Rental empire under siege: Anno Darwinii 0.75

It’s been about 9 months since the birth of my real estate empire.  There have been some notable triumphs, but also a big new threat… called COVID-19.

Rental empire: up to 4 units

In its first year of life, my real estate portfolio has grown quickly.  After nine months (or 0.75 Anno Darwinii) the empire has grown to four units.

I started with turnkey properties in Little Rock and Birmingham, which were already renovated upon purchase.  I learned the importance of good property management with these purchases.

One of the houses came with anemic property management, and it lay vacant for 3 months prior to getting tenanted.  I wrote about the depressing effect this had on my return on investment.

The other turnkey property came with a proactive property management group and was literally rented from Day 1.  I introduced the property in my last update, and I’m very happy to report it’s performing quite well.

But as I learned more about real estate investing, I decided to try my hand at “value add.”  In this method, a property is renovated to increase the value of the property more than the cost of the renovation.  It’s a fast track to wealth creation, if done right.

The Duplex

To do this, I purchased a dilapidated duplex in Indianapolis last October.  It cost about $160,000. Over the next few months, I renovated both sides of the duplex. My renovations were mainly superficial, but still fairly extensive.

Between both sides of the duplex, I spent about $60,000 for the facelift.

Before the renovations, the duplex was generating about $1700 in total monthly rent. After the renovation, I was able to raise the rents to about $2600 total. After I refinance the property, I hope to see about an 11% cash on cash return.

Here’s a selection of before and after photos to see the extent of the renovation:

Bathroom

• Tiled shower/bath enclosures, new flooring, new vanity, new linen closet.

Flooring

• Luxury vinyl plank, new carpet, or refinished hardwood

Kitchen

• Stainless steel appliances, subway tile backsplash, granite countertops

Overall performance of the portfolio

By the end of February, all of my properties were finally rented and generating positive cash flow.  Aside from an unexpected failure of a water heater (-$1500), there were no unwelcome surprises. 

As the rent checks came in, I started to breathe more easily.  The plan was working. My rental empire was thriving.  The duplex renovation had been a home run, in my mind making up for the poor return of my first property.

So in keeping with my big goal to have $150,000 of rental income by 2025, I forged ahead. I liquidated more assets and started scouring the MLS, looking for more deals.  I put in a few offers, and went under contract on another distressed duplex in an up and coming area of Indianapolis. 

Then, seemingly overnight, COVID-19 blew up in the US. 

Rental empire, interrupted

I watched with growing alarm as the COVID-19 crisis blew up first in Washington state, and then increasingly in Northern California. There was first light hearted gossip about the virus at my hospital, but this quickly gave way to a flurry of activity as preparations began for our own crisis.

Two days before our closing date, with California days away from a “stay at home” order, my contractor in Indianapolis expressed concern about the duplex’s foundation.  I took it as a sign from the gods and pulled out of the deal. Since it was late in the game, this cost me my earnest money and inspection costs (about $3000). But I retained the vast majority of my capital and am poised to jump back in when the time is right.

What’s next for the Empire?

Well that’s the $10 million question.  To continue growth at the current pace, I need to keep working. I’m acutely aware that many people are losing their businesses and jobs because of “stay at home” orders.  Thankfully, I am relatively protected (at least from unemployment) since I’m a physician.

While I don’t expect to lose my job, there have been big changes to my finances.  In preparation for the surge of patients expected to hit my hospital in the next few weeks, my hours have been cut and I expect a 30% reduction in my pay.  While I’ll still be able to pay my bills, I’m not sure how much money will be left over for investment in the near future.

I’m also not sure how long my tenants will keep on paying rent. Unemployed, unevictable tenants will not hasten the rise of the rental empire.

Luckily, right around the time I was getting cold feet about the duplex, I closed on a $400,000 HELOC. I’ll likely write more about this soon. But this line of credit should fund a lot of growth when the time is right.

But how will I know when it’s time to start buying again?  And how will the real estate market respond to an extended shutdown of the US economy and the recession that it is likely to follow? 

Let’s find out together.

— TDD

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Learn about COVID-19

• COVID-19 basics: Why it’s so much worse than the flu
• What to expect from COVID-19: Are the symptoms deadly?
• The CDC: About Coronavirus Disease 2019 (COVID-19)

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