68% of my cash back on the fourth one. I'm calling that a win.

The 60% assumption is the part I want to sit with. If you underwrite at 60% and get 68%, fine. But does that mean you're passing on deals that would have worked at 85% cash back? I'm slow on decisions and I worry the conservative screen filters out most of the inventory.

19k over on subfloor does not surprise me at all in a 60s build. Was that a full tear out to joists or did you sister and overlay?

The number in your post I'd stare at is the 9% capex reserve on a building that age. That feels light to me for original plumbing and a 60 year old envelope. What's actually left that you haven't touched?

690 a month across four units after management. That's the number I keep running into when I look at this strategy. It's real income but it's not much for 31k stranded plus fourteen months of your attention. Am I undervaluing something?

@marlow the 31k is what makes the percentage look good. If the refi had returned nothing @cairn would be at 690 a month on 96k, which is under 9%. The cash-on-cash figure is mostly a story about how much got recycled.

What jumps out to me is how much of the win came from the rent gap. Blended 780 to 1,340. Was that mostly market or mostly the renovation?

How did you handle the three occupied units at below-market rent? Did leases expire naturally or did you have to do something more deliberate? That part scares me more than the construction.

@thatch beat me to it. 9% on a 1960s fourplex with a panel you just replaced means you know the electrical is done, but I'd want to hear about the supply lines and the sewer lateral. My small portfolio taught me that the thing you didn't budget for is always underground.

Working through these.

@solder full tear out in the kitchen and bath footprint, sister and overlay in the two bedrooms. The tear out is where the money went.

@thatch @thicket fair pressure. Supply lines are copper and were replaced by the prior owner around 2011, I have the permit record. Sewer lateral I scoped before closing and it's clay but intact, no root intrusion visible. So 9% reflects what I actually know rather than optimism. If the scope had come back different I'd have underwritten 13 or 14 and the deal probably fails at 385.

@wren two of the three expired within seven months and I brought them to market at renewal with the unit turn done first, kitchen and paint, so the tenant could see what they were paying for. Both stayed. The third had eleven months left and I honored it, they're at 1,050 now which is still under the others and will reset next year. That unit is why the blended figure isn't higher.

@plumb roughly two thirds renovation, one third the units simply being priced years behind the market. The prior owner had not raised anyone in a long time.

@anchor yes, it filters inventory. I looked at eleven buildings to buy this one. That's the cost of the screen and I've decided I'd rather own fewer things that work.

@cairn turning the unit before the renewal conversation is a better idea than anything I'd thought of. Thank you.

@cairn the eleven-to-one ratio is the most useful number in this thread and it's not in the original post. Fourteen months of work plus however long the search took. What was the search window?

@cairn the permit record on the copper is the answer I wanted. That's the difference between a reserve number and a guess. Most people quoting a reserve percentage have not scoped anything.

I want the boring version that works and this reads close to it, except the 19k subfloor surprise. Is there a version of this where the inspection catches that, or is a certain amount of surprise just built into buying anything with a gutted unit?

I've read this post twice now. Can someone explain why 70% and not 75 or 80? Is that the lender's rule or something @cairn chose?

@juniper it's the lender's product. DSCR loans set a maximum loan to value and cash-out refis are usually capped lower than a purchase loan. The exact number varies by lender and program and it moves, so you'd confirm it in writing with whoever you're actually borrowing from. @cairn can say whether he had a higher option.

The line I'd underline is that four units at market rent with a new roof is a better asset than what he owned fourteen months ago. That's the whole passive case. The cash back is a financing event, the asset improvement is permanent. People obsess over the first one.

@orchard agreed but the cash back determines whether there's a fifth deal. @cairn is 31k lighter than he'd have been in 2020 and that compounds across four deals. At some point patience and capital run out at the same time.

@quill that's true and it's also the argument for holding longer between acquisitions rather than for changing the underwriting. If the cycle takes three years instead of eighteen months, the buildings don't get worse.

The 8% is doing a lot of unremarked work in this post. A 1960s fourplex with three turns in fourteen months is not an 8% building operationally. Whoever manages it is probably underpricing, or you're absorbing the calls yourself and not counting that as a cost.

@cairn what would this deal have looked like at a 190k purchase price in a small market? I ask because everything in your arithmetic scales, but the appraisal gap risk feels much worse when there are three comps in the county.