This Is How We Real Estate
We took a trip to the city today to place a lock box and check the condo before the first showing. I emailed my buddy, a discount realtor, a few days ago who popped my listing up on MLS for a minuscule fee. We have used him for years, and he already has the listing sheet and pictures from the last time. It took thirty minutes. Per our instructions, if realtors want to show the unit they text me their info (I don’t want to be interrupted by phone calls). If their credentials check out. I text my current tenant and get their approval before texting back the agent and giving showing instructions. We’ve now done this so many times, that in a pinch, we have conducted the process from out of the country. I even have a lease downloaded on my phone.
We never thought we would become real estate moguls, but it kinda makes sense. Growing up, my parents owned 13 rental properties at once. My wife’s octogenarian father, to this day, manages two buildings and fifteen units. You could say that real estate is in our blood.
Our first condo was not even an investment. The market had plunged and my wife and I had always dreamed of a pied a terre in the city. So we bought a one bedroom in a high-rise off the miracle mile for $230,000. WE put $15000 into it, fixed the kitchen, and turned the dining room into a second bedroom,. We were mesmerized by the walls of windows in almost every room revealing the dazzling cityscape.
It was beautiful. But we didn’t use it. So we rented it after six short months. Out first tenant got a great deal. We now collect $2300/month. This is by far our worst investment do to high HOAs. Our current Cap rate is about 5%.
Then the market crashed. We found a foreclosure two bedroom in a very popular but respectable city neighborhood. We spent another $10,000 for minor fixes, and after a few years the rent has risen to $2100/month. Given the low HOA and property taxesnthe Cap Rate stands at 8%. The has been our best purchase. Since we paid cash, we have no mortgage costs to carry.
With two properties under our belt, we were feeling confident. My wife, who always dreamed of owning a house on lake Michigan, found a foreclosure four bedroom with 80 feet of lake front beach in Wisconsin, a one hour drive from our home in the Chicago suburbs. We did an extensive renovation of the kitchen, bathrooms, and bedrooms and spent another $40,000. We financed this one with $100,000 line of credit that we paid off quickly over the next year. We rented the house for $2700/month which gave us a lousy Cap rate of 4.1%. This one, however, was worth far more than we bought it for. After three years of renting to the same couple, we sold it to a neighbor without realtors for $705,000.
Now, as many of you, we are not big fans of the tax man. So we quickly bought two more condos in the city using a 1031 exchange (and contributing about $50,000 of cash). These condos have been occupied since last year.
So in total, we own four condos. We spent $945,000. The condos are now worth an estimated $1,500,000.
We collect in rent: $2300 + $2100 + $2700 + $2700 = $9800/month or $117,600/year
Cash flow after expenses is half: $58,800
Our Cap rate based on our original investment: $58,800/945,000=6.2%
Our Cap rate if you consider the earnings from our house sale included in the purchase of the last 2 condos: $58,800/1,210,000=4.9%
Although many have argued that owning and renting condos is risky business do to the difficulty associated with Home Owner Associations (HOA’s), we have found the exact opposite. The HOA governing board is made up of tenants and many of them also rent out their own condo’s. So the likelihood that our HOA’s will pass a no renter policy is small. Also, the HOAs provide for basic maintenance. Condo’s are smaller and upkeep is generally cheaper.
We also really haven’t used leverage. Although this cuts down on our returns, it makes our risk profile extremely low. We have the luxury of being high W2 asset class earners and real estate has provided a good way to transfer our wealth from the risky W2 asset class to the more stable business asset class.
So there you have it. This has been our formula for success. In the next few years we hope to buy one or two more properties to round out or rental income. We dream of one day making enough income from rentals to support ourselves, taking the depreciation from the properties, and then having zero effective income. This would certainly help us work on our Roth conversion ladders.
Anyone else out there renting condos? let me know your thoughts.