owner spent $1.8K in both 2014 and 2015)
Management: $0 (Tenant manager for the past 15 or so years and seems eager to pay the rent. However, I have mgmt. in place in the event the tenant mgmt. relationship becomes cloudy)
Utilities: $1,400
Property Taxes: $530
Cleveland Map Location Zone: F
Current Cap Rate: 33%
The vacant 1 BR unit should rent for $300 which will push the cap rate near 60%. Once I reach full occupancy, I’ll likely do some more upgrades to enhance the overall condition.
-A few takeaways from my first purchase:
-You can obtain financing on a mortgage less than $20K (Fifth Third Bank, Citizens Bank, and Dollar Bank are a few lenders which low volume financing).
-The process isn’t a walk in the park even for cash buyers, remain patient while being aggressive.
-Emotions are involved (I had to call the seller’s agent to get the deal back on track as the seller wanted to severe ties after I wanted a contractor to tour the property after the property inspection)
-Agents like text messages instead of voice messages
-Tour the property or use WeGoLook, another value add discovered by BP. I believe 10 photos cost $69 and you can pay an additional $15 (my total order was $84)
-Cap rates above 30% do exist but not every lemon will produce lemonade. There are some really bad apples out there. In other words, make sure there is a pig to put lipstick on if your goal is to generate passive income without major repairs or rehab.
Good luck to all and thanks BP for helping another investor get in the game.
