I bought rental property number 12 last Tuesday after going six months with no rental property purchases. I did not waste any time and bought rental number 13 the next day. Rental property number 13 is a little different from most of my rentals; I have had to expand my criteria to find properties. Rental property number 13 is a multifamily property and a little older than most of my properties.
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The details on rental number 13
Rental property 13 was built in 1927 and could be a college rental. I bought the property for $120,000 and the seller paid $2,000 of my closing costs. The property has two bedrooms and one bath on the main floor and has a one-bedroom, one-bath basement apartment. The property has two units, but looks like a single family home. It was originally built as a single family home. The zoning allows for multifamily and both units are rented separately.
This is the first rental property I have bought that was rented when I bought it! The main floor unit is rented for $850 a month and the basement unit is rented for $450 a month. The main floor tenants’ lease is up in April, but they want to renew and the basement lease goes until October.
The home needs some repairs and may need a roof in the next few years, but I do not have to spend any money on repairs right now.
Why did I buy a two-unit college rental property?
I have written a number of articles about why I do not buy multifamily properties or college rentals. So why did I buy a two-unit college rental property? It has been very hard finding any good rental properties lately, because prices continue to rise and there is very little inventory in our area. I would love to keep buying rental properties like rental property number seven. I bought it for $113,000, spent $8,000 on repairs, and rented it for $1,400 a month. Those deals do not exist anymore and I have no choice but to expand my criteria if I want to keep buying rentals.
Even though this property is two units, it is more like a single-family home than a multifamily property. The tenants in the main floor are not college students and are on a long-term lease. In this market, the home could be rented to college students or non-college students. I will most likely receive more rent from college students, but they may also cause more damage and have more turnover than a family would.
One of the main reasons I do not buy multifamily properties is the returns are not that great in my area. The cap rates are extremely low on most properties and I make more money on single-family rentals (even with rising prices). This property was extremely inexpensive for needing no immediate work and being rented for $1,300 a month. As you will soon see, I was very lucky to buy it.
How did I buy rental property 13?
Rental property 13 was listed on the MLS for $115,000 on December 17, 2014. At the time, I saw the listing, but I did not look at it, because I was still set on newer single-family homes. The property went under contract in 10 days, but the contract fell apart in mid-January. I saw the home pop up in MLS and decided to look at it right away, because I was not finding any properties that were close to this good of a deal or would be as good of a rental (except for rental property 12).
I took one of the new agents on our team to see the house and show him how I judge an investment property. We went through the house in about 15 minutes and I had my assistant write up a full price offer right away. I got my offer into the agent and she said they had a ton of interest and they would be reviewing offers in a couple of days.
I raised my offer to $117,500, with no inspection and seller paying $2,000 in closing costs. I was notified that my offer was not accepted! I was disappointed, but I had number 12 under contract, so at least I had one new rental property coming soon. Then a few days later, the listing agent called me and said the contract they accepted fell through again! I raised my offer to $120,000 with no inspection and I got it that time.
What is the cash flow and cash on cash returns for number 13?
If I plug the numbers into my cash flow calculator, I get $341 a month in cash flow with property management and 20 percent allocated for maintenance. I am using a very high number for maintenance, because I know the property will need some work down the road. My monthly payment will be around $530 (with taxes and insurance) on a five-year ARM with my portfolio lender. I put 20% down and my loan is $96,000.
My cash on cash return will be 16 percent based on no repairs and receiving no commission as a real estate agent. However, I am an agent and I got back over $3,000 in commission, which raised my return to 19 percent. The best part is I can increase my returns with this property.
How can I increase the cash flow on this rental property?
I am happy with the returns this property is providing, even though it is not as high as some of my other rental properties. However, I would rather be making 19 percent on my money than have it sit in my accounts making nothing. I can do a lot to increase the cash flow from rental property number 13.
The basement apartment currently has one bedroom, but it could easily be two bedrooms. It is also in need of some paint and other minor maintenance that would make it look much better. If I make it a two-bedroom when the current tenant moves out I could raise the rent to $550 or maybe even $600 a month. If I could rent the basement for $600 a month, it would increase my cash on cash to 28 percent!
What is the value of rental property 13?
I may have expanded my criteria on rental properties by buying a two unit house and a college rental, but I did not buy a house at full market value. There were multiple offers that indicate a lot of interest in the property. My first offer over asking price with no inspection clause was not accepted, which also indicates there were other buyers wiling to pay more than list price. After reviewing the comps in the area I think it is worth at least $140,000 if not $145,000 based on the current rents and condition.
It feels great buying two more rental properties after going so long without buying any. It is funny how what we focus on usually is where we excel. Last year I concentrated on flipping and had ten flips going at one time for most of the year. This year I am concentrating on rentals and have bought two, but I am down to four flips. I hope to find a happy medium where I am holding five to seven flips at a time and buying as many rentals as I can.