Duplex #2 - The Journey & The NumbersFeb 10, 2022
To say our Real Estate investing journey moved swiftly and has been a bit of a whirlwind would be an understatement.
We started diving into what I call the “learning phase” of real estate investing shortly after my husband and I got married in late 2018/early 2019.
My husband was more intrigued by this side of the investment world than I was in the beginning. He read books, joined a local real estate investors group, and I’m pretty sure listened to every. Single. Episode. of The Bigger Pockets podcast.
We had conversations about it, and I attended 1 or 2 sessions of the “weekly real estate group” meetings but we were really just soaking in education for quite a while. Then some time at the end of 2019 - my husband came home one day and informed me that we were going to a Real Estate investors conference in Saint Louis for an entire weekend.
I’ll be honest, at the time I was a little perturbed because the conference wasn’t in the budget, LOL, and he didn’t ask me about it before signing me up! Sometimes, you just have to go for it and I appreciate his ambition. I was still a little iffy on Real Estate investing at this point. Looking back, my iffyness was purely driven by my lack of education at the time and the conference was exactly what I didn’t know I needed!
We left this conference in early 2020 (quite literally the weekend before the world shut down) and were fueled with inspiration, invaluable education, and motivation. We were ready to go!
Let's Dive In
This blog post is all about Duplex #2, but before we get into the journey of duplex #2 (if you’ve you have been following on IG since ~June of 2021 you know a bit about this roller coaster ride) I want to provide a brief outline of the OVERALL journey. Won’t be diving into Duplex #1 today as that property has been quite honestly a breeze that we snagged for a KILLER deal and I don’t think it paints an accurate picture of investing in Real Estate in today’s market.
2018ish-Early 2020 = Learning phase/accumulating first down payment
October 2020 = closed on Duplex #1
March 2021 = Stumbled across Duplex #2 through our Realtor
May 2021 = closed on Duplex #2
See what I mean by “a bit of a whirlwind?” we moved quickly from Duplex #1 to #2 (insert the hot and sweaty emoji).
Duplex #2 - The Full Run Down from Start to Finish
Late March 2021
Duplex #2 in all her glory on the day of the showing
As I mentioned in the timeline, we came across this duplex through the Realtor we used to purchase our primary home back in 2017. After chatting with her about the property - we felt like it was something we needed to entertain. We didn’t think we would be buying another duplex so soon after closing on the first one, but this wasn’t something we could turn a cold shoulder to.
We started thinking strategically, getting our ducks in a row, and off we went to the showing of the property.
There was 1 showing for the property during a 2-hour window, that's it.
This is pretty common in today’s market, especially for rental properties where it’s a bit of a headache to get tenants out. We rolled up to the property and investors and their realtors were literally lined up like an episode of Shark Tank. It was honestly hilarious, we were all walking around the duplex together, whispering our thoughts and trying to talk quietly with each other so our “competition” couldn’t hear. Alongside us were 2 other men, appearing to be business partners, wearing business professional attire at the showing.
The property panned out to be pretty solid as we had expected.
- Each side of the duplex was identical: 2 beds, 1 bath with a garage.
- Good location with decent schools in the North Kansas City area close to highway access and just about 15min from the downtown area.
- The garage space on each side was huge with windows and a nook for laundry. My husband immediately noticed the potential in each garage to finish out an additional room such as an office down the road.
- Hardwood floors throughout both sides with an all brick exterior are a big bonus from a maintenance standpoint as a landlord. With brick, you really don’t ever have to replace siding and hardwood floors, as we all know and love, last for years and can be refinished easily when needed without breaking the bank.
Of course, there were a couple of drawbacks or CONS...
- While side #1 of the duplex had been recently renovated and had a great, trustworthy tenant with a good track record. This tenant was locked in for another yearish almost, so part of the deal was they were coming along to the new owners no matter what. On the other hand, Side #2 was a bit of a disaster. It needed a remodel and the tenants living in side#2 were borderline hoarders who quite frankly, lived in complete filth.
- And Con #2, the roof would need to be replaced sometime in probably the next few years.
Given all of the above and our strategy to buy and hold long-term, we decided we want to make an offer.
The property was listed at $190K, and although the housing marketing was buzzing, with some of the cons considered, we knew it wasn’t going to fly off the market well above that price…. At least we knew any smart investor wouldn’t offer more than $200K.
So, we put in our offer at $195K contingent on an inspection. As you are likely aware, in this 2021 housing market, people are waiving inspections right and left in this market, but we were not comfortable doing that.
The waiting game… if you’ve ever bought a house, you know after you put in your offer you just sit back and anxiously await a call from your Realtor.
Phone rings - Darn it. We didn’t get it. Those 2 other men we saw on the property had won the offer. They also offered $195K but had waived the inspection.
Okay moving on, we said! It wasn’t meant to be.
