Case Study - Borough Park
In this article, I will show the multi-step evaluation process we follow to find and validate properties. I will also show the renovation costs and how the property performed over the hold period.
Our Multi-Step Evaluation Process
We find the small set of candidate investment properties using our proprietary data mining software. Without the software, it would be almost impossible to find such properties because they represent only about 0.4% of all available. Our software identified Borough Park as a candidate, and it began our multi-step validation process, illustrated below.
Below is the information we had at each step of the process.
#1: Our software identified Borough Park as a property worth further consideration.
#2: We manually evaluated the property and found no issues, and the return was good. Below is a summary of the return based on 20% down, 4% loan rate, $1,150/Mo. rent plus all other fees, including management and debt service.
| Value | |
|---|---|
| Cash Flow/Mo. | 164 |
| ROI 20 | 4.7% |
| Cash/Cash | 5.6% |
| Cost | Qty/SF | Unit Cost | Extension |
|---|---|---|---|
| Ceiling Fan | 2 | 150 | 300 |
| Ceiling Light | 4 | 50 | 200 |
| Replace Carpet | 421 | 1.8 | 757 |
| Tile (1,404SF) | 982 | 4.7 | 4615 |
| Paint Interior | 1404 | 1 | 1404 |
| Blind | 2 | 60 | 120 |
| Used Refrigerator | 1 | 800 | 800 |
| Microwave | 1 | 350 | 350 |
| Pad | 2 | 500 | 1000 |
| Estimate Total | 9546 |
Notice that we included a $1,000 pad. We know more items will be discovered during the inspection and the property manager may recommend additional changes. What we wanted at this point was an estimate so we could revaluate the return including renovation.
#4: We sent the video to the property manager for her opinion, which is below.
I 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.
#5: Based on the property manager's evaluation, the list of renovation items changed as follows:
| Cost | Qty/SF | Unit Cost | Extension |
|---|---|---|---|
| Ceiling Fan | 2 | 150 | 300 |
| Ceiling Light | 4 | 50 | 200 |
| Replace Carpet | 421 | 1.8 | 757 |
| Tile | 982 | 4.7 | 4615 |
| Paint Interior | 1404 | 1 | 1404 |
| Window Blinds | 2 | 60 | 120 |
| Used Refrigerator | 1 | 800 | 800 |
| Microwave | 1 | 350 | 350 |
| Curtain Rod For Slider | 1 | 50 | 50 |
| Pad | 2 | 500 | 1000 |
| Estimate Total | 9596 |
#6: Nothing significant was discovered during the inspection. Here is the inspection report. After the inspection and the property manager's walkthrough, we understood what needed to be done. We next went through the property with the renovation company, who put together a detailed estimate. Here is a video of the walkthrough, and below are the renovation items and cost.
| Item | Cost |
|---|---|
| Paint walls and trim | 1400 |
| Repair master ceiling and paint ceilings | 600 |
| Tile whole house except bedrooms. | 3780 |
| Demolition | 600 |
| New baseboard | 700 |
| New carpet in 3 bedrooms 540SQFT @$1.80 | 972 |
| Replace 4 fixture lights | 160 |
| Replace lights as needed and new smoke detector | 80 |
| Adjust lock in garage door | 30 |
| Install new screen door | 100 |
| Fix the water heater | 80 |
| Repair stucco and touch up paint | 200 |
| Secure garage box opener | 50 |
| Attach tile on roof | 50 |
| Install back flow in exterior faucet | 20 |
| Install thermostat | 50 |
| Replace blind in living room | 100 |
| Install new fan in master bedroom | 180 |
| New microwave in the kitchen | 350 |
| Used refrigerator | 800 |
| Install 2 angle valves | 40 |
| Repair kitchen faucet | 40 |
| Move appliances | 100 |
| Replace blind next to the entry door | 60 |
| Install curtains at the sliding door | 40 |
| Grand Total: | 10,582 |
| Assumptions | |
|---|---|
| Purchase Price | 180000 |
| Rent (Mo) | 1250 |
| Fees (Mo) | 64 |
| Insurance (Yr.) | 400 |
| Property Tax (Actual) | 1105 |
| Management (%) | 8% |
| Management ($) | 100 |
| Closing Cost (%) | 2.0% |
| Closing Cost ($) | 3,600 |
| Loan Rate (%) | 4.25% |
| Estimated Rehab | 10,582 |
| Loan Term (Yrs.) | 30 |
| Down (%) | 25% |
| Debt Service (Mo) | 664 |
| Vacancy (2%) | 25 |
| Maintenance (2%) | 25 |
| Acquisition Cost | |
| Down Payment | -45000 |
| Estimated Rehab | -10582 |
| Closing Cost | -3,600 |
| Total | -59182 |
| Recurring Expenses (Mo) | |
| Debt Service | -664 |
| Insurance | -33 |
| Property Tax | -92 |
| Vacancy | -25 |
| Maintenance | -25 |
| Fees | -64 |
| Total | -903 |
| Income (Mo) | |
| Rent | 1250 |
| Management | -100 |
| Net Rent | 1150 |
| Return | |
| Cash Flow (Mo) | 247 |
| ROI | 5.0% |
Update 02-16-2021
The rent is now $1,495/Mo. and the market value is about $275,000. The return today is as follows:
- Cash flow: $464/Mo.
- ROI: 9.4%
- After all expenses, but not including tax advantages, the property generated >$20,000 in net income over the 4 year period.
- The property appreciated 53% in 4 years; from $180,000 to $275,000.
Note: The results from this property are not unusual. Many of our client's properties performed better.
Summary
Real estate is not a get-rich-quick scheme. However, real estate is almost a guaranteed way to generate a long-term income stream that you will not outlive if you follow the right process. And, due to the rapid increase in rents in the Las Vegas market, your return increases over time while your costs remain relatively fixed.