The Darwinian Doctor Last month, my real estate empire turned one year old. In this time, it grew from one rental house to 10 units in three cities. In today’s post, I’ll review how the first four units have been performing. I’ll also profile the most recent six units.
In the last installment of Anno Darwinii, I reviewed the performance of my four units of rental property. I also told you about getting cold feet on a deal as Covid-19 spread across the nation, leading to a $3000 loss to break my purchase contract.
At the time, I was looking forward to the refinance of my Indianapolis duplex, which I hoped would boost my cash on cash return to 11%.
Here’s a quick performance summary of the units. In this chart, I list how much money I’ve got tied up in each deal, the cash flow, and the cash on cash return.
| Unit count | Total investment | Annual cash flow | CoC return | |
| Birmingham SFH | 1 | $23,890 | $830 | 3.5% |
| Little Rock SFH | 1 | $24,570 | $2,370 | 9.6% |
| Indy duplex #1 | 2 | $18,310 | $8,270 | 45.2% |
| Total | 4 | $66,770 | $11,470 | 17.2% (average) |
Birmingham
My first purchase in Birmingham has been my worst performer so far. Not only did it lay vacant for 3 months prior to finding a tenant, but it also rented for less than I expected. Finally, during the COVID-19 pandemic, no rent came in for two months.
Overall, my return is depressingly dismal from this property. Even my Real Return, which counts factors like principal paydown and appreciation, is pretty poor. I’m seriously considering selling this property if we tap out our HELOC and need more capital. I’d take a loss on my investment, but at least I’ll have more capital to re-deploy.
Little Rock
The Little Rock rental continues to be a steady workhorse. The low property taxes in Arkansas have helped it achieve a solid return despite being a turnkey property. I have had no tenant problems, no rent problems, and zero repairs. It’s a shining example of a good turnkey property.
Indianapolis
The Indianapolis duplex has been also been a stellar performer. The renovation came in on-budget, on-time, and it rented out over my projections.
You may notice that my cash on cash return is 45% on this property. This is much higher than my expected return and much higher than the typical return on rental property. How is it returning this much?
Well, last month I closed on a refinance of the duplex. It appraised for much more money than I expected, which allowed me to pull out more of my invested capital. When we closed, the bank sent me a check for about $50,0000 to use to fund my next deal! Soon, I’ll go through this entire deal in detail to show you the specific numbers and illustrate the power of the BRRRR process.
Progress towards my 5 year goal
My short term SMART goal is to achieve a cash flow equivalent to $150,000 of income from my job as a surgeon. I figure this is about $100,000 of rental income, since this income is so tax protected. I’m over 10% of the way there with just these 4 units, and I have until 2025 to make it the rest of the way.
The Empire has grown!
A few months ago in the beginning of the pandemic, I had a series of failed deals where negotiations fell apart due to bad inspection reports or appraisals. This was a frustrating period in my life as an investor.
The Dr-ess and I are now partners in real estate investing. Together, we sat on our heels for a couple of months and watched the Indianapolis market.
Our patience was rewarded last month when we were sent three great deals in rapid succession. We pursued all three at once and added all six units of rental property to our portfolio.
I’ll do a quick introduction to all three properties and briefly discuss our plans.
Indy duplex #2
- Purchase price: $165,000
- Configuration: shotgun style, 3 beds/1 bath each side
- Plan: light renovation and refinance
- Target total rent: $2100-2200
This deal was a wholesale deal, so included an additional $4000 “assignment fee” for the wholesaler who sourced the deal.
It’s actually in great condition and was renovated just 3 years ago. One side is already rented to a nice family that is taking good care of their unit. I plan to do some light renovations to the other side and refinance the property in 6 months to pull out some more money from the deal.
