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Rental Property #5 Search (November 26, 2013)

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I just wanted to do a quick post to update readers on the status of Rental Property #5. At this moment in time, I am under contract for a fifth rental property which is listed at $180,000. The property is located in Chicago and is another 2-flat, similar to Rental Property #3. Each unit has 4 bedrooms and 1 bathroom.

Update

The property is currently under construction and the seller would like to start closing in December. However, because I just closed Rental Property #4 this month, realistically, I don’t think this will be possible. I need some time to build up some cash reserves, and I am very doubtful my loan file will pass through underwriting. I’m currently negotiating with the seller, and asking for an extension until January. If closing starts in January, then I most likely won’t need to come up with the 25% downpayment + closing costs (seller paid for, but lender needs me to show enough funds to also cover this) until sometime in mid-February.

Mid-February works much better for me. If we run into another glitch (like last time), I should be able file my 2013 taxes to overcome any debt-to-income problems. Rental Property #1 will be on 2 years of tax returns (2012, 2013), so I’ll be able to offset that $230,000 loan.

Numbers

I really like this property, and even stopped by to take photos of it when I was in Chicago earlier this month. It should rent out for $1200/month for each unit, bringing in gross rents of $2400/month. The cash-on-cash returns will be around 19% or so.

When running numbers, my returns are always calculated with maintenance and vacancy reserves in place. I used 5%, which I think is reasonable. Property management is 8%, also included.

Also, even though the property will return a portion of the principal with each mortgage payment, and depreciation come tax season, these gains are not included in my spreadsheet calculations. Principal paydown and depreciation are awesome, but I’m still looking for deals that return 15% cash-on-cash without factoring these benefits in.

Lastly, closing costs are not included because I’ve worked out a deal with the seller to cover all closing expenses. I will also be getting 1 year rent guarantee and a 5 year warranty on the roof.

Here are the numbers:

chicago_returns

All About the Timing

If the timing doesn’t work out, I may have to let this one go and wait for another property that’s further out from being fully completed. This property is under construction and should be fully completed (ready to rent) in another two weeks. Finding a property to close in March or April would probably be the best move (financially), otherwise I will have to stretch myself a bit to close this one. So, for now I’m under contract and the numbers are shown above. I will of course update as more details emerge. Don’t be surprised if this one falls through and I have to readjust my gameplan. This stuff is always changing and dynamic in nature.

But, you know me, I like to take risks… Good thing I have some ESPP coming down the pipeline in January. 🙂

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{ 13 comments… add one }
  • Fast WeeklyNo Gravatar November 26, 2013, 7:43 am

    Way to go FI Fighter. Just don’t spread yourself too thin. Can you give me a few pointers on how you interview and narrow down your property managers? Was this some sort of build to rent package? I was surprised to see a 1 year rental guarantee. How’s property #4 doing? Stabilized and occupied?

    A 9.5 CAP on a property in that price range looks great to me! Good work
    -Bryan

    • FI FighterNo Gravatar November 27, 2013, 10:37 pm

      Bryan,

      For this property, the seller is also the property manager, so I don’t actually have to go and screen them out. Actually, I’ve never done that since I manage my own local properties as well.

      Yeah, these properties are built for investors. They get marketed to investors as soon as rehab begins.

      Property #4 will start to collect rent next month (December). The tenant has moved in and signed a 2 year lease. More details to follow next month.

      Take care!

  • MartinNo Gravatar November 26, 2013, 6:38 pm

    OK,now I understand why you are not freaking out and why you are not scared at all. It’s because I am sh*ting my pants for you when reading your stories 🙂

    Well, I admire your endeavor on this and how you go for it. But this is completely beyond my guts. It would be awesome if you close this one too, but I wouldn’t do it at all.

    How prepared are you for another housing crisis should one happen? During the last crisis even renting went down and many locations remained vacant. Would you survive?

    • FI FighterNo Gravatar November 27, 2013, 10:41 pm

      Martin,

      I understand your concerns, and thanks for being the voice of reason. I know I’m getting ahead of myself, but I’m also trying to be “smart” with my decisions.

      If there is another housing crisis, well, housing prices will plummet. But that will affect stocks as well, so it’s no different than being “too invested” in stocks. What will you do with stocks? You have to hold them until the markets recover. Same with the property. As long as you collect dividends, I’m guessing you really don’t care. In fact, you’ll probably want to buy more stocks b/c of the heavy discounts. Property isn’t much different. Worst case, I have to lower rents a few hundred dollars. Like a dividend cut. This property cash flows 19%, so even if you reduce rent by $200, $300, $400, it still cash flows. You only run into trouble if the property is underwater AND you are cash flow negative. In regards to vacancy, sure it could happen. That’s why I have other rentals… for diversification.

