Rental Property #1

Well everybody, it's official.

I am a homeowner! Perhaps more importantly in this context, I'm also now a landlord!

“Ok Gwen, that's cool, BUT SHARE THE DETAILS! WE'VE BEEN TEASED ENOUGH!!”

Alright, alright, alright. Here's the numbers and information on my very first rental property!

  • Stats: Triplex
    • Unit #1: 1 bedroom, 1 bath
    • Unit #2: 1 bedroom, 1 bath
    • Unit #3: studio, 1 bath
  • Size: 2,100 square feet
  • Style: Conversion
  • Condition: Good
  • Built: 1910
  • Purchase Price: $85,000
  • Repairs: est. $15,000 (!?!?)
  • “Total” Acquisition Cost: $100,000

What does that gross?

  • Rental Income: Unit #1: $600
    Unit #2: $500
    Unit #3: $385 (when I'm not living in it)
  • Does it Meet the One Percent Rule? Obviously.
  • Total borrowed— $77,647
    • Mortgage: $76,500
    • VA Funding fee: $1,147
  • Down payment: $8,500 (10%)
  • Mortgage: $359.60 per month
  • Taxes: $248.92 per month ($2987/year)
  • Insurance: $96.91 per month ($1162.92/year)
  • Vacancy: $88 per month ($1056/year) at 92 percent occupancy, $1100/mo rent
  • Management: $110 per month ($1,320/year) at 10 percent fee, $1100/mo rent
  • Repairs/Maintenance: $100 per month ($1200/year) because it's an old house that needs some TLC
  • Total Expenses: $1,003.43 per month

Cash Flow: $386.50 per month, or $4638 per year

Cap Rate$4,638 / $100,000 = 4.64 percent

WTF, Gwen!? You're doing all this work for only $300 a month? A cap rate of 4.64%?! That's a terrible deal! I thought your numbers were way better than that!

Woah. Easy. Take a deep breath.

I've run the numbers for the first year where I will be living free of cost. The unit I'm occupying previously went for $385/mo. That's $4,620 not leaving my pocket, but also not entering my pocket because I can't rent it out. If I run the scenario above including my studio unit, the numbers get better.

Cash Flow: $740.66 per month, or $8,888 per year

Cap Rate: $8,888 / $100,000 = 8.89 percent

8.89% > 4.64%

I guess those are decent numbers then…. so how did you find this income producing property?

My city is split in the middle. I chose to focus on the western half only. Of that western half, I focused on just a few zip codes. I started watching the listings as soon as I knew I'd be moving to the area. This helped me get a feel for the local market and let me see what comps were going for. Once I found a realtor, he added my parameters to a program that spit me an email every time a new property came on the market that met my requirements.

My requirements for a property were:

  • met the 1% rule
  • good shape
  • at least one unit empty
  • move-in ready
  • no pool or other time/resource intensive landscaping

I also checked out the local crime statistics on the gov't website and Trulia to make sure the area wasn't riddled with crime. Nothing more than petty crime in the area, so we're good there. I will just have to remember to lock my car doors (which I do anyways).

I would love to share photos, but most of the property is already rented! To protect my tenant's privacy, I'm only going to post the ones I took of the outside, my unit, and the common areas. Note also that these are very much the before pictures. I have one 8 million or two small things to update. It's going to be gorgeous when I'm all done though!

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“I see you noted the condition as good…. can you explain more about that?” Absolutely. Thanks for asking!

For a house that's 107 years old, she's in pretty great shape! The roof was redone in 2008 and looks great. The foundation is also in good shape for being a bunch of rocks stacked on one another. It's everything else in between the roof and foundation that needs some TLC.

Ok, that's not fair. More stuff is fine and doesn't need attention than the amount of stuff that does. But boy howdy, the stuff that needs some attention will be a doozy. I need to redo the gutters, replace rotten wooden exterior boards/shakes, paint everything, take a tree limb down, redo the back stairs, and finish the attic.

Of those items, the back stairs and finishing the attic can wait. I will have to do the back stairs next year. Finishing the attic…… I'm not sure that will happen. It's unnecessary. The studio works just great without it. I want to finish it so I can have some more space beyond the 12′ x 13′ room I have now. We'll see. Depends on if I can do it DIY or hire my friends to do it on the cheap for me.

Some of the existing features of the house will need to be replaced as well. Everyone who's looked in my bathroom has blanched at the state of the toilet. It works, and doesn't leak, so I don't care. But, it will need to be replaced before I get new tenants in it.

