Case Study 9473 Borough Park St

This paper was originally published in October of 2016. It's been a year, we have a new tenant, the property appreciated and the rent increased. Below is the original article and following it is the update. Below is the results after one year:

  • Return increased from 5.5% to 6.4% in one year.
  • Purchase price 180,000. One year later: $209,000. A 13.8% increase.

In this article I will show how our process works by following a property from discovery through leased. Cleo (my business partner) was the purchaser of this investment property so we can share any and everything about the acquisition. Included in this article you will find links to:

The Property

The property is a town home located at 9473 Borough Park St in the south west part of the city and is marked on the map below:

The property was initially selected using our software. Our first viewing is captured in this video. (That is Cleo in the video.) The property appeared to be worth further consideration so we ran hand comps, which supported a purchase price of $180,000 (the asking price) and a rent of $1,150. Below are the numbers:

Assumptions

Item Value
Purchase Price 180000
Rent (Mo.) 1150
Fees (Mo.) 90
Insurance (Yr.) 350
RE Tax (%) .86
Management (%) 8
Closing Cost (%) 3
Loan Rate (%) 4
Loan Term (Yr.) 30
Down (%) 20

Recurring Expenses (Mo)

Item Value
Debt Service -687
Insurance -29
Property Tax -129
Assoc. Fee -90
Total -935

Income (Mo)

Item Value
Rent 1150
Management -92
Total 1058

Return at 180000 and 1150/Mo.

Item Value
Cash Flow/Mo. 123
ROI 20 3.5%
Cash/Cash 5.3%

We know this specific community and it is located in an excellent area with new construction all around the area with lots of shopping and such going in. We were both very positive on the long term prospects for this property so Cleo was less concerned about short term return and focused more on the long term profitability.

We sent the video to the property manager for her opinion and below is her opinion:

I have reviewed the video and really like the floor plan and the neighborhood is great.

There are a few items I would look to change: I would get all kitchen appliances to match. The mismatching right now is tacky. Of course the slider blind needs to be replaced. (I would look into just a curtain rod and light weight curtain since there really isn't a privacy issue (that I saw.) Keeping the curtain drawn up on the NON-opening side would add a color accent to the kitchen and you wouldn't have to deal with pesky blinds. Just a thought. The garage is very large. I am not a fan of the washer and dryer in the garage but there are pros to having it there. As a rental, most tenants do prefer W/D inside the property. I would paint the walls. It feels VERY white in there now. The light beige that Eric puts on the rentals is a very warm and neutral color. The carpet looked to be in good shape but if there is gonna be yours to live in you may want to upgrade the flooring.

Overall a very nice real estate purchase. My only complaint would be the walk to the front door. It is long and not very appealing (but as the owner you would very rarely be taking that route since you will be pulling into the garage and accessing the property from there. )

If you were interested in rents- Should be $1195 with the items mentioned above completed. (It sounds like this is gonna be your own property so the rental comp may not have been needed but good to know)

At $1,195/Mo., the return is:

Return at 180000 and 1195/Mo.

Item Value
Cash Flow/Mo. 164
ROI 20 4.7%
Cash/Cash 5.6%

We next estimated the rehab cost based on installing tile throughout the property with the exception of the bedrooms. There was already tile in the baths and kitchen, which had to be removed. The initial rough estimate is below:

Cost Qty Unit Cost Extension
Ceiling Fan 2 150 300
Ceiling Light 4 50 200
Replace Carpet 30% 1.8 758
Tile 70% 4.70 4619
Paint Interior 100% 1 1404
Blind 2 60 120
Estimate Total 7401

There are other items we expected to be discovered during the inspection so we ended up estimating the rehab to be approximately $8,500 plus a new microwave and a refrigerator. Adding these costs: $8,500 + $800 (refrigerator) + $350 (microwave installed) = $9,650. This still made sense due to the specific property and what is developing around it.

Cleo offered the asking price of $180,000 because we expected multiple offers on this property due to the specific community (and there were indeed multiple offers) and we believed others would offer more than the asking price so she did a few things worth noting in the purchase contract ( Here is the purchase contract.) which are listed below:

Item Cost
Paint walls and trim 1400
Repair master ceiling and paint ceilings 600
Tile whole house except bedrooms.
840FT of tile @$4.50
3780
Demolition 600
New baseboard 700
New carpet in 3 bedrooms 540SQFT @$1.80 972
Replace 4 fixture lights 160
Replace lights as needed and new smoke detector
batteries on smoke detectors
80
Adjust lock in garage door 30
Install new screen door 100
Fix the water heater 80
Repair stucco and touch up paint 200
Secure garage box opener 50
Attach tile on roof 50
Install back flow in exterior faucet 20
Install thermostat 50
Replace blind in living room 100
Install new fan in master bedroom 180
Install new microwave in the kitchen 80
Install 2 angle valves 40
Repair kitchen faucet 40
Move appliances 100
Replace blind next to the entry door 60
Install curtains at the sliding door 40
Grand Total: 9512

The offer was accepted and Cleo had the property inspected. Here is the inspection report.

