Real Estate Rental Property SH #1 Update (September 02, 2014)

by FI Fighter on September 3, 2014

in Real Estate Updates

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Time flies when you’re out having fun! Well, that and when you have ambitious partners who will work aggressively trying to close a property while you’re out of town (thanks so much team!). 😉

The dust has settled (rather quickly), and Rental Property Side Hustle #1 has been fully funded! The team and I received the keys last Thursday night, and we’ve been working expeditiously trying to get the property up to stuff in as short a timeframe as possible.

For the most part, this unit was acquired fully turnkey (rent ready), and only a very minimal amount of elbow grease needed to be put in. Quite simply, all we had to do was change out a few things: all the doorknobs, electrical outlets (install GFCI plugs in the kitchen and bathrooms), some doorstoppers, blinds, smoke detectors, carpet cleaning, mailbox, etc.

The place is just about rent-ready now (after only three days of work)! Ideally, we will have a tenant in place sometime this month and be able to collect a pro-rated portion. My partners and I now need to actively market this unit. Optimistically speaking, we are hoping for $3,000/month in rent. The unit is 3 bedrooms and 1.5 bathrooms, situated in a prime location in the South Bay Area.

$3,000/month in rent might be a stretch, but the unit is in top-notch condition. New construction apartments are easily renting for over $3,800/month… If we can somehow get $3,000/month in rent, this unit will cash flow from Day 1 (without factoring in any funds for PM, maintenance, or vacancy)!

Not too bad when you consider the fact that we only put down 20% and are purchasing in the super EXPENSIVE Bay Area, right? Let’s hope for the best!

Here are the pictures!

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Those black vents have got to go…

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Awesome kitchen!

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Glass hazard… has got to go!

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More black vents…

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Spectacular view of Levi’s Stadium!

Rehab Pictures

When it comes to rehab, I love getting a lot of bang for my buck. This unit was acquired in fantastic condition. It already featured: new countertops, stainless steel appliances, copper piping, etc.

So, basically all the expensive items arrived in great shape. HOA also covers the fence, landscaping, and roof, so no worries there. From an upgrade point-of-view, only a few minor cosmetic items needed to be addressed.

The team and I maximized our dollars by performing cheap (but important and noticeable) upgrades. Daily use items were swapped out: electrical outlets, doorknobs, mailbox, carpet (cleaning), blinds, etc.

Some of these $10 upgrades really go a long ways towards helping us create a more favorable impression. We are hoping that these subtle upgrades will be sufficient to help justify the higher rent. 🙂

Here are pictures after three days of rehab!

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Before

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After

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After

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After

{ 18 comments… read them below or add one }

1 billy.zNo Gravatar September 3, 2014 at 8:36 am

Hi, I enjoyed reading your blog, thank! I have a couple of questions for your thought process: 1- it seems that you are real estate heavy in terms of your total investment strategy and very little on the stock front (401k+IRA probably occupies less than 10% of your total portfolio). Historically the ROI of real estate performs lower than that of stock market, and also, it’s less liquid. I understand you want to generate some passive income but that also affect your income tax. So I am not quite sure how to understand your overall strategy unless you just like to be a landlord. 2- So several of these rental properties are co-owned between you and your business associates. I assume you set up an LLC to divide the shares. How do you calculate the asset value between you and your friends? For example, a house worth $400k on zillow, and you have 50% share of the LLC, you claim your asset to be $200k?

Thanks!

Reply

2 FI FighterNo Gravatar September 3, 2014 at 8:53 am

Billy,

Thanks for the comment! Let’s see if I can address some of your questions:

1) Yes, my portfolio is heavily focused on real estate at the moment. However, the portfolio is a work in progress and this will not always be the case. The primary reasons why I’m so interested in RE are:

-Need a W-2 income to get a loan. Once I declare early FI and quit my job, it won’t be possible for me to get any more conventional loans. In general, cash on cash returns are higher than straight Cap Rates, and you get the extra pillars of principal paydown, interest deductions, etc. All which are paid for by your tenants.

-REI is very much local. For instance, you cannot compare Bay Area properties directly with something in the Midwest. Each market has its pros and cons. With this investment, it is a pure appreciation play. In hot markets, you have to get in sooner rather than later… Otherwise you’ll miss the boat completely.

