If I could find 100 deals identical to the duplex we bought as an investment property last year in Schenectady, NY, I'd buy them all.  In fact, the economics of this deal worked so well, it completely warped our expectations of every other deal we looked at since, causing us to pass on countless other not-as-good, but still pretty darn good deals.  We finally corrected this bias and currently have another very similar property under contract that will still be a great deal, but not quite as good as this one. In this post, I'll share the full behind-the-scenes:

• Before and after pics
• Some play-by-play of the remodel
• The NUMBERS!  Yes, I'll even share the numbers on this one, and how we funded the deal.

The Backstory

At the height of the real estate market in early 2008, we sold a duplex we had owned and rehabbed in Watervliet NY for a tidy profit, with the intent of parlaying those funds into a single-family residence to occupy, and shortly thereafter begin investing in more rental properties.  We managed to purchase the single-family residence that we still occupy today, but within weeks of closing, the 2008 recession hit, the Feds took over Fannie Mae and Freddie Mac, Lehman and AIG went bust, and all real estate hell broke loose.  

The very few investors that were sitting on piles of cash at the time (not us...) had a field day, scooping up properties for 50 cents on the dollar or less, but those of us relying on bank loans were totally sidelined.  The banks stopped lending, our home equity to tap had disappeared, and to add insult to injury, in 2010 the Dodd-Frank Act was passed which made it even more difficult to get loans on investment property.  We were totally out of the market. 

Fast forward to 2015, we had saved up some cash, our home equity had recovered, we learned we sucked at picking stocks, and decided it was time to get back into our passion of real estate investing.  In the years preceding it had always been a topic of conversation, but marriage, children, home remodels, and every other life event always provided a convenient excuse to delay until we finally got down to business looking for our next purchase.

Finding the Deal

No trick to share here, this duplex sat on the MLS untouched for 5 months for all the world to see before we rolled up.  Throughout the fall of 2015, we had looked at over 100 properties throughout the Capital Region, mostly avoiding Schenectady due to the tax rates and our misperceptions about the area.  

Prior to this acquisition, we subscribed to the prevailing wisdom that great deals could only be found "off-market", but this property proved otherwise.  It was an REO (Real Estate Owned) bank foreclosure that had sat vacant for about 2 years during the foreclosure process, and we almost didn't look at it after touring 8 other similarly-priced Schenectady properties that day that were total disasters.  However, within 5 mins of walking through the property, we knew this one was a winner.

About the Property

The property was listed for $64,900 and was configured as a 3 bedroom/1 bath unit on the first floor, and a 2 bedroom/1 bath unit on the second floor.  Interestingly, the unused third floor attic was enormous with full height ceilings, a huge dormer, tons of natural light, and full-sized stairs front and rear for egress, making it a perfect candidate for a third unit.  Even better, it appeared as though a prior owner had the same idea and had already completed most of the electrical rough-in and drywall work to make a third unit. Third floor partially finished attic space. 

Word of warning: Although the third floor was unfinished and didn't even have plumbing roughed in to the space, the listing agent had listed this property as a 3-family, which was not just a stretch based on the condition of the space, it also turned out to be illegal by the city of Schenectady due to being zoned as a 2-family.  I suspected this might be the case so fortunately checked with the city before making our offer, but this could have been a disaster had I run the numbers based on the assumption that this space could be a rentable third unit, or worse, had I actually spent the $10,000-$15,000 necessary to build out a complete unit that would have eventually proven unrentable.  

It's unfortunate, but this happens CONSTANTLY with as-is properties and is clearly a deceptive practice on the part of selling agents, so ALWAYS perform your own due diligence before making a purchase.  We've even made a habit when looking at properties to count the bedrooms because even that is incorrect fairly often. Although it was a shame the third floor couldn't become it's own unit, we decided it could still be finished and instead used as added space for the 2nd floor unit, so we still thought it had held pretty significant value.

Making the Offer

Next, we toured the property with our contractors and got their worst-case-scenario estimates.  Based on these estimates, we felt the list price of $64,900 was still great based on the condition of the property, but since the property was winterized we couldn't test the mechanical systems for function.  

With most REO properties, there is generally no inspection period after your offer is accepted like there is with typical home sales, you just make your offer "as-is" and plan for the worst.  However, this property was loaded with cast iron radiators, galvanized piping, and the quality of the third floor electrical work was questionable, so we made our offer contingent on a 2 week inspection period.  

After a bit of negotiating, we settled on a price of $62,000 and the selling agent surprisingly agreed to our inspection period, but purely due to an oversight on her part which she made clear was not their intent, but that was their problem so we temporarily turned on the utilities and conducted our mechanical inspection.

