For those of you who haven’t had a chance to read my first blog post, How Our First Property Turned Into an Eviction and Rehab 5 Months In, I’ll give you a little background. My husband and I are from South Florida and currently live in Brooklyn, NY. We started educating ourselves about real estate in late 2016 when we decided we wanted to build a rental portfolio after realizing how truly expensive it was to purchase an apartment for ourselves in New York City. So we began reading forums and several BiggerPockets books, and listening to podcasts. When it came to deciding where we should invest, we felt most comfortable in the state we grew up in: Florida.
Step 1: Saving Money
My husband and I both have well-paying jobs in NYC, but more importantly we live below our means. This is one of the main aspects that has allowed us to save money and has enabled us to invest in real estate. We understand that NYC, and most other big cities across America, has high rents and food cost forcing many people to live paycheck to paycheck. Many of our coworkers buy breakfast and lunch everyday, while we eat breakfast at home and bring our lunch to work. While a lot of New Yorkers go out for dinner, we cook at home. Don’t get me wrong, we definitely do get to enjoy evenings out with our friends and take trips, but we do it conservatively. We don’t want to spend our entire paychecks and have nothing to show for it, so we came up with a plan that would allow us to save a good amount each month. Our savings strategy is simple: we make sure that all of our expenses can be covered by one of our salaries while the other person saves their entire salary or pays down our debt or a combination of both. We feel this is the most efficient way to save. We have always been big savers. We saved to pay our wedding in full, to move to different cities, for vacations throughout the past twelve years and most importantly we max out our personal ROTH IRA accounts each year. Anyone can do this no matter the size of your paycheck. We did not make much while saving for our wedding or any of those other times. At least one of us was always in school. It wasn’t until two years ago that we both had good paying jobs at the same time. So the lesson here is, no matter how much money you make, you can always find a way to put a good amount of it into your savings if you live conservatively.
Step 2: Preparation
Besides saving money and learning about rental property investing for two years we also had to decide which city in Florida to invest in. We went back and forth for a while and ultimately decided on Jacksonville. At first we felt like narrowing down a city was all we needed to start investing, but we quickly realized that we needed to learn more about each neighborhood since each neighborhood has unique demographics. This was not so easy as Jacksonville is the largest city in the continental United States by land area. It took us another year to really learn which areas had high crime rate, which areas were good for rentals, which areas had potential for appreciation, etc. Of course we did not want to wait an entire year to learn this, we had already waited long enough! We spoke with our realtor, which is a trusted long time friend, and stayed in the lower crime areas for our first deal.
Step 3: Dive In
Many newbie investors get stuck at this stage. They have the money, they have the knowledge, but they can’t find a property. We could have been analyzing deals for the next year, but we knew we just needed to go for it. We found one property we really liked but hesitated thinking we would need to update several costly items to make it perfect. The house was in good condition, but had ugly paint color and old tile flooring which looked dated. Ultimately, we didn’t make an offer on it because we figured we would have to invest too much into the renovation of the property so that it can be rented out. Shortly after we saw that the house was purchased and rented out immediately without a single thing done to it. Lesson learned. The second property we liked was a bank owned property and we did make an offer on it. The bank had sealed off the attic and would not open it for inspection. That was suspicious to us and we didn’t want our first purchase to potentially be a money-pit, so we backed out during the inspection period. Third time’s the charm! We found a 3/2 with a tenant and closed a month later.
You’ll see a pattern here with each one of our properties. We inherited tenants with all of them which was pure coincidence. The first property we purchased in February 2018 is a 3/2 near Jacksonville University. We had saved approximately $28,000 for a real estate investment so we wanted to find something under a $100,000 purchase price. Here are the details of the deal:
Listing Price: $100,000
Appraised Value: $106,000
Purchase Price: $90,500
Down Payment: 20% ($18,100 plus $5,200 for closing costs)
Monthly Mortgage (Including Taxes & Insurance) and Operating Expenses: $723
30 yr fixed rate of 4.875%
Monthly Rent: $1,075
Vacancy Loss: 8% annually
Monthly Cash Flow: $266
If you read my first blog post you already know that this inherited tenant ended up abandoning the property a few months later, leaving a disaster behind. We had to undergo a rehab which gave us the opportunity to build a strong relationship with a contractor we met on BiggerPockets a few months before. Here are the new details of the property post-renovation:
Rehab cost: $8,000
New Appraised Value: $118,000
New Monthly Rent: $1,200
New Monthly Cash Flow: $381
Cash-on-cash return: 14.7%
Target 10 yr net IRR: 13%
Because of this renovation we ended up with a 43% increase in monthly cash flow. You can see the Zillow listing here and how nice it turned out. It took less than a month to get it rented out to high quality tenants.