Indy duplex #3
- Purchase price: $123,000
- Configuration: shotgun style, 1 bed/1 bath and 3 bed/1 bath
- Plans: extensive renovation and refinance
- Target total rent: $2200
This deal was sourced by my realtor as an “off-market” deal. This means I had no competitors during the negotiations. I felt like I had more power to request price reductions during the deal, and I was able to knock off more than $20,000 from the initial sale price.
But the property is in pretty rough shape and will need a big facelift. Cost overruns on the renovation could sink the deal, so I’m going to have to be careful with this.
The property is currently rented to two long term tenants, so unfortunately I’ll have to convince them to vacate to start the renovation. They’ve both been living there for over 10 years!
Indy duplex #4
- Purchase price: $123,000
- Configuration: shotgun style, 3 bed/2 bath each side
- Plans: extensive renovation and refinance
- Target total rent: $2600
This property was also a wholesale deal. It’s vacant and needs a thorough renovation, but it’s in a great area of town on a corner lot. I’m very excited for its potential!
Conclusion
In about 1 year, my rental empire has grown to 10 units. I’m making good progress towards my short term goal of replacing $150,000 of active income with rental real estate by 2025.
Like all of my goals, I secretly hope to blow by my benchmarks and timelines. If things go well with this new batch of properties, I think I’ve got a good chance of doing just that.
One thing that might slow us down is access to liquid capital. So far, the Dr-ess and I have left our retirement funds untouched. I funded my first real estate investment with about $100,000 I pulled from my taxable brokerage account. We funded our most recent purchases with $50,000 from our first BRRRR deal and money from our HELOC.
But even if my appraisals and refinances go well, I’ll still likely have a lot of HELOC money tied up in down payments. After a few more properties, all of the HELOC money might be gone.
The choices we make when that happens will determine the true trajectory of the next 10-15 years of our lives.
— TDD
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6 comments
It sounds like you are well on your way to your goal. Congratulations. You may have covered this in a previous post, but I’m curious how you feel being a remote landlord? How did you develop a team for your property locations (contractors, property manager etc)?
I’ve been thinking about real estate, but have felt more comfortable (even after reading about it) being truly passive with investments in the markets. I enjoy the few mouseclicks a month approach! A common situation I guess.
Hey Medimentary, thanks so much!
Remote landlording is not for everyone. I think it’s ideal for people like me who live in a high cost of living area where the local real estate is too expensive to generate positive cash flow. But I readily agree that it’s harder than owning buildings down the street, with vendors and property managers I could see face to face.
I generated my team through referrals and also by visiting Indianapolis twice to learn the city and meet everyone. Since then, it’s been a consistent effort to keep in touch via email and phone and video chat.
Absolutely agree that index funds are much easier, and also, very sufficient for most people! I’m just choosing to go a different route.
Great comment, thanks!
— TDD
You are really making your money work for you. I’m really impressed. I was thinking of rushing through my student loan after graduation. What did you do with your loan? Did you refi? If not, are you worried about continuing to take a hit for the interest rate. How long are you planning to pay your student long for.
Hey Chris, in my last year of residency, I refinanced my loan with First Republic Bank at a fixed interest rate of 3.5% and a 15 year term. It’s a hefty payment every month, but I’m whittling it down slowly and steadily. I could pay it off faster, but I’m doing my best to use the extra money to invest. If you think you have the discipline to do the same, you can come out ahead in the end. It’s definitely a higher stress strategy to carry the debt, though. I can see the appeal in just getting rid of the debt as soon as possible. Made a decision either way, and stick with it! — TDD
How did you put only $18,310 into your indy apt #1?
$160,000 purchase price * 0.2 (down payment) = $32,000
+ $60,000 renovation…
Even if you’re subtracting out $50k from the refinance, I don’t get how you get to $18k.
Thx for checking.
Hi there, thanks for the comment! Take a look at this post where I go into more of the numbers: https://thedarwiniandoctor.com/the-brrrr-method-how-we-got-a-62-return-on-our-first-duplex/
Let me know if it helps answer your questions!