On April 14th I purchased a quad-plex at 1624 Read Ave, Chattanooga TN 37408. This post will compare my estimates to reality, now that I have owned it for nearly a year.
Considerations:
I tried to be overly conservative with my estimates. I spent more than I expected on repairs and maintenance, but not by much because I overestimated all expenses initially. The location is great and the primary reason why I purchased the building. The building is in the middle of the up and coming south side Chattanooga, next to main street that has all the newest bars and restaurants. In the last few months, many new businesses have opened within a block and there are many properties under construction on all sides. I didn't plan on 4 new apartment buildings opening this past year, but my location is far better and my price point much lower.
Part 1 - Purchase Price & Valuation
Projected
The building was initially listed for $620,000. Annual revenue was only $48,000 so I felt it was well overpriced. I believed I could increase rent from $1,000 to $1,400 per unit within a year or two, still 23% lower than the surrounding market. The average monthly rent for a 3 bedroom apt within half a mile is $1830. At $1,400 a month, annual revenue would be $67,200 per year. After subtracting inflated expenses and a 10% vacancy factor, my NOI was roughly $44,750. At an 8% cap rate, the suggested purchase price would be $559,369. I rounded up to 560K for my evaluation model, but made an offer for $520,000.
Actual
After many contract revisions, I ended up going under contract for $540,000 and agreed to close in 45 days.
Part 2 - Rent
Projected
As you will see in my model, I could only collect a few months of rent in my first year and would have to wait until the leases ended before I could renovate and increase rent. I projected increasing rent to $1,300 in Year 2 and $1400 in Year 3. I certainly believe I can achieve this goal or exceed it.
Actual
In my first 4 months, I removed 3 destructive tenants, renovated apartment B in a week, and moved in two new tenants for $1300.
Future
I believe with additional property improvements, proper advertising on Apartments.com, Zillow.com, Rent.com, Instagram, Facebook, and a few more listing sites. I will get close to 1500 for one or two of the apartments within 2020.
Part 3 - Costs
Projected
I underestimated painting expenses by a little bit, but I was pretty spot on with my other estimates.
Actual
Painting was more expensive, but only because I had to repaint hallways and ceilings.
Future
It will be lower next year because I am removing bad tenants who have destroyed walls, and I will not need to repaint every year.
Part 4 - Cap Ex
Projected
I knew from hiring an HVAC expert that I was going to have to replace two of the HVAC units. I knew I wanted to replace all carpet with vinyl plank. You will see from the model that I budgeted $20,000 for capital expenditures.
Actual
I ended up spending a little more than $22,000. I will however have to spend more to renovate another apartment where I had some terrible tenants. I will have to repaint, replace carpet with vinyl, replace appliances and light fixtures in all the bedrooms. Hopefully I won't run into any bathroom maintenance. I am estimating this will cost roughly $4500.
Part 5 - Driving NOI & Cash Flow
I will focus on the following items;
Increase rent by advertising more, and utilizing staging.
Decrease operating expenses by making quality repairs, not patches.
Decrease interest expense by refinancing at a lower interest rate.
Decrease potential damages by evaluating tenants.
Conclusion
I have a lot of work ahead of me. I am nervous because of the financial risk, but believe I have made a sound financial investment backed by good numbers. My IRR matrix shows an ideal hold of 6-7 years, but considering the potential appreciation from the large amount of development occurring in my area, I think it would be wise to hold the investment for 10+ years, unless I can use this equity for a better investment.
If you have any comments, suggestions, or questions please post them below. I appreciate all feedback. Thank you for your time.