Between February and October of 2018, we continued to save and around the beginning of October we designated $20,000 for a down payment and closing costs for our next deal. These funds came from us saving the way I spoke of earlier and also saving some of the cash flow we had from property #1, before the rehab took place. The second property we purchased is a 3/1 in a bit of a lower income neighborhood, but had long standing tenants and a very nice cash flow. We purchased it in October 2018. Here are the details of this deal:
Listing Price: $55,000
Appraised Value: $49,500
Purchase Price: $49,000
Down Payment: 20% ($9,800 plus $4,093 for closing costs)
Monthly Mortgage (Including Taxes & Insurance) and Operating Expenses: $389
30 yr fixed rate of 6.0%
Monthly Rent: $815
Vacancy Loss: 8% annually
Monthly Cash Flow: $361
Cash-on-cash return: 32.9%
Target 10 yr net IRR: 32%
This property required us to fix an electric meter about a month after purchasing it which cost $900 and about $200 fixing a few minor items like a broken light and vanity in the bathroom. After this deal we had a little over $5,000 left in our real estate investment savings account.
One month after purchasing property #2 we wanted to either do a flip or BRRR. We already knew that our first property had a good amount of equity in it so we started researching how we could obtain a HELOC on an investment property. This idea came from Brandon Turner's "The Book on Investing in Real Estate with No (and Low) Money Down" that we read along the way. By the end of November our first house appraised for $118,000 and we were able to open a HELOC for $24,000. We also built a relationship with a hard money lender. All we needed now was to find a deal. After over two months of looking at hundreds of properties and then performing heavy analysis on about 60 properties, we could not find one that would meet our standards. It turns out that the Jacksonville market did not give us much of a margin to do a flip or a BRRR unless you do a lot of the rehab work yourself or have cash where you would avoid the hard money fees. We also didn’t want to take on more risk by buying a really old house that required more work than what we initially wanted to do our first time around. So we changed our strategy and decided to purchase a third rental property. We found a 4/2 in a very nice neighborhood. An all brick home and of course it already had tenants. The tenants have been in place for twelve years and they don’t plan on moving any time soon. Additionally, the tenants are currently paying below the fair market value for that specific neighborhood, so we do plan on increasing rent proportionally each year to bring their rent to fair market value. We purchased this property in February 2019. Here are the details of the deal:
Listing Price: $128,000
Appraised Value: $126,000
Purchase Price: $123,000
Down Payment: 15% ($18,450 plus $6,633 for closing costs)
Monthly Mortgage (Including Taxes, Insurance & PMI) and Operating Expenses: $890
30 yr fixed rate of 5.25%
Monthly Rent: $1,100
Vacancy Loss: 8% annually
Monthly Cash Flow: $122
Cash-on-cash return: 5.8%
Target 10 yr net IRR: 15%
ARV: $185,000+ with about $25,000+/- of work needed
For this one we used $15,000 of our HELOC for the acquisition costs and the rest we paid with our savings. Luckily, we had the HELOC sitting and waiting for us to find a deal. Not only are we always looking for deals, but we have the money in place beforehand. The plan is to pay the HELOC in the next 12 months and fully rehab the property in the next two years using the same HELOC. With an ARV north of $185,000 we stand to make a good profit if we decide to sell it or do a cash-out refinance, which was why we accepted a lower cash flow from this property. With these three properties we now have an average positive cash flow of $249 per month.
Savings + Preparation + Diving In = Three Rental Properties
A ton of hard work went into getting three properties in a one year time span. It was not luck. We are not rich. We planned and saved and prepared to get here. Anyone else can do the same, but you have to be committed to achieving your goals. The work doesn’t stop at acquisition, it actually just begins! Our properties are giving us all new challenges to face: learning to deal with tenants, finding contractors and handymen to fix problems and keeping up with the housing markets. I have so many people asking, “How did we purchase three properties in such a little amount of time?” When I start explaining to them about all the work involved to acquire the properties and all the work that comes after, I can tell whether they really want to do this or not.
A lot of investors decide to hand over their properties to a Property Manager, but we self manage from out of state. I enjoy self managing, in fact I actually love it. It’s always rewarding when we handle issues immediately that our tenants have had from previous landlords and how grateful they are when we fix it quickly. As renters ourselves we expect our landlord to fix any issues as soon as possible. We try to treat our tenants as we would like to be treated ourselves.
Our next step is to begin looking for investors who want passive income in real estate. We plan on finding the deals and manage them long-term with our rolodex of contacts in Florida to handle any situation that may arise. Our positive cash flow strategy has proven successful thus far, so our only logical next step is to now scale our business model. Stay tuned for more updates and our next post on how we conduct our analysis!
Happy rental property hunting to all, and thanks for reading! Feel free to ask any questions you have about rental property investing or real estate, I’ll try to answer as best as I can.