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%
#3: The next step was an on-site evaluation. The community, location, exterior, and interior looked good, so we took a video, which you can see here. We determined the following items needed to be changed, and we estimated the renovation cost. Note that the prices below are from 2016; prices are higher today.
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
We recalculated the return, including the estimated renovation cost. The numbers were still acceptable, and we decided to make an offer. Based on the market and anticipated competing offers, we made a full-price offer ($180,000). They accepted our offer, and we opened escrow and scheduled inspections.

#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
Now that we knew the cost of the renovation, we reevaluated the property. The result of the evaluation is below.

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%
5% cash/cash, including all costs, is an excellent return, so we proceeded to close. Once escrow was closed, renovation started and was completed in about ten days. After the renovation, we had a professional real estate photographer take the marketing photos, which you can see here. The property was rented in 10 days for $1,250, which was more than what was projected.

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.