So far, I have shared an in depth insider view and analysis of every rental property that Selenid and I own. Including our first one here. And our most recent 7th property here. However, the story doesn’t always cleanly end when you buy and fix up a property. Sometimes, stabilizing a rental property can take years.
And that is the story that I would like to share in this post.
For frame of reference, we are talking about our third rental property that we purchased in June 2021. You can see the full initial deal analysis here.
You may also remember this property as the one that taught us these 3 hard lessons in real estate investing.
But this post is telling a different story…
Setting the background
Before stabilizing a rental property, you need to get to a point where out needs stabilizing. Obviously.
This property has 3 units, a duplex in the from of the lot and a two story single family home in the back of the lot. As you will recall from my post about our mistakes, we inherited tenants in all 3 units. The tenants in the duplex were not good tenants and eventually moved. We then turned over those units and have had great tenants since.
The tenant in the back home was a very nice woman living with her three children. We were able to tour the home when we viewed the property and it seemed in decent condition. However, she was private, which we respected and did not have much access since that time.
She had trouble paying the monthly rent of $1200 but was able to get government assistance. However, in December 2022, she decided to move out. And we went in to see where things were at with the home.
Upon initial walkthrough, the unit didn’t seem in that bad of shape. It needed a new coat of paint, a thorough cleaning, and a few minor fixes. Also there was small piece of junk left behind that needed removal. Nothing too out of the ordinary for when a long time tenant moves out.
So, we go our handyman in to do a few repairs. The the first surprise hit. In the bathroom, he noticed that the toilet was not secured to the floor properly and due to water damage, the entire bathroom floor and subfloor needed to be replaced.
And the electric was completed wired unsafely so this would have to be redone throughout the first floor.
So, he set about doing that. At this time the painters also started painting the walls. We were right around Christmas time now.
The big surprise
You may recall that in Buffalo around Christmas this year, there was an all-time blizzard. This blizzard made traveling impossible for 3 days. When the weather subsided, the painters went back to the house to work.
We immediately got a call that water was leaking profusely from the ceiling. A pipe had burst from the cold. Luckily, the painter knew enough to turn the main water supply off while Selenid and I brought our wet dry vac to the property and immediately cleaned up all the water.
But it was a mess. Damaged pipes and damaged ceiling.
We are lucky to work with a great plumbing company and they came over quickly to evaluate. The source was a lack of pipe insulation that led to a burst. The next day they started working. And they fixed the affected pipe. But, when they turned the water back on, another leak popped up from another broken pipe. This went on for 3 days – each time with additional costs. Drywall and stairs needed to be removed as well for access.
Finally, it seemed like everything was fixed. But when the water came on, there was damage between the connection of the old pipe and the bath tub. We needed a new bathtub installed. Ugh.
Stabilizing this rental property
So, after all was said and done, stabilizing this rental property required the following repairs:
- Initial minor repairs like replacing handle on oven
- Replacing bathroom floor and subfloor
- Rewiring electric
- Fixing broken piping
- Replacing damaged bathtub
- Fixing drywall and stairs that were removed for access to fix pipe damage
However, we also added a couple of new renovations to make the property more attractive. The largest of these was installing a washer and dry hook-up upstairs s there were no hook ups currently in the home.
All of these stabilizations were complete on January 23, 2023. So the whole process took about 1.5 months.
After this, we took professional photographs, virtually staged the photos, and listed the property for rent at a new monthly rent of $1500.
With a week, we found a great new tenant who began renting on March 1.
Financial analysis of stabilizing our rental property
I think it’s really important to look at the financial analysis here. Because to someone who does not invest in real estate, this all seems to be Exhibit #1 for why real estate investing is not for them.
Because yes, this sounds like a headache and it was a bit of a headache. But our role was really only coordinating repairs and trying to be patient as everything got done.
But beside that, the financial return on our investment will be worth it.
Let’s take a look
In all, stabilizing this rental property cost us $32,883.24. You can see a full cost breakdown right below:
However, this unit will now give us a monthly rent of $1500 per month. This is much higher than we could have obtained without these renovations and obviously without the repairs.
So, our annual gross return on investment here is 54.7% [$18,000 ($1500 x 12)/$32,883.24]!
But this doesn’t tell the whole story. We need to look at net annual return on investment – after all expenses have been accounted for.
Well, the monthly expected cash flow after all expenses including mortgage from this property is $2,175. It we weight the three units by the rent that they bring in, this stabilized unit accounts for 38% of the monthly rent ($1500/$3960 total monthly rents from all units), then this unit accounts for an average monthly net cash flow of $827.
Therefore, the net return on investment for this unit is still 30.2% [$9,924 ($827 x 12)/$32,883.24]!
Both our gross and net ROI well exceed our modest of 10% cash-on-cash return. So doing this makes for a great deal!
But this still doesn’t tell the whole story…
Because we need to analyze the entire property!
Below you will find a full and current analysis of the property:
As you can see, despite our estimates coming down from prior, our expected cash on cash for this rental property after stabilizing remains greater than 20%.
Obviously if we didn’t need to do any repairs, that would boost our numbers even more. But that is life an the point is that this is still a fantastic investment!
The morale of the story
Effectively stabilizing a rental property is an important part of being a successful real estate investor. It is not uncommon to find some unexpected…ahem…surprises when you are doing this…whether that is right after you buy the property or years later like in this case…
However, a strong mindset with an equally strong “why” coupled with a great team will get you through. Also remember that nobody cares about your money or your investment as much as you do. So make sure you are overseeing the project, even if from a distance, to keep things on track.
I hope this story illustrates how real estate continues to be a great investment
despite due to some of its inherent challenges opportunities!
And here are some other great real estate investing resources!
- The Real Estate Flywheel Effect for Successful Physician Investors (This one is really mandatory reading for anyone interested in real estate investing!)
- A Real Estate Investing Guide for Physicians
- How to Screen & Analyze Investment Properties the Right Way
- 5 Biggest Downsides of Real Estate Investing
You can also learn more about real estate investing in my course, Graduating to Success!
What do you think? Have you had to stabilize a rental property? How did it go? Did you have any surprises? Let us know in the comments below!