(Originally published on Medium, August 3, 2017)
All the financials of my recent rental investment + some key learnings
- Opening bid = $137.5k + $500 escalators up to $145.5k
- Closing price = $145k
- Deposit = $1k
- Loan = 4.75% fixed conventional w/ 30 yr amort
- Down payment = 25% or $36,250
- Due at signing = $37,216 (incl lender fees, title fees, taxes & insurance impound, negotiated seller credits, pro-rated rent, et al)
- Current Rent = $1,425 (700 + 725)
- Market Rent = $1,800+ (900 + 900) → used for CoC analysis below
- $3k repairs (planned for Jan/Feb ‘18)
- 5% vacancy
- 7.5% CAPEX
- 7.5% OPEX
- 13% prop mgmt (incl placement fee)
- 5% insurance (actual)
- 11% property taxes (actual)
YoY Growth Assumptions
- 2% expenses
- 3% rental income
- 3% property value
CoC Return Estimate
- Yr 1 = 9.5%
- Yr 3 = 11.5%
- Yr 10 = 20%
- NOTE: return estimates are based on the Bigger Pockets rental property calculator. It’s a simple yet robust financial tool that I highly recommend for both newbie and seasoned investor types. More calculators (flips, wholesaling, etc) can be found here.
- My property listing came up Thu afternoon → I spoke to my broker Fri AM, had her and mentor visit it Fri night, and bid early Sat AM before hitting the Mammoth slopes. While people start taking the weekend mid Friday, get busy! Doing so can provide you a small advantage that can help you get a deal in a hot mkt.
- I researched mkt rents by talking to multiple property mgrs, area locals and skimming sites like Zillow and Trulia. I learned rents are under market by 25–35%, but be careful adding to your fin model. If you make that assumption for your bid range and it isn’t true, you expose yourself to compressed returns.
- I used conventional financing, and got multiple loan bids. Important to be upfront with the lenders about your process — those who are willing to work hard for your business are worthy partners…those who aren’t willing are not. Just don’t blindside them with a pass after getting their bid and follow up questions >> let them know you’re in talks with others.
- I had multiple mentors who gave me exceptional guidance in evaluating and consummating the deal, and I rewarded them appropriately (and plan to keep doing so). Take care of those who look out for you, and the rewards will keep coming your way.
- Have systems set up to eval deals. My custom google map filters, MLS drips, local broker who’s super responsive, local mentors, etc all allowed me to move quickly and aggressively.
- I did a full home inspection that cost me $680. Critical for a newbie buyer for the education alone, plus it’s an obvious choice to protect your investment if rehab assessments are not your specialty.
- Property mgrs have their standard monthly fees (usually 7–12%), but they also have a placement fee for new tenants (usually 50–75% of 1st months rent). Don’t forget to factor that in to cost assumptions…that was news to me!
- I had to sign an affidavit upon closing that I would NOT enter into another property purchase, lease, credit card, job, etc for 1 month. This is a LOT to navigate when many of our lives are so often in flux, so just be mindful that the credit diligence on you doesn’t always end at closing…particularly if your mortgage broker is planning to sell your loan.
- I admittedly over-indexed on diligence $$ and time on this investment, as it was all part of my planned RE education. I spoke to multiple property mgrs, lenders, lawyers, mentors, and it cost me proportionally. I don’t regret it for one second, as I now have the confidence and experience to be that much better on the next one…and the next…and the next…and the next…
- While harder to find deals in this mkt, they def exist. Don’t sit on the sidelines, just get smarter. No one knows when the market will actually turn…could be in 6 months or 6 yrs. I got lucky (let me rephrase that…I strategically put myself in the way of luck) and found a motivated seller >> she was an out of state owner looking to wind down her portfolio, and had a property mgr on salary vs direct commissions, so there was no incentive to raise rents. AND, I found this on the MLS, not via a private listing. So yeah, get out there!
Thanks for reading!
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