Nothing significant was discovered during the inspection. After the inspection and the walk through by the property manager we now had a fairly clear list of what needed to be done so I met with the handyman and put together a detailed estimate of the rehab cost. Also, we were able to obtain a used refrigerator and a lower price on the microwave for a total cost of about $400 which is not included in the cost list below. The revised rehab cost estimate is below.

Adding the $400 for the refrigerator and microwave the total is now ~$10,000. We reran the numbers and the return was still acceptable with the revised rent estimate ($1,250/Mo.) so we continued with the purchase.

McKenna Property Management did the final walk through before they took it under management (a few more items were discovered and corrected at no additional cost). Based on the final condition of the property, the rent was set at $1,250. The property closed on 9/23/2016. Rehab stated the following day. The property was placed on the market for rent (after rehab was complete) on 10/08/2016. It went under contract 10 days later on 10/19/2016 for $1,250/Mo. The tenant moved in on 11/1/2016. Here is the MLS sheet showing rental price and date.

Actuals

Below are the actual final numbers:

Purchase Price 180000
Management 8%
Annual Insurance 400
Annual Real Estate Tax 1105
Annual Fee 1088
Closing Cost 2%
Financing - Down 25%
Financing - Rate 4.25%
Financing - Term (Years) 30
Monthly rent 1250
Income:
Annual Rent 15000
Reoccurring Expenses:
Annual Debt Service -7969
Annual Management Fee -1200
Annual Insurance -400
Annual Real Estate Tax -1105
Annual Period Fee -1088
State Income tax 0
Total Reoccurring Expenses -11762
Acquisition Cost:
Down Payment -45000
Closing Costs -3600
Rehab Cost -10000
Total Acquisition Cost -58600
Pre Tax Cash Flow (Ann) 3238
Pre tax Cash Flow (Mo.) 270
Pre Tax ROI 5.5%

Summary

In this article we showed how our process works by following a property from discovery through leased.

2005-2018 Eric Fernwood and Cleo Li All rights reserved. Eric Fernwood, 702-358-8884, EricFernwood@gmail.com Cleo Li, 512-296-0425, CleoYLi@gmail.com

Update 12-07-2017

At the 10th month of the lease, the property manage has an independent third party review the property. They do not test anything, they take a lot of photos and make observations on the number of people in the property and the overall condition of the property. Here is the report.

The tenant paid the rent on schedule but were not keeping the property clean. The decision was made to not renew the lease. After they moved out, I shot a video so you can see the condition.

We obtained a quote for the work, which totaled $1,905. Here is the quote. The tenant has a $1,500 security deposit that was applied to the cost of repairing the property. Note that the security deposit cannot be used to repair reasonable wear and tear. However, the damage observed was well beyond reasonable wear and tear, which is why the lease was not renewed. So, the total out of pocket for the owner was about $400.

During rehab, I was approached by someone who was interested in renting the property. I directed them to the property manager but they checked out so we had a tenant before rehab was complete. The new rent is $1,300.

Below are the return numbers based on the increased rent.

Purchase Price 180000
Management 8%
Annual Insurance 400
Annual Real Estate Tax 1105
Annual Fee 1088
Closing Cost 2%
Financing - Down 25%
Financing - Rate 4.25%
Financing - Term (Years) 30
Monthly rent 1295
Income:
Annual Rent 15540
Reoccurring Expenses:
Annual Debt Service -7969
Annual Management Fee -1243
Annual Insurance -400
Annual Real Estate Tax -1105
Annual Period Fee -1088
State Income tax 0
Total Reoccurring Expenses -11805
Acquisition Cost:
Down Payment -45000
Closing Costs -3600
Rehab Cost -10000
Total Acquisition Cost -58600
Pre Tax Cash Flow (Ann) 3735
Pre tax Cash Flow (Mo.) 311
Pre Tax ROI 6.4%

So, return increased from 5.5% to 6.4% in one year.

The most recent model match sale was 1889844 - 8585 Dyker Heights Ave which sold for $209,000. Dyker Heights was not in as good a condition as Borough Park. So, I believe if Borough Park was sold today, it would sell for at least $209,000. This is a 13.8% increase in value in one year!