BUT then the tides turned. Roughly 2 weeks later we get a call back from our Realtor stating the 2 men had retracted their offer. The exact reasons were not shared, but our safe assumption was that they ended up not feeling comfortable proceeding without an inspection and as their offer was not contingent on one… they pulled out.
Our Realtor informed us that if our offer still stood, we would get the property (contingent on an inspection of course). We saw no risk here - and there we had it! The property was ours pending the inspection.
The inspection was conducted and there were no major red flags - it passed. Woo hoo!!!
We did it.
We closed at the end of May and Duplex #2 was in our hands.
Next Steps… The curveballs start coming….
As previously stated, the tenant on side #1 was already locked into a lease agreement through 2021. But, on side #2, we knew the tenants (I’ll refer to them, kindly, as the messy ones) had a lease ending June 30.. About a month away from this point in time. We weren’t sure if they would resign.
While they were messy tenants, we hoped they would resign for 1 more year as we knew that side needed a remodel. The longer they stayed, the longer we could put off that work. After buying our 2nd property in 6 months, facing a remodel right of the bat was something we wanted to avoid if possible.
Sigh - these tenants informed us they were not going to resign and would be moving out at the end of June when the lease with the prior landlord expired. Okay fine.
Curveball #1 - We have to execute a remodel, pretty close to a complete gut aside from the flooring to make it worthwhile. I remember sitting on the back deck grilling some food with my husband when he got this call.. We just looked at each other and said.. “Alright here we go! We can do this!”. We began to plan for this and created a loose budget. We knew we couldn’t plan in detail until the tenants were out and we could fully assess the situation. I’m not kidding you they had stuff stacked everywhere, floor to ceiling.
And the clock starts ticking to June 30th….
Curveball #2 - The messy tenants call my husband and kindly asked if they can stay until July 14th. They explained their new place wasn’t ready on time and my husband, who has a pretty good BS reading ability and had spoken directly to the tenants on a couple of occasions at this point, felt they were respectful and agreed to let them stay an additional 2 weeks under 2 circumstances.
1) Prorated rent for 2 weeks must be paid July 1
2) Also by July 1, they must sign OUR lease agreement for those 2 weeks. You can’t have anyone living in a property under no lease agreement, no matter the duration.
They completely understood and agreed to the above circumstances to stay until July 14th. My husband stated he would be sending the lease agreement via email, shared how to pay, and that was that- the phone call ended pleasantly.
& it starts to go down…
It’s almost July 1 and a few days after my husband had emailed the lease agreement. No response. He follows up with a text which is ignored, then a phone call which is answered. (Mind you, at this point, our state was still under the eviction moratorium due to COVID) The tenant explains she does not have access to the internet and cannot sign/send the lease agreement back via email. My husband's BS meter starts to light up. We knew this tenant worked from home, but okay maybe there was a major internet outage…
My husband says “no problem” and arranges a time to deliver the lease agreement in person. The tenant agrees to the time.
That time arrives and my husband is standing at the door knocking with the lease agreement in hand. No one answers. People are clearly home. He knocks some more. No one will answer the door.
At this point he realizes what is about the go down, these tenants plan to avoid him at all costs and squat on the property until they leave.
He calls and texts again and again, never a response after this point.
We sit back and just say “okay, it is what it is, let's just hope they still plan to leave by July 14th.” We weren’t worried about getting 2 weeks' worth of prorated rent - we just wanted them gone without additional headache.
^^If you want to go down a rabbit hole of entertainment… search tenant evictions on Tik Tok… you will find some insane videos of landlords dealing with tenant evictions after the eviction moratorium ended. In many cases… these tenants hadn’t paid rent for an entire year or more and still wouldn’t leave. This isn’t 100% relatable to our situation as at this point these tenants were legitimately squatting on a property with no valid lease agreement in place.. But still.
Okay, I digress.
We sit on the edge of our seats until July 14th. The day rolls around and they are not gone… but it does appear progress is being made as a moving truck was in the driveway.
We get legal notice ready to go and plan to check back in a couple of days.
July 16th… whew! They are gone. We were relieved and felt like we honestly came out on top as the situation could have been a huge drag had we needed to get others involved.
Here comes curveball #3…. THE CLEAN-UP.
We knew this unit was going to need a lot of TLC after they left… but holy cow. The amount of stuff they left behind was daunting… and disrespectful to say the least. Piles of trash, I’m talking PILES strung all over the floor. Dirty clothes strung out all over the place. A refrigerator full of expired food. I have never seen a refrigerator so filthy in my entire life. It took a pressure washer and gallons of bleach to clean it out! Junk strung out all over the place. It took multiple truckloads, no exaggeration, just to get the stuff left behind out of the house before we could even begin the work to update this unit.
Here are some photos of the filth after we go the junk out… it was really, really sad, to say the least, as an infant was living with the tenants.
The VENTS - they ALL looked like this. The air freshener hanging off of it was the icing on the cake. I mean.......