Same thing with the stove. I'm pretty sure it was around in the Carter administration.

The washer and dryer in the unit downstairs will also need replaced at some point. The current tenants have insisted the washer and dryer there now work just fine, but if they ever leave I'm replacing them.

One day….. one day this house will be restored to her former glory and I will be so happy. Until then, I'll just tackle one thing at a time!

Shout out space:

Thank you SO MUCH to the following people for all the encouragement, inspiration, and practical advice. I literally could not have done it without these amazing folks behind me. I highly recommend reading all of their stuff on real estate, as this is everything I used to find and buy my property. (and BiggerPockets. Can't forget them!)

Paula Pant @ Afford Anything: My OG Real Estate inspiration
Chad Carson @ Coach Carson: Super useful posts on RE from a guy who owns tons of rentals
Miss Mazuma @ Miss Mazuma: Excellent cautionary tale, super useful advice on the whole process and small living
Zeona McIntyre @ Zeona McIntyre: Great advice during the inspection period!
Claudia @ Two Cup House: Amazing advice on small living
GuyonFire @ GuyOnFire: Had really great advice on the purchase process, small living, and landlording!

And last but not least, Julie from Millennial Boss for being a calming influence and willing to let me vent to her in a call.

Thanks for reading! Any space-saving tips on downsizing into a studio apartment?!

 

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42 thoughts on “Rental Property #1

  1. The house looks great! Lots of character. I never remember to think about all the other costs associated with owning a house. The list just goes on an on…I am curious about why you chose to use a PM company when you will be living on site (I would have done the same, I just wonder what your reasoning was). Also, do you know why it is so cheap? 10% seems weirdly low, and it also seems to be the normal rate. How do the communal areas work, like the kitchen? Do the tenants get along?

    • I am living on site and managing it for now. The PM fee goes to me right now, but will eventually go to someone else when I get enough properties/move out.

      Each unit has their own kitchen and bathroom. The only real communal areas are the stairs and porches.

  2. If you didn’t put 20% down, does that mean you’re paying PMI on the house? That insurance covers the bank, but comes out of your pocket until you (generally) get 20% of the house value paid off.

    • The stairs to the attic are in the studio. So if I fixed the attic up, I could charge more for the studio even though it wouldn’t be up to code and totally shouldn’t have beds up there (since there is only one point of egress and not two).

  3. Congrats Gwen! Thank you for the shoutout. I believe this property will serve you well as your first house hack/investment. Cannot wait to see where real estate takes you! (Hint: it starts with F and ends with I).

    Keep up the great work

  4. Yay, congratulations! Looks like you’re well on your way. 🙂 Everybody’s gotta start somewhere, right? How long do you think you’ll live in your studio? Smart idea living in the cheapest apartment in the building, too–gotta snag that cash flow!
    Mrs. Picky Pincher recently posted…What A Frugal Weekend!My Profile

    • Thank you! My plan for now is to live here for a year. Since I got the VA loan, I have to live in it for a year before I can move somewhere else. As for choosing the studio….. it was the only one open when I bought it!

  5. Congratulations, Gwen! That’s exciting stuff… though I will say I’m a little jealous! 🙂 I’m looking for a third property and haven’t been able to make one work with my numbers for a few months now. 🙂

    Smart move planning for property management fees out of the gate. Even if you manage it yourself now, it’s good to have that in the numbers for down the line. Congrats on your investment!

    — Jim
    Jim @ Route To Retire recently posted…Four 401(k) Mistakes That Can Crush Your Retirement SavingsMy Profile

    • Thanks Jim! My area of the Midwest is pretty low cost. I could throw a rock and hit a house that would meet the 1% rule (or I could, if I wasn’t afraid of hitting a window lol).

  6. Congratulations and good luck! The property is ridiculously cheap. Our smaller duplex cost more than 5x. The house looks awesome. The stair case looks almost the same as our duplex. That square post (what ever it is call) looks exactly the same.
    I think you’re underestimating the repair and maintenance. Old houses like that always need a lot of work..

    • Ah the difference between the Midwest and Portland. Don’t worry, the high cost of living in Portland compensates by having a lot to do there. Not so much here :/

      It’s entirely possible. After the money I’m sinking into it this year, it *should* be good to go for awhile. Gives me time to save up for the next thing!