      Cheers!

  • Charles@gettingarichlifeNo Gravatar November 26, 2013, 10:42 pm

    Hey FI,
    I have a love of real estate like you do. Is Hawaii where you want to retire? Good luck on the rental property.

    • FI FighterNo Gravatar November 27, 2013, 10:43 pm

      Charles,

      I would love to retire in Hawaii someday. Realistically, it’s probably out of my reach due to high cost of living… I’ll probably start off in Southeast Asia first.

      Cheers!

  • JC @ Passive-Income-PursuitNo Gravatar November 27, 2013, 5:39 am

    I can’t believe that 5 is already in the works. Seems like the next one is already lined up as soon as you close on one. The numbers look great here. Chicago appears to be treating you very well. Hopefully underwriting/closing goes smoother than with 4. Are you planning on having a co-signor from the start or just if they come back and say that you need to fix something. I’d always heard stories about how most underwriters just plug numbers in, instead of looking at the real picture. Your income sources have changed dramatically since you filed your taxes. Have you been going with the same lender through all of this or jumping to whichever will give you the best rate? Curious which would end up working out better, especially as you try and close on another rental.

    • FI FighterNo Gravatar November 27, 2013, 10:46 pm

      JC,

      Yeah, #4 took awhile to close, so it gave me time to build up cash for #5. I started #4 in September, and I’m looking to close #5 beginning in January. Closing might occur in February, if that’s the case. So, 5 months or so between properties, which is about my timeframe.

      I’m planning on not using a co-signer this time around. Hopefully this lender will be easier to work with. If not, I’ll try and file my 2013 taxes as early as possible to offset my debt from #1. If I can waive #1, I can free up another $230k in debt. That will help a lot.

      I use a different lender for each market. Since I bought from Chicago before, I’ll be going with the same lender. They seem to cater to investors, which I like.

      Best wishes!

  • BrentNo Gravatar November 27, 2013, 12:24 pm

    Great find here at 19% COC return! Have you thought about scaling up by adding a multi-family property?

    Also, great to see that you include property management in your numbers. So many people I talk to don’t use that in their calculations because they plan to manage it themselves. Then they are disappointed with their returns when they get burnt out and turn the property over to a property manager to handle the day-to-day.

    Keep it up!

    • FI FighterNo Gravatar November 27, 2013, 10:51 pm

      Brent,

      Yes, I would definitely love to get into multi-family commercial buildings in the future. In regards to multi-family residentials, this unit is actually a 2-flat, or duplex.

      Anything above 15% cash on cash is music to my ears! I try to make sure to account for PM, vacancy, maintenance in all my calculations. If the returns still work after all that, I’m all ears 😉

      Thanks for stopping by!

  • AJNo Gravatar January 3, 2014, 11:31 pm

    Just looking at your numbers here.. Does management company charge lease up fees? That would cut into your return.
    Quick 50% rule calc
    2400 rent * .5 = 1200 NOI
    1200 – 708 = 492 cashflow
    492*12/45k = 13% cash on cash return
    If everything is freshly rehabbed, imagine getting better than 50%.
    Even at 50% expenses, 13% sounds great to me.
    I’m buying some new construction SFR’s in Houston, less than 10% cash on cash return but fingers crossed for the economy to keep pumping for a while.

  • FI FighterNo Gravatar January 3, 2014, 11:39 pm

    AJ,

    No lease up fees for this particular property management. I’m with you and agree that a 13% return is outstanding…. I’ll gladly take it over the long term, especially if his number doesn’t factor in principal pay down.

    Yeah, i wouldn’t be surprised with lower returns in Houston, it’s a more competitive cash flow market. Even though the returns may be less, there are lots of benefits with that market… It’s one I want to get into eventually. I’m seeing a lot of people report back 6% to 8% or so…. 10% sounds very solid indeed, especially for newer construction.

    Best of luck and keep me posted on how it goes!

  • FI FighterNo Gravatar January 3, 2014, 11:45 pm

    I should add that the 50% rule is a good one to use since it’s tested over time, and close to what a lot of landlord report back as being “real” returns. Since this property is brand new, I would expect the returns to be quite a bit higher over he short term… Maybe even 20% or so…. But in general, it’s prudent to err on the side of caution. Just my opinion, but anything yielding a true 10% sans principal paydown, depreciation, etc. is an excellent return.

    Thanks for bringing up the 50% rule!

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