Today we will get back into our journey with our 4 unit we bought off market that I described 2 days ago in day #6.
So, we had the large 4-unit we bought from a direct mail campaign for $21k. The house was in an unlivable state with grass growing in rooms, mold, walls missing, ceilings falling & tons of work ahead. We had hired a new contractor team & started the demo. Just clearing out the trash, “walls,” plumbing & wiring filled up over six 40-yard (the BIG ones) dumpsters. We were left with basically studs on the inside and the outside walls. We had bought the house cash, but got a construction loan from the bank for $105k to cover the project. This turned out to be a gross underestimate of what ended up going into the essentially new construction of the 4300 sq ft building. We ended up putting a total of $160k (including the finishing touches such as brand new stainless steel appliances, all new windows, etc). While this was more than what we had budgeted for (this was our first large project), we still knew that we had acquired a great building that was worth more than we put in. When the project was done (see pics below – it turned out wonderful!), we went to the bank for the mortgage to pull out our cash. Due to this being a 4 unit, it was valued based on comps instead of rents as commercial buildings are (defined as 5+ units). There were no other local, new construction 4-unit buildings around, so the appraiser based on under-rented, old local comps. This was a huge blow to us because we were (hoping for) a larger appraisal to pull out all our cash as we did in the first 4 houses we bought and discussed. We ended up having to keep some of our initial capital in the project. HOWEVER, now that we have this property owned and seasoned for over a year (meaning you have owned it for a certain period of time), we are in the end stages of a refinance on the property. Over the last 2 years as is obvious even if you are not an active investor, the housing market has exploded. House valuations are up across the country. We have made sure the bank is going to value this based more heavily on rent instead of comps this time and will be pulling out about $200k on this property. This is $200k we can now reinvest in another building this summer. Meanwhile, we still have huge cash flow each month from this property while we pay $0 ourselves to the mortgage since the tenants’ rent covers this! The units are currently rented out for up to $1200 / unit. $40k/year NOI and 50% Cash on cash. Not bad!
Tomorrow I will discuss leverage & why you will get much further (and wealthier) by owning properties w/a mortgage & leveraging debt to secure more properties!