Tales of a newbie real estate investor: Purchasing my first multi-family rental property

I’ve always been interested in real estate. So, investing in single family rental properties has a been a goal of mine for quite some time. I’m not sure why it’s taken me so long to take the plunge. I’m sure fear was a large factor in not making a purchase. Even though I’ve listened to countless podcasts on real estate investing, read numerous books and attended meetings of local real estate investing groups, I still had this feeling that I didn’t know enough yet. I felt like I needed to learn more about it to avoid making any mistakes. Many would call this analysis paralysis which is over-analyzing a situation to the point that action is never taken. After absorbing all this information about the subject for years it was time to get serious about finding a deal. I had listened to enough of the success stories on the BiggerPockets podcast and I started to wonder why not me? Why wasn’t I a part of this real estate investing frenzy that so many people brag about. I felt like I had a good idea on how to proceed and what to expect when purchasing a property so it’s time for me to go out and build my empire. I mean don’t get me wrong, I didn’t expect investing in real estate would easy but it isn’t rocket science. You attempt to buy a house below market value, make necessary repairs or updates and find a tenant willing to pay a rent that’s higher than your expenses. How difficult could that be? But for some reason I was still hesitant to pull the trigger. It wasn’t until I ran across I “good” deal, that I finally decided to get off the sideline and get in the game.

My first piece of investment property was a small multi-family property that needed work but had lots of potential. The deal was brought to my attention by my dad. He found out that I was interested in purchasing investment property and told me about a friend he knew who managed a small multifamily complex which the owner was looking to sell. He couldn’t remember all the details but recalled that the complex had 7 or 8 units and the average rent was approximately $400. I quickly went online to search for this small apartment complex on google maps to get an idea of how it looked. The picture looked good so I was interested in learning more about the property. I looked up information about the property on the county assessor’s website to get an idea of the estimated market value and the estimated tax rate. The county assessor estimated that the market value of the property was $150,000 and according to my dad, the owner was looking to sell it for $82,000. Of course, now I was very interested in this property and quickly asked my dad to put me in contact with his friend, Robert, who was the property manager.

I spoke with Robert via phone the same night and he gave me a little background information about the property. The property was owned by an elderly woman whose husband had purchased the property in 2004 (the county assessor’s site indicates that he paid $148,000 for the property). The owner’s husband had recently passed away and she wanted no part of owning or managing the property. She had been looking to sell the property for some time now but had only received a few lowball offers. I’ll have to admit, the fact that it had been on the market for a while made me nervous. Here was a property the previous owner paid $148K to obtain. The county assessor values the property at $150K but the owner is willing to sell it for $82K and no one else had put in a serious offer. It felt as if I was missing something. I mean there had to be something wrong with this property…right? Nevertheless, I continued with my research and due diligence. I also scheduled a meeting with Robert the following week to view the property.

Since this property was in a different state from where I reside, I had to wait until the weekend to view it. When I got a chance to walk the property I kept expecting to find some glaring issues that would explain why the property was being sold at such a reduced price. But I never found anything. What I found was nice property with lots of potential but would require some updating due to the lack of maintenance. The property had 8 apartment units and 6 of the 8 units were already rented to tenants. I learned from Robert that the owner was not interested in being a landlord and had invested very little in the apartments to keep them maintained. To sum it up, she was a very motivated seller who was looking to unload the property, thus the low price.

So far, the property had passed the eyeball test but I still needed to run some numbers to be sure the investment made sense. With rents averaging around $400 per unit and 6 units already rented, the apartment was currently generating about $2,400 in revenue each month before expenses. If the two vacant units were also rented, we would be looking at $3,200 in rental revenue each month. At this point I realize that there will be operating expenses such as taxes, insurance, property management fees, etc. but so far it looks like an investment that can generate a descent amount of revenue each month. My next step was to estimate the expenses.

Expenses Monthly Annual
Insurance $300 $3,600
Taxes $200 $2,400
Property Management $250 $3,000
Utilities $300 $3,600
Mortgage Payment $400 $4,800
Capital Expenditures $300 $3,600
Routine Maintenance $50 $600
Total $1,800 $21,600

Table 1: My Estimates

Based on current rental estimates with 6 tenants we’re looking at $2,400 per month in rental revenue minus $1,800 in monthly operating expenses. That’s approximately $600 per month in cash flow! Not to mention that since the property will be managed by a property manager, the cash flow obtained would be somewhat passive income. I say somewhat because there is still some work on my part, even if it’s just monitoring or managing the property manager. Plus, I would have the opportunity to increase the cash flow approximately $800 by renting out the two vacant units. There was also an opportunity to earn additional revenue through an onsite laundry room. From my understanding, the laundry room had a coin operated washer and dryer but they weren’t being used because they needed repair and the previous owner declined to have them fixed. By gaining two additional tenants and repairing some appliances I could be looking at over $1,400 per month in cash flow. These calculations had me excited and ready to become a real estate investor!

I quickly contacted the listing agent to put in my bid. I’m not sure if this mattered or not, but I allowed the listing agent (or seller’s agent) to also represent me as the buyer’s agent. The logic behind that is that the realtor would be motivated to get the seller to accept my offer since she gets to keep the entire commission as opposed to splitting the commission with another realtor. I put in a bid for $80,000 just $2,000 short of the $82,000 asking price. In hindsight, I probably could have gotten the property for a lot less but at this point I was convinced the property was such a good deal I didn’t want to miss out on it by trying to lowball. But if there is one thing that haunts me about this deal, it’s that I wish I would have went in with a lower initial offer just to see how motivated the seller really was. The seller immediately accepted my offer and I had my first deal under contract. Now it was it was time to find the money to pay for it.

Financing the property turned out to be tricky. Since the property had more than 4 units, it was considered a commercial property. In order to finance it I would need to get a commercial loan. After researching a few different options for financing, I decided to purchase the property using equity from my primary home through a cash-out refinance. Looking back, I wish I had just spent the time attempting to get it financed with a commercial loan but to be honest…I can be very impatient at times. Once I identified that this the property was worth investing in I wanted to purchase it quickly and this was the quickest way I identified to finance it. The lender who currently has the mortgage on my home agreed to do the cash-out refi so it was streamlined and pretty painless. They did have to do a quick appraisal on my home just to make to make sure it was valued appropriately. Once the refinance was done I made the purchase in cash so technically there is no mortgage on the property but I use a portion of the rental revenue to cover the increase of my mortgage payment after taking out the equity loan.

In an effort to not have this post go on too long I’ll wrap it up and save additional information for my next post. In my next post, I’ll address some of the issues I ran into as a first time landlord and talk about how I a tackled a renovation project immediately after the purchase. I’ll give an update on how close my estimates were to my actual expenses. In closing I’ll just share that what I learned by actually going through the process was invaluable. What I take away most is that the entire process wasn’t that difficult, as I mentioned earlier it’s not rocket science. For those investors that were like me, sitting on the sideline in analysis paralysis mode, I would say go ahead and get in the game. Try to start off slow and make sure investing in real estate or being a landlord is something you really want to do. After that first purchase you’ll feel a whole lot more comfortable about making a second purchase.

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