Rental #7 A test of patience

Patience is not my strong suit. Trust! 

I had this article written about 2 months ago and wasn’t able to post it just now because this deal took way longer than I had anticipated. I love to tell people that Real Estate is easy (and it is) but things never go smoothly. This was still a good deal even if it went slower than I would have liked. A test of my patience for sure. 

NINJA EDIT – This deal took longer than I expected TWICE so I’ve actually written it 3 seperate times, updating it with each approach. So I apologize if it’s worded messy, I tried to tighten it up. 

Bidding was very fast on this deal. My offer was accepted almost immediately, which does not happen often so instead of excitement my first thought was “oops! I overpaid”. Regardless, I trusted my team accepted the offer anyway and moved forward. We got in the house and quickly found the house was lipstick ugly, but the core was in GREAT shape. 

It had a new roof, new HVAC, and new water heater. Thanks for the free CapEx! Also, the house is in a good area, on a corner lot, and it’s a bit larger than I usually buy. These are all great adds that I didn’t really expect. To top all that out, while we are doing the rehab we had potential renters coming up regularly to ask about when it would be ready. This is the best possible situation to be in! We asked for all the money, closed with a great tenant, and moved to refi. 

EASY 

The numbers

Purchase – $49,900

Rehab – $15,000

Ancillary costs – $1,135

Total Cost (Line 120) – $66,319

Rent – $950

Price-to-rent ratio – 1.43%

NOI @ 45% expense ratio – $617.5

Debt service – $367

Cash flow – $250

ARV – $ 85,000

Total loan amount $63,750

Equity created – $21,250

Mistakes

Every time I get a new property, my property manager and I have the same fight: “What to ask in rent”. Now, it’s important that everyone understands that no matter how close you and your manager are there are fundamental asymmetries in the outflow of rental income. Specifically, if I ask $1000 in rent for this place the buying pool goes way down because it’s high rent for this property. It might be possible, but it’s harder because market rent is probably closer to 900-950. It’s in MY best interest to ask for $1000 because I want ALL THE MONEY, ALL THE TIME, but the property manager has to work a lot harder and deal with a lot more potential tenants to get that extra $50 but in the end, they only receive 10% of that (colloquially known as five bucks). This is not a critique of my property manager who is amazing, this is just important for everyone to know when going through these processes, where do efficient leverages lie for all parties.

So this property rented much slower than it should have because I was just trying to extract too much from the property. As soon as we lowered the price to $950 it was filled. My property manager originally thought we should ask 900-950, and I should have listened to him. It’s my nature to seek out conflict though, so battling with him is always worth it. 

Appraisal on this house came in a bit low. This is never great news to hear, but it does happen. My last property came in HIGH, and this one came in low, it’s important not to base your whole deal on ARV coming in perfect because it might not. This was only about 5k low, but that means I’m leaving about $3,000 in the deal. Now that’s still in equity and I didn’t lose any money, it’s hard to complain about making 21 grand instead of 25 BUT all these mistakes compound. I’ve done this 8 times now and still make mistakes if you’re doing your first do not assume things will go perfectly. It’s not even the catastrophic error that gets you, it’s the 3-4 10% mistakes that  you make which add up. Many of them are unavoidable so expect to have errors, just  build them into your risk mitigation and you’ll be good! 

Thinking about the future

The market I invest in has been saturated recently with new investors so buying has become much more difficult. So much so that I’m looking to invest in a different strategy going forward, I’ll still buy 1-2 more to get my 10 max mortgages, then I think I need to start looking at the next challenge. This SFR strategy has worked well for me, but I’m really starting to feel it’s inefficiency to scale. I also don’t want to keep doing the same process forever and end up with 30-40 single family units. I think I have the talent and ability to take down a 30-40 unit multifamily complex instead, or maybe buy a commercial retail building and start a brokerage? Regardless, the point of buying these SFR was to create my retirement, and protect my financial downside so I’m not forced to work every day, and I’ve pretty much accomplished that. I do not want to be stagnant, nor do I want to settle for small ambitions, so I’m starting to think about how I can further stretch my potential.

Before pictures

After pics