The Case of the Exploding Pipes

A couple days before closing, I toured the property one last time on a record-setting cold morning (14 below zero).  In a case of extraordinary coincidence, while I was standing in the basement inspecting the plumbing system, I heard a loud crack followed by a splash, and discovered that the temperature had actually gotten cold enough to freeze the antifreeze in several low points of copper pipe, and a series of pipes burst right next to me.  Although the pipes that split in front of me would be an easy fix, I was concerned that the same could be happening inside the walls elsewhere in the building, or that the radiators could crack.  

We immediately contacted the selling agent to explain what had happened and to renegotiate, but she refused to budge and instead claimed the pipes had always been damaged.  This was infuriating on several levels because 1) the pipes were not damaged during our initial inspection, 2) if she really knew the pipes had issues, then she was concealing a material fact that she was legally required to disclose to a buyer, and 3) I was standing right there and watched them burst! At this point, things had become quite contentious and the bank was not going to budge, but we still liked the deal so ultimately closed at $62,000 despite the plumbing incident.

Rehab by the Numbers

The total rehab took 10 weeks and $32,100, and had the building inspectors showed up when they were supposed to every time, we could have shaved another 2-3 weeks from the timeline.  Here is the breakdown:

Acquisition Costs:

• $62,000 - Acquisition price
• $1,700 - Closing costs (legal, filing, and title insurance)
• $450 - LLC Filing fees
• $400 - Contractor inspections
• $300 - Construction insurance policy during remodel

Rehab Costs:

• $6,900 - Carpenter to frame and finish new bedroom and half-bath on third floor, gut and refinish full baths on 1st and 2nd floors, install kitchen cabinets and countertop on first floor, and various other smaller jobs
• $4,100 - Plumber to repair damaged pipes, plumb in new bathroom fixtures, and rough-in plumbing for new half-bath on 3rd floor
• $4,000 - Kitchen cabinets for 1st and 2nd floors
• $2,900 - Electrician to finish wiring the third floor and install wired smoke alarms per building code
• $2,600 - All new stainless appliances for 1st and 2nd floors
• $2,400 - Bathroom materials for all 3 bathrooms
• $2,000 - Laminate flooring for 2nd and 3rd floors
• $1,000 - Paint and paint supplies
• $800 - Gas and electric during construction
• $500 - Roofer to repair damaged slate roofing
• $400 - Permits
• $300 - Landfill fees
• $4,200 - Everything else (misc lumber, screws, hardware, fixtures, receptacles, trim, etc.)

Total Invested: $96,950

We did about 300-350 hours of the work ourselves on nights and weekends which consisted mostly of painting, renovating the 2nd floor kitchen, refinishing hardwood floors, and laying 2,000 square feet of laminate flooring.  I estimate that we saved around $15,000 in labor costs by doing the majority of the work ourselves, but what really drove our decision to self-perform was to hit our self-imposed rent-ready deadlines.  Quality construction labor is extremely hard to come by in the Capital Region and many contractors were booked out for weeks or months at the time of closing, so I felt we could have the majority of the construction done by the time a contractor could even show up, so that's what we decided to do and I'm glad we did. 

We finished right on schedule and around $7,000 over budget due to some unexpected issues that had to be brought up to code, but overall it was a hugely successful project that went mostly as planned.  Our only major issues were all plumbing related, mainly because our licensed, supposedly reputable plumbing company (one of the biggest in the area) installed a shower valve backwards (cold-to-hot and hot-to-cold), plumbed a lavatory faucet with only cold water, had multiple leaks, and did a shoddy job servicing our furnace that eventually resulted in our tenants going without heat for a night in February the week they moved in.  

This was especially infuriating because the city requires ALL plumbing work be done by a licensed plumber, otherwise I would have done it all myself in a weekend and saved $4,000.  Instead, I had no choice but to pay a plumber $4,000, but STILL ended up repairing the plumber's lousy work myself after the inspection was completed (yes, their work passed inspection, which is equally infuriating).

Before and After Pics

Unit 1 - 1st Floor

 Kitchen: Replaced cabinets; roughed-in new dishwasher; replaced all appliances; installed Allure vinyl flooring; replaced countertops with laminate; replaced all fixtures, hardware, and receptacles; patched, sanded, and painted walls, ceiling and trim.  Living room: Removed carpet; screened and poly'd hardwood floors; new interior door; patched, sanded, and painted walls, ceilings, and trim; replaced all fixtures and receptacles.  Dining room: Removed carpet; screened and poly'd hardwood floors; patched, sanded, and painted walls, ceiling, and trim; replaced all fixtures and receptacles.  Bath: Replaced metal tub and rotted tile surround with acrylic tub and surround; replaced vanity, toilet, fixtures, and receptacles; installed Allure vinyl flooring; painted wall tile with Rust-Oleum tile paint; painted walls.  Bath: Replaced metal tub and rotted tile surround with acrylic tub and surround; replaced vanity, toilet, fixtures, and receptacles; installed Allure vinyl flooring; painted wall tile with Rust-Oleum tile paint; painted walls.  Bedrooms: Removed carpet; screened and poly'd hardwood floors; new closet doors; new fixtures, receptacles, and hardware; patched, sanded, and painted walls.