In regards to total return from real estate, it’s really, really subjective and depends on how you calculate the numbers. Principal paydown, tax breaks (depreciation), appreciation (especially from leveraged money) are very real returns that ride on top of the cash flow… often not factored in when running return numbers.

Also, don’t forget about tax shelters such as 1031 exchanges that can help out significantly at time of sale.

I don’t mean to imply REI is better than stocks, or vice versa, but I don’t put much weight in these “historical return” numbers when it comes to REI. Also, not every property, or market is a winner. If you don’t have cash flow and are investing in a market that doesn’t appreciate much, of course your returns will be abysmal… and this is very likely true for many homes out there!

When you start creating REI index funds or averaging across aggregates, it just dilutes the numbers. Appreciation is very much speculation, so if I’m using that strategy, I will place my bets in areas where demand is high (e.g. good schools, jobs, weather, etc.). Historically, Bay Area returns have been out of the stratosphere… Again, just a grain of salt, but here’s a Bay Area only study:

http://www.janepoppelreiterrealestate.com/bay-area-home-purchase-vs-sp-500/

Let’s hope the trend continues!

Ultimately, over time, I will work on balancing out my portfolio. I don’t want to be overleveraged, and will most assuredly invest in stocks (dividend + growth) after I reach early FI. I’ll probably even start that up again soon…

With stocks, I’m not in a rush to invest b/c stocks are so liquid and the barrier to entry is so low. I can buy shares with just $100 in my brokerage account, for instance. No loans, underwriting, etc…

2) Yes, I still need to work out the partnership details. LLC is most logical route to go, and I will update once we have an agreement/structure in place. For now, we just wanted to close the deal and win.

When it comes to valuation moving forward, I won’t use Zillow for any partnership deals. My ownership stake of $25k on this one will be used in the net worth reports… I’m going to keep things as simple as possible.

Outside of this property, I own the others five myself with no partnerships. So, I will stick to Zillow for those.

Hope that helps!

Cheers!

Reply

3 billy.zNo Gravatar September 3, 2014 at 10:04 am

Thank you for the reply, it is very detailed and informative. I learned a great deal. I tend to shy away from speculative investing cause I think it is very much gambling in nature and your odds can be worse than 50/50. But then no guts no glory, the 10%-20% return can only come from speculative investing. Great blog. Thanks again!

Reply

4 FI FighterNo Gravatar September 6, 2014 at 8:53 am

Yes, this is most definitely a speculative play, somewhat to akin to gambling, like you mentioned.

If I’m going to gamble, I want the odds to be in my favor. When it comes to investing, you just want to make as educated a guess as possible. When I look at all the development and data around me, I think the odds that this area will do well (and appreciate substantially) over the next 5-10 years is very likely.

So, although technically it’s gambling, it’s almost sort of like buying Google stock at IPO… It’s risky, but the upside is tremendous. This is my bet on finding the next GOOG in real estate!

Cheers!

Reply

5 Financial SamuraiNo Gravatar September 3, 2014 at 9:10 am

Very cool pic of the stadium right in the background! It really is right there. One would think that it should have some very good upside potential, especially after the rehab.

My only worry though is congestion. I just spent 35 minutes driving into downtown due to all the road work, and trucks double parking on major arteries. So maddening!

Reply

6 FI FighterNo Gravatar September 6, 2014 at 8:57 am

Sam,

Yeah, if you’re a football fan it sure doesn’t get much better than this! Walking around the stadium, you get this surge of electricity in the air. I can’t wait until they get around to breaking ground on Santana Row 2.0!

Traffic is already pretty bad, so yeah, I would imagine it would only be magnified by 1000x on game day… Not really sure how they will address this issue… the lanes are only so wide on Tasman, Great America, etc.

Take care!

Reply

7 Dave @ The New York BudgetNo Gravatar September 3, 2014 at 1:33 pm

Nicely done! This place is looking great. In NYC (at least in Manhattan and parts of Brooklyn) this place would rent for WELL over $3,000.

Heck, it might even rent for over $3,000 in any borough! I’ve heard that the Bay area is getting worse (or in your case, better) in terms of cost of rent than Manhattan. If that trend continues, it shouldn’t be long before you are cash flowing quite a bit! Of course, this is Santa Clara and not San Fran proper, I realize, but still.