    • Definitely has some drawbacks. I got woken up at 345 by one of the tenants slamming the outside door this morning -.-

  7. Hi Gwen, Congratulations!

    Though, I didn’t quite follow your numbers. I see the total monthly expense of $1003.43. But the cap rate with and without you living in were harder to follow:
    Total rents minus your unit = $1,100 – $1,003.43 = $96.57 ~ 1.16% cap rate
    Total rents (if you include your unit) = $1,485 – $1,003.43 = $481.57 ~ 5.78% cap rate
    Did I miss something?

    My wife are working on purchasing our first property/duplex and it is fascinating to see the differences in the property market!

    • I actually did the same calculation as you until my friend reminded me cap rate is before debt service. It’s a metric meant to compare returns without leverage involved, so I had to run the numbers without my mortgage in it. Everything else stayed the same.

  8. This is great Gwen! I am closing on my first rental investment and I plan to release the numbers soon! It’ll be interesting to compare our two investments – my single family and your multi-family. I searched for a multi unit here but unfortunately they are not common in my city :/
    CentsOK recently posted…On the Hunt for a Mortgage LenderMy Profile

    • My previous town didn’t have an abundance of multi family properties either. Deals were SO much harder to find there. I’ll be interested to see how your numbers work out!

  9. Looks like a fantastic deal! This is *exactly* how I would approach it if I lived in the land of affordable real estate, too. I’d love to house hack! When the inevitable annoyances of tenants demanding things that aren’t in the lease, being late on rent, and capital expenses hit, just repeat to yourself, “I’m living here for free… I’m living here for free… I’m living here for free!”

  10. Congrats Gwen! Very excited for you. And nice that you were able to find a reasonably price property with some good return metrics even considering you’ll be living in one of the units.

    Listening to Chad Carson on the MadFI podcast was good inspiration a month or so ago. Part of me wishes I would have done a live-in rental unit to help get others pay the mortgage and get a return, but those days may be behind me. Eventually I’d like to have some rentals though.

    Happy for you and wish you the best of luck.
    The Green Swan recently posted…Our Retirement LifestyleMy Profile

  11. Congratulations Gwen!

    Now I’m going to take myself off to a corner to weep quietly for a bit about the fact that my house while smaller in terms of square footage cost about 10x.

    About living in a studio: I did that for over a year (but not quite two) in San Francisco. Here are some tips:

    1. Be tidier than you have ever been before. A cluttered studio, with no way to escape from the mess without hunkering down in the loo, is hell.

    2. I hung a rack from the ceiling of my kitchen, and another shelf with hanging space on the wall. This gave me plenty of space for kitchen stuff, and ensured that I couldn’t use lack of kitchen space as an excuse for not cooking.

    3. I used Ikea blinds that I hung from the ceiling to enclose my sleeping area and make it seem separate and very, very cozy.

    4. I had an Expedit Ikea shelf that was about 6 feet long and 6 feet high and divided into 25 cubes. So. Much. Storage.

    5. Use a shoe rack that hangs from the back of a door.

    6. Be brutal in your purging of material goods.

    7. Spend a lot of time outdoors exploring your city.
    Mrs. BITA recently posted…Are We There Yet? A FIRE CalendarMy Profile

  12. Yeah! Thanks for the shout out…I can’t wait to get my grubby hands on that efficiency!! We will make everything work efficiently. 😉 Love all Mrs BITAs ideas – she’s a smart cookie!! I have 10 years studio experience and if anything is true it is her #1. Get rid of all non essentials that don’t make you happy. All the crap we collect that has no real meaning. Doing that alone will help to be able to store the things that truly matter. I can’t wait to come see it in person!!
    Miss Mazuma recently posted…Shift Your Perspective & Create New HabitsMy Profile

  13. Congrats – I know Paula wrote some great articles on kitchen rehabbing for cheap so that may be the next step while you’re living in the studio. You can always rehab it and then move into the next one and do the same thing. I didn’t see utilities on there for the CF statement – on my multi-unit properties I’m responsible for sewer/electric/etc so just want to make sure you’re including those in there. But cap rate honestly looks great regardless and now you’re living rent free!

    • The kitchen is fine, now that the oven is there. I added a kitchen island on the other side so I have counter space and a drawer for utensils!

      Good call about the utilities. I’m responsible for the house line gas/electricity, sewer, water, and trash. No idea how much that will be. I also need to include yard work. I have no idea how much each of those are, so I’m waiting to get actual numbers on those before I include them.

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