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Deal Analysis After Stabilizing Rental Property #6

About 8 months ago at the time of this writing, Selenid and I closed on our 6th rental property. This one was a bit different however. Both units came occupied with tenants that would not be retained. Both units also needed a bunch of work. Well, here we are 8 months later after stabilizing the rental property and I’d like to share our updated deal analysis!

I think this is a great exercise because this whole process takes a lot of patience. And as Selenid will tell you, I am not the most patient person in the world.

It’s also another illustration of the real estate flywheel that I talk about all the time. Real estate is not a rocket ship. It takes time and small pushes to build momentum after which things really start to move.

Our initial deal analysis before stabilizing this rental property

Before showing what the deal looks like now that it is stabilized, let’s review what it looked like to start.

How we analyze properties

And so we are all on the same page, this is how we analyze properties (the right way).

  • We invest in multifamily cash flowing rental investment properties using a Buy, Fix, Rent, and Hold model
  • To screen investment properties, I use the 1% rule (Monthly rent/Purchase price >/= 1%)
    • If it meets criteria, I move forward to more analysis
    • If it doesn’t meet criteria, I move on to another property
  • To analyze investment properties, I use cash-on-cash return (Annual Net Income/Money Out of Your Pocket >/= 10%)
    • If it meets criteria, I lock up the property by placing an offer based on your criteria
    • If it doesn’t meet criteria, I move on to another property
  • To valuate investment properties, I use NOI (Annual Income not including financing)
    • Estimated Sale Price = NOI/X% (based on local market data, usually 8%)

Remember, you can download our free Cash Cow app on iPhone or Android here to help you analyze deals on the go!

And back to our initial analysis…

After closing and finalizing all of our estimates, our cash on cash analysis looked like this:

stabilizing rental property

Well, as I mentioned at the outset, this rental property needed stabilizing. By this I mean that the old tenants were still in place and any repairs/rehab had not been done.

Our plan to stabilize the property

Our plan going in was to let the tenants know that we did not plan to renew their month-to-month leases. Note that it is imperative to make sure you accurately know the kinds of leases a current tenant has. If they had just renewed yearly leases, it would have been a different decision for us. We would not have offered on the property.

Anyway, by New York State law, we gave them 90 days to find a new apartment. We did this very cautiously and respectfully and both tenants were very gracious and understanding.

We made sure to emphasize that we did not want to unduly displace them and would work with them. As of now, they are both actively looking for apartments and keeping us informed. That is all we can ask.

As such, you would expect our CoC analysis to look just like it does below in our worst case scenario with $1350 of monthly income via rent (the rents the original tenants were paying) and a return of 0.2%.


Because after you close on a property, you usually don’t owe a mortgage payment right away. The initial payments for the first 1-2 months are baked into the closing costs.

So, we didn’t owe a mortgage payment until November, 2 months after we closed.

With that in mind, our cash on cash return in October after both tenants paid their usual rent was 22.8%! In fact, we knew that even if new tenants don’t move in for 3 months after closing, our expected cash on cash return would actually be 8.15%.

Lastly, we know that even in a worst case scenario with a protracted time to find new tenants at market rents, we are still cash flow positive with the current tenants and rent. It’s only $11 positive. But we are not coming out of pocket for the property.

What actually happened when stabilizing this rental property

Here is a breakdown of what happened as we worked on stabilizing this rental property:

Upper unit

The upper unit was occupied by a really nice single guy. He very respectfully understood that we wanted to rehab the apartment and it would not be tenable to stay during that time.

Within 3 months, he had actually bought his own single family home and moved out. During those three months, he paid $700 for rent as he had been beforehand.

We then paid $11,877.25 on renovation for this unit including:

  • Replacing carpet throughout with vinyl flooring
  • Painting the whole unit
  • Plumbing repairs
  • Professional cleaning
  • Moving a fridge from another property to this one
  • Obtaining professional pictures and virtually staging them for advertising
  • And odds & ends like a few lightbulbs etc

At this point, we advertised the unit. To our surprise, one of our tenants at another property whose lease was expiring found the ad and wanted to move there. So, within a month of the showing, she moved into this new unit at $1400/month rent and we rented out her other unit.

The only issue with this was that we lost out on another month’s worth of rent since she was already paying her rent at the other unit. That was the price of doing a swap rather than getting a brand new tenant in right away. But she is a great tenant and was looking to move anyway. So it was worth it for us.

And that is the story of the upper unit.

Lower unit

This one was a bit more of a challenge.

This unit was occupied by a young couple with a young son. We let them know about the 90 day deadline and they agreed. However 3 months passed and despite frequent checks they did not move out. At first they were not communicating with us. However, we eventually got in contact with them and did two things.

First, we let them know that we were very willing to work with them and would not kick them out. But in order for us to work with them we did need open communication. And second, we told them that they would still need to move out. So we extended the deadline another 3 months. During this time they paid their original $650 monthly rent.

At the 6 month deadline however, they had still not found a place. So we extended it another month but said that we would need to increase rent to $850. Another month and another extension later and they finally found a place and moved. This took a long time but was worth it in our eyes to not displace them or add more hardship.

The disappointing part is that when they left, they left the apartment a mess. In the end, we paid $13,294.89 renovating the lower unit including:

  • Junk removal
  • Replacing carpet throughout with vinyl flooring
  • Replacing an old, unsightly wall in the family room
  • Painting the whole unit
  • Professional cleaning
  • Obtaining professional pictures and virtually staging them for advertising
  • And odds & ends like new locks etc

At this point, we advertised the unit. After 1 week, we found a great young family to move in paying $1300/month for rent.

Final, post-stabilizing deal analysis

After tenants moved into the upper unit and before the family moved into the lower unit, our actual cash on cash return for this property was 5.9%.

And after the young family moved in downstairs, our expected cash on cash return looks like this:

real estate deal analysis

You can see by comparing with our initial deal analysis above that there are some differences. The main ones are:

  • We severely underestimated the costs of rehabbing this property. This is something we are learning from by experience, especially as we begin to see trends in costs of labor and materials. We are now much more conservative in our estimates.
  • Secondly, we are underestimated rents by $100. We do this on purpose to be conservative in our initial estimates. And in this case it worked out for us.

In the end, our cash on cash return for this investment at 15.9%, while not as high as our initial 19% estimate, is still fantastic! And it more than meets our goal of 10% cash on cash return for our rental investments.

For more great insider tips and tricks for new and experienced real estate investors, check out these posts!

And don’t forget you can watch my Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!

What do you think? Do you have experience stabilizing a rental property? What was that experience like? Would it deter you from investing in real estate? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

    4 thoughts on “Deal Analysis After Stabilizing Rental Property #6”

    1. What I don’t get, living in California, is how you can buy duplexes anywhere for $200,000 and get a loan for such a great interest rate. I just got charged 6.48% after buying down 2.1 points! So, basically, it would have been over 8.5% interest. Don’t even ask about my closing costs, because they were way more than twice yours. Knowing how to get those costs and rates you mention in your article is the financial info I would really love to have!
      Thanks for your good work.

      • Hi Margaret, I’m terms of price that is just market specific. And the loan terms is based on our broker, we’ve used a bunch of loan companies but they are able to shop around for best terms based on our credit scores and other variables etc I hope that helps!


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