My only financial goal in my list of 2011 New Year Resolutions was to acquire a 4-plex rental property. I’m glad to report that we finally closed the deal on August 31st and are a proud owner of a 4-plex investment! This 4-plex was a short sale property and we’d been trying to work out a deal since April. It took almost 6 months to go through the whole process and I don’t know if I would buy another short sale property with this kind of wait time.
The 4-plex was listed for sale at $375,000 in Jan 2011 and was reduced to $350k by March.
In April, we made an offer of $325k (+5k closing cost) to the bank, contingent on inspection. The bank took about 2 months to make their decision and accepted our offer in late June. At this point we had a thorough inspection done and found many issues as detailed in this 4-plex short sale experience post. After seeing all the issues, I got a bit scared and asked for another price reduction. The last offer we made was $300k + 5k toward closing cost. The bank took another month to do the paper work and they accepted the offer in late July.
Here are the final numbers
|loan fee, title, escrow, etc…||3,827|
|1st year insurance||1,184|
|mortgage loan (75% sale price)||225,000|
|out of pocket||74,276|
|closing cost credit from seller||5,000|
In addition to this, we paid for a few more things during the inspection period.
|sewer cap repair||347|
Up to now, we’ve invested a total of $76,408 in this project.
The roof and crawlspace need some repair and maintenance before the rainy season and that will cost around $3,000. We probably can’t look at the last 4 months of this year due to the deferred maintenance, but I will report each month and show you the income and expenses. I think 2012 will give us a much better idea of how this 4-plex will do as a rental property.
Here are my monthly estimates.
|Monthly calculation||1st year|
|Rent with 5% vacancy||$2,802.50|
|monthly payment 30 years @ 4.875%||($1,190.00)|
|tax and insurance||($465.33)|
|monthly operating cost (management, repairs, lawn, etc…)||($946.18)|
|depreciation value @ 28% tax rate||$169.70|
|money to principle||$300.00|
|real positive net worth (cash flow + tax credit +
payment going to principle)
|yearly ROI (8,048/76,408)||10.53%|
As you can see the cash flow is pretty small at $200/month in the first year. The monthly increase to the net worth looks much better though. Rental properties usually take a few years before they start making a good return. In 10 years, the rent will increase and the mortgage payment will stay the same with more payment going toward principle. At that point, we should be getting good monthly cash flow. Mrs. RB40 is crossing her fingers.
We are taking a mostly hands off approach to the 4-plex and hired a property manager. I’m way too busy to manage a 4-plex by myself at this point. Maybe once I leave my full time job, I can take up the challenge.
– Don’t be afraid to ask for further price reduction. The agents may hesitate to do this because they want to close the deal, but use your own judgement. I suppose we could have asked for a lower price too…
– Ask for interest rate float down. We got .125% float down just by calling our finance guy.
– Short sales will drag on for 6 months and give you a lot of headaches.
Any questions or comments?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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