Here Is My Latest Real Estate Deal And How I Project It Will Perform

Some of you who have been following Your First Million for a while already know that I am a huge advocate for real estate investing as a way to build passive income and massive long term wealth.  The advantages of real estate, such as cash flow, use of debt as leverage, tax deductions & depreciation, appreciation, forced appreciation (sweat equity) and debt pay down/equity build up are all reasons why I love real estate over other forms of investment. I also love that I can control the asset.  When I own stocks, there is little that I can do that will affect the price or value of that stock.  When I own real estate, there are countless ways that I can affect the value of my property.

I especially like multifamily real estate for the following reasons:

  1. Generally better cash flow than other forms of real estate
  2. Economies of scale (multiple units in one location vs. single units scattered around)
  3. Multiple occupancies (if you lose a tenant, you still have other tenants paying for your mortgage and bills, unlike a single family home)
  4. You can generally afford to hire a property manager to do all the work for you

 

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Just last month I closed on a triplex (3 unit apartment building) in northern Utah, pictured above.  The asking price was $135,000 and I offered $120,000.  The seller accepted my offer, which was to my surprise.  This tells me that I may have offered a little too much because I usually expect to receive a counter offer.  Anyway, I was perfectly okay with paying $120,000 because I had estimated that the property was worth at least $130,000 based on several recent comparable sales of other triplexes in the area.  The appraisal later came out that it was estimated to be worth $135,000 (so I instantly became $15,000 richer on the day I closed on the property!).

After flying out to Utah and doing the physical inspection during my due diligence period, I estimated that the property could use about $7,000 of minor repairs and cosmetic improvements.  We moved forward with the property, putting down 25% ($30,000) and securing a 30 year fixed loan of $90,000 at 4.5%.

At closing after all said and done, it cost me $33,500 out of pocket for the down payment and after all closing costs.  Once we closed we immediately started doing the minor repairs and cosmetic work that should be another $7,000, so about $40,500 total out of pocket. 

One of the units was already in rent ready condition and had a stable tenant already in place.  Another unit had a terrible tenant inside, however I put a contingency in my purchase agreement that the seller needed to remove the tenant before I would close on the property.  This tenant was obviously using drugs and had really made a mess of the unit.  The other contingency I put in there was that the seller needed to put new carpet in that unit once the tenant was gone since that carpet had been destroyed by this bad tenant.  

The third unit was vacant and in average condition, so we painted the unit, replaced the carpet and did a few minor cosmetic upgrades.  No longer than a week later we signed a lease for a new tenant for this vacant unit.  

So less than 1 month after closing, we have 2 of the 3 units in rent ready condition both with solid tenants in place.  We are now just finishing up the third unit and once complete we should have it rented out and will be at 100% occupancy.  

Once it is fully occupied, the total rent it will bring in will be about $1,525 per month.  

My mortgage payment (including taxes and insurance) is $592 per month.  My water sewage and trash bill is about $110 per month, and I pay my property management company 10% of the rent ($152 per month).  This leaves me with a $661 monthly cash flow.  Now this does not include occasional repairs/maintenance or setting aside money for future capital expenditures.  Fortunately I take that $661 each month and put it into a property savings account, which I use for all of those things.  As this savings account builds up, I will also use some of it for future down payments (reinvesting the cash flow).  

One other thing that has come up which is still developing, the City in which this property is located is currently doing some inner city revitalization and redevelopment.  They have contacted me and said that they would be willing to buy this property from me as part of their redevelopment project.  I am still waiting to hear their offer, but I have told them that most likely I am not going to sell it because I typically do not sell my properties.  However, if the offer is reasonable and I can turn a $30,000+ profit in less than 2 months, it may be worth it.  Then I could get my original down payment money back + the $30,000 profit and potentially buy 2 more properties.  We will see how things play out… it will be a winning strategy either way.  That is how I like it 😉

Although this is not a “huge” real estate deal, if you get several of these going as I have, and keep building your portfolio, eventually that $661 becomes $6,661 per month, then $60,661 per month.  It is all part of a formula for building passive income and massive wealth over time.  Eventually, once you have several smaller investment properties, you may come across an opportunity to trade up some of these smaller properties for a bigger one.  Remember, from the game Monopoly, 4 green houses = 1 big red hotel.  That is how the game is played in Monopoly, and it is the same way it can be played in real life.  

Happy investing 🙂

 

 

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