IC Elesson: Deal Analysis of the Month
This month’s deal evaluation comes from FastTrack member Derek Christian, with whom I spent some time last week going over the success of his first 4-family deal, in a borderzone area in Cincinnati called Price Hill.
Derek chose the unusual asset class of 4-families for the same reason that most people avoid it: it’s a kind of building that’s very common here in Cincinnati but is considered “too big for the small guy and too small for the big guy”. Thus, there are opportunities in 4 families that a lot of buyers pass up because the buildings aren’t big enough to have on site management, but are too big to pass on a lot of management responsibilities to tenants, as we do in single family homes.
Here’s a summary of our conversation:
Q: How did you find this building?
A: A wholesaler had it available. I had actually seen a different 4 family from this same seller a few months earlier, but I missed out on the chance to get it because I moved too slowly. I wasn’t going to do that again, so I saw it right away and tied it up right away.
Q: What did your initial evaluation of the building tell you?
A: First off, it was pretty solid structurally and mechanically. It had separate furnaces (which are rare in this kind of building) and they were all less than 5 years old. The plumbing and wiring were good, the foundation and structure were good.
The units themselves were a mixed bag; they’d been rehabbed in the last 5 years but in some cases poorly. The tile floors in the kitchens and baths were cracked, and there were some other minor cosmetic issues.
The standout unit was unit 1. It was occupied by a hoarder and it was a wreck: holes in the walls, plumbing issues, smells no one should have to smell. Here are some “before” pictures:
[images style=”0″ image=”https%3A%2F%2Fregoddess.com%2Fwp-content%2Fuploads%2F2017%2F06%2Fliving-rom-wall-1-225×300.jpg” width=”225″ align=”center” top_margin=”0″ alt_text=”Living%20room%20wall%20with%20water%20damage” full_width=”Y”]
Living room wall with water damage
[images style=”0″ image=”https%3A%2F%2Fregoddess.com%2Fwp-content%2Fuploads%2F2017%2F06%2FBedroom-wall-1-225×300.jpg” width=”225″ align=”center” top_margin=”0″ full_width=”Y”]
Bedroom with just some of the dozen or so holes in the plaster
[images style=”0″ image=”https%3A%2F%2Fregoddess.com%2Fwp-content%2Fuploads%2F2017%2F06%2Fkitchen-1-300×225.jpg” width=”300″ align=”center” top_margin=”0″ full_width=”Y”]
Kitchen. Don’t even ask.
For contrast, here’s a video of the same unit 80% finished https://www.youtube.com/watch?v=ComqlQvO8Ko&t=17s
The big problems were gutters, the back lot which is all blacktop and was pretty degraded, and some places where the concrete stairs needed to be repoured.
The only other thing that stuck out to me was that the prior owner let all of the tenants have their own washer/dryer hookup, even though the owner pays the water in this building.
Q: How did you decide on the value?
A: I did an income evaluation. The gross rents were $2,100 when I started, the taxes about $100 a month, the insurance $40. I figured on a 20% vacancy loss and another few hundred dollars a month in water. Since all the units were rented, I figured that at a $35,000 asking price with maybe $16,000-$20,000 in turnover and a net cash flow of $6,000 a year, I didn’t see how I could lose even if I couldn’t raise the rents.
Q: How did you pay for the building?
A: I paid cash, but the plan all along was to reperform it, get a year’s worth of payment history, and then refinance to get my cash out. I’m in the process of doing that now, and I expect the appraisal to come in at a price where I can borrow at least $80,000 which will give me back every dime I have in it and more.
Q: What happened after you bought it?
A: First, the hoarder was good enough to stop paying her rent and I evicted her and spent $4,000 turning over that unit.
Second, it turned out that the tenant in unit 2 was paying significantly less than the other tenants, despite being the most recent move-in. I discovered that the reason for that was that the former owner’s property manager was giving this tenant a discount—because the tenant worked for the property manager. He didn’t want to pay market rent, so he went, too.
Then it turned out that units 3 & 4 were feuding, which meant they were calling me all the time trying to get the other one evicted, so I eventually got 3 out as well.
I then turned the property into a non-smoking building, raised all the rents to cover the water the washers were using, and increased the rents from $2,100 to $2,300 a month.
Interestingly, I didn’t end up spending as much on rehab as I’d planned. When I got to talking to the tenants about that lot in the back, they told me that they never parked in it because the driveway was too narrow, and that they’d rather have a picnic table back there than new pavement. So instead of $12,000, I spent $300, and they’re happier.
Q: What lessons did you learn?
A: Lesson 1 is that I can rent units that aren’t ready. As soon as I start turning them over, I start advertising them and usually have a new tenant before I’m done. I’ve had 3 vacancies this year, but none for more than 10 days.
Another thing I learned is, talk to your tenants. What you think they value and what they think they value may be different things, and that saved me over $10k.
I made these units a little nicer than the area really calls for. I also tell every new tenant that they have a $250 budget for any upgrade they want when they move in. Of course, I’m doing the work but they can get a ceiling fan, a shelf in the bathroom, whatever they want as long as it costs less than $250. It keeps me from having to give move-in discounts, and gives the tenants a sense of ownership. As a result, I get the best tenants and the best rents, and so far I have 100% retention in the units I’ve renovated.
Q: What advice would you give an Inner Circle member who wanted get out there and buy income properties?
A: First, don’t spend too much time analyzing. When you see a good deal, pull the trigger.
Buy properties with solid cosmetics and mechanics. Ugly is easy to fix.
Finally, you’ll discover that none of this is as scary as it seems if you’ll just do it.