Unit 2 - 2nd Floor

 Kitchen: Replaced cabinets; roughed-in new dishwasher; replaced all appliances; installed Allure vinyl flooring; replaced countertops with laminate; replaced all fixtures, hardware, and receptacles; patched, sanded, and painted walls, ceiling and trim.  Eat-in kitchen area: Installed Allure vinyl flooring; replaced all fixtures, hardware, and receptacles; patched, sanded, and painted walls, ceiling and trim.  Dining room: Installed laminate floors; patched, sanded, and painted walls, ceiling, and trim; replaced all fixtures and receptacles.  Living room: Installed laminate floors; patched, sanded, and painted walls, ceiling, and trim; replaced all fixtures and receptacles.  Bath: Gutted and replaced tub and tile with new metal tub and acrylic surround; replaced tub, vanity, fixtures, and receptacles; removed all wall tile and skim coated with spackle; patched, sanded, painted all walls; roughed-in and installed exhaust fan per code.  More bathroom pics.  Stairway: Installed laminate floor on landing; patched, sanded, and painted stairs, walls, ceiling, and trim; installed new trim and railing; installed new fixtures, receptacles, and hardware.

Unit 2 - 3rd Floor

 Half bath: Roughed-in and finished all plumbing and electrical to space; hung and finished drywall; installed Allure vinyl flooring; roughed-in and installed exhaust fan per code; installed toilet, vanity, hardware, fixtures, and receptacles; sanded and painted all walls, ceiling, and trim.  Front room: Framed and finished additional bedroom; ran new electrical service from basement to 3rd floor electrical panel; installed electrical panel and breakers; installed electric heating with thermostats; wired and installed all receptacles and fixtures; installed laminate flooring; patched, sanded, and painted all walls.  More front room pics.  Back bedroom: Installed electric heating with thermostats; wired and installed all receptacles and fixtures; installed laminate flooring; patched, sanded, and painted all walls.  More back bedroom pics.

Renting and Refinance

When we initially looked at this property, we ran our numbers based on a conservative rental estimate of $800-900/month for the 3 bedroom unit on the first floor, and $700-800/month for the 2 bedroom unit on the 2nd floor just in case the city wouldn't allow us to use the 3rd floor at all.  We also estimated annual expenses of:

• $1,200 - Insurance
• $6,500 - Taxes
• $1,500 - Snow and yard maintenance
• $1,200 - Other maintenance
• $1,200 - Annual reserve for long term maintenance

This would have provided a decent return on the $90,000 we had budgeted for the project, a 9% cap rate, and we were almost guaranteed to cash flow even if everything went wrong.  Throughout construction however, as we began to see the rehab take shape and got the green light on finishing the 3rd floor, we started revising our estimates upward and comping other rentals in the area.  

The property closed on Halloween 2016, the first floor was completed by New Year's, and we rented it the first day it hit the market for a February 1 move-in date for $1,100 month to great tenants.  The 4 bedroom, 1.5 bath 2nd unit was completed in late January 2017, we advertised for $1,400, and had rented in 3 weeks to tenants that moved in on March 1st. In total, the property is now generating $30,000/year in gross rental income, expenses are around $12,000/year, resulting in net operating income of $18,000/year.  

As soon as we had signed leases on both units, we refinanced with an appraisal of $110,000 for 20 years with a commercial loan through NBT Bank.  With that instant equity and a 75% loan-to-value, that let us pull out $82,000 of our $97,000 investment, leaving roughly $15,ooo of our cash tied up in the property, a mortgage payment of $550, an outstanding cash flow of $11,400/year, and a 1st year cash-on-cash-return rate of 76% on our $15,000 investment. 

For comparison and for those of you that aren't handy, had we not done any work ourselves, we would still be earning a 35-40% cash-on-cash return, which is still excellent.  For management, we automate all of our rental processes so leases and inspections are done electronically, our tenants pay rent online, payments are are direct-deposited to us, and we have a maintenance request portal so tenants can request work orders online rather than call.

What's Next?

Hold onto this property indefinitely and buy more like it!  The beauty of rehabbing a rental like this one as opposed to buying a "turn-key" rental is not only the instant equity created if done right, but the reduced maintenance burden of everything being new, and you tend to attract FAR better tenants to a new, upgraded unit.  We could have gone out and bought a $120,000 property with existing tenants, but we would see a far lower return on our investment and greater maintenance costs as things begin to fail over time.  

This investment will have totally paid itself back in just over a year, so we are constantly on the lookout for more deals just like this one, and are also looking to scale up by either purchasing a larger property with more units, or possibly a packaged portfolio of several multifamily properties.  If you have a property you think we might be interested in, let us know!