The bathroom sink. I thought about trying to salvage those eyelashes... lol JKJK.
Okay, I will stop there as you might be throwing up a little in your mouth. Trust me, you don't want to see the rest.
So we got it ALL cleaned up… and now to start the remodel.
We learned A LOT through the remodel. We made mistakes, but we are thankful for the learnings as they have already made us better investors.
Mistake #1 was thinking we could do it all ourselves… HA! Big LOL looking back. Ya know, kinda like when you feel REALLY hungry at a restaurant and you order A LOT of food… but then you realize you can only eat half of what you ordered…that is kinda how this went down!
While my husband is VERY handy and spent summers in high school working for a contractor who executed flips… We realized after about 2 months that it wasn’t a sustainable 1 man job… especially 1 man job of a man who works full time!
At this point, it is mid-September, we had all the supplies purchased and had done a lot of the demo work and painting ourselves…but realized it was time to pull the trigger on a contractor to do the rest.
So we did just that… got a contractor in place who refinished the wood floors, laid the tile, installed new countertops, etc.
While this was going down…
CURVEBALL #4 comes flying in…
There was a huge thunderstorm that knocked down a tree in the backyard damaging power lines. Tree removal was required (luckily as the contractor was in place for the work INSIDE now, my husband managed this with his chainsaw) in addition to dealing with the utility company to fix the damaged power box/lines.
FINALLY, READY TO RENT!
Finally, November rolls around and the unit is READY TO RENT. Whew.
But, as you can imagine, around the holidays is pretty much the worst time to list a unit. Not many people are moving this time of year!
At the end of December, we get a quality tenant lined up to move in early Jan… whew, it’s over!
^^ During this time, we had a tenant chose not to resign their lease in Duplex #1… so my husband was juggling finding 2 tenants at 2 locations all at once. Thankfully, there was a pretty large number of applicants, and we feel really good about the tenants in place.
...probably the moment you’ve all been waiting for...
There are 3 KEY KPIs when looking at a rental property…
- Cap Rate: This gives you an idea if you are buying the property at a good deal. It compares the return on investment (ROI) to the purchase price.
- The calc for cap rate is: (Net Annual Income (which is gross income – expenses) / Purchase Price) x 100 *IMPORTANT NOTE* Cap rate calc does not include mortgage expenses
- Cash Flow: You need a positive cash flow. This is essentially your profit after all expenses are taken into account.
- The calc for cash flow is: Monthly expected income – monthly total predicted expenses
- Cash on Cash Return: This number is how much return you are getting on the money you invest. If you pay all cash for a property, this number will be the same as the Cap Rate. If you are financing, this number is the most accurate way to see the actual return you are getting on your cash-in and the leverage.
- The calc for Cash on Cash Return is: (Net Annual Income / Total Cash Invested) x 100
The Breakdown of Duplex #2
Purchase Price = $195,000
Cash Down = $50,000
Renovation Expenses = $6,947
Monthly Rent post Renovations = $1,845
PITI (Mortgage Principal, Interest, Taxes & Insurance) = $982
HOA Fees= N/A
Property Management Fees = N/A
Vacancy = 5% ($92.25) - this is how you calculate and accommodate for vacancy costs. You include in monthly expenses. Luckily with a duplex such as this property, 1 side can almost entirely cover monthly PITI, which is very helpful during vacancies.
Repairs = 10% ($184.5) - just like vacancies, this is how you buffer in repairs.
Total Monthly Expenses = $1,258.75
Cap Rate on this property = ((($1,845 - $276.75) x 12)/$195,000) x 100 = 9.7%
Anything over an 8% cap rate for a rental property is considered good.
Cash Flow (today) = $1,845 - $1,258.75 = $586.25
With a fixed mortgage rate, cash flow will only increase over time.
Cash on Cash Return = (($1,845 - $1,258.75) x 12) / $56,947 = 12%.
In general, most experts agree that between 8-12% is a good cash on cash return.
And there you have it, the journey and the #s for Duplex #2. The numbers are prettttyyy solid. While the housing market is HOT, there are still good deals out there. They require hustle, but that hustle will pay off BIG TIME.
At the end of the day - here’s how to think about it in layman’s terms.
This is an appreciating asset that our renters will pay the debt on overtime while providing cash flow.
If rent NEVER goes up (which it obviously will) in 30 years a $56,947 upfront investment will pay us back $148,230 in cash flow. And in 30 years, this property will be worth ~$475,000 assuming an average 3% annual appreciation.
My husband and I plan to hold this puppy long-term. The mortgage will be paid in full by age 60 for us, at the latest, and assuming we don’t sell, the cash flow per month will likely be close to $3,500/month if not more at that time while the property will continue to appreciate. I won’t shake a stick at an additional $3,500/month in income (income that comes with a lot of tax favors) during retirement, that’s for sure!
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