Just eyeballing the pictures here, I would say this could go for as much as $4,500/month in midtown Manhattan. It would go for much more than that if the 2nd bathroom was a full bathroom. Have you done any research on the ROI of converting that to a full bathroom?

Reply

8 FI FighterNo Gravatar September 6, 2014 at 9:00 am

Dave,

Haha, yeah I was definitely in for some sticker shock when I visited New York. I saw this 1/1 apartment in Chelsea renting for $5000/month… it was unbelievable to me, and Silicon Valley is pretty pricey in its own right.

I’m hopeful we can secure a $3000/month lease for 2-years. Being able to do that would go a long ways towards helping us remain break even, or even slightly positive. True, I’m not factoring in vacancy/maintenance costs, but the property is almost brand new, and vacancy in the Bay Area is a lot less worrisome than compared to out of state investing. The tenant caliber here is superb and almost everyone has 700+ credit scores.

Yeah, we looked at the prospect of converting the bathroom, but unfortunately the layout doesn’t work… Maybe an extra $100/month if it were possible?

All the best!

Reply

9 MartinNo Gravatar September 3, 2014 at 5:00 pm

I love those pictures of your properties. I wish I could rent that space.

So, before you said this unit will not be cash flow positive but a flip, right? Or am I mistaken?
With the 3k rent is that the game changer?

Reply

10 FI FighterNo Gravatar September 6, 2014 at 9:02 am

Martin,

Thanks! It is a nice property and all my partners are in love with it (me included).

Long term, yes it will be a flip. Depending on the rent we collect, it may or may not be cash flow positive from Day 1. Hoping to get $3000/month to help make the numbers work out.

Each investor has other cash flow positive assets, so even if this goes slightly negative, divided by 4 we should be ok…

Best wishes!

Reply

11 writing2realityNo Gravatar September 3, 2014 at 6:24 pm

It is amazing that a little bit of sweat equity, and some $10 parts, can drastically improve and modernize a space. The every day things are a good rule of thumb, and can really make a difference when “updating” a place on the cheap.

Keep up the good work!

Reply

12 FI FighterNo Gravatar September 6, 2014 at 9:03 am

writing2reality,

Yes, definitely! I love $10 upgrades that add a lot of enhancement. Kind of like finding a $10 hole in the wall restaurant that has delicious food and leaves you fully satiated.

All the best!

Reply

13 Mr. FrugalwoodsNo Gravatar September 4, 2014 at 4:21 am

Can’t wait to here how the rental process goes. Looks like you hit the major bang for your buck reno tweaks. One tip: They make stainless switch and outlet plates that look great in already stainless heavy kitchens. A couple bucks more than plastic… but they look nicer and they are more durable.

Reply

14 FI FighterNo Gravatar September 6, 2014 at 9:04 am

Mr. Frugalwoods,

Great tips! We had some of these plastic plates laying around from previous, so opted to just stick with those.

Those metal plates are a lot more sturdy and rugged. Maybe next time.

Cheers!

Reply

15 JasonNo Gravatar September 4, 2014 at 11:21 am

Looks good, FIF!

Reminds me of the good old days I had reno’ing. And, yes, it’s amazing what inexpensive changes can do to an old place. It’s a shame that we don’t live in a place where someone can make a decent living just futzing with carpet, tile, and paint. That’s what I’d like to do for a year or two, for sure – move into a fixer-upper, put some time and money into it, then sell it and move to the next one.

Maybe after I retire…

Reply

16 FI FighterNo Gravatar September 6, 2014 at 9:06 am

Jason,

Thanks! Yeah, home renovations can be a bit of fun, and I wouldn’t mind improving my skills and maybe dabbling around with it lightly once I get to early FI. I definitely wouldn’t want to do it full time (it can be intense physical labor), but maybe just a few times to learn some very useful home improvement skills that could come in handy in the future.

Maybe you can try it out after you retire and let me know how it goes! 🙂

Take care!

Reply

17 A Frugal Family's JourneyNo Gravatar September 4, 2014 at 10:03 pm

Looks like another great property you picked up. Not bad for your first side hustle, especially if you can get $3,000 and have it cash flow from day 1!

Wishing you the best of luck getting the rent you desire. AFFJ

Reply

18 FI FighterNo Gravatar September 6, 2014 at 9:07 am

AFFJ,

Thanks! Yeah, a cash flowing flip… that’s not too bad! 😉

Hope it works out!

All the best!

Reply

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