24May

One year of investment property operation data in Phoenix, Arizona

12 comments so far

Following my Las Vegas property 1-year break down, I am going to present to you the numbers for my second property in Phoenix, AZ.  I also bought this condominium on N Cave Creek Rd during my 3week trip to the USA in the summer 2009. It was much easier to find the investment property in Phoenix (in fact it took me just one afternoon), but how did this property do during the first year of operation? Here is the table (click to enlarge):

As you can see, I already started with some rehabs in October 2009, but since it was from the middle of the month, I counted November as the first month. Therefore the official first year of operation is ending by the end of October 2010 the same as my Las Vegas property. You can see again, that I was charged initially for the property management fee by RPM Phoenix Metro. This property however was in worse shape than the one in Las Vegas. We needed to put new windows in, change a couple of doors, cabinets and paint the whole place. This rehab project was, in the end, quite expensive and you can see these expenses in the repairs column. The property was then rented in December. The tenants found out right away, that the fridge didn’t work. The property manager told me that they couldn’t check it, because electricity wasn’t working. They offered getting them a new fridge for $300. I fast checked craigslist, and found a guy who had refurbished and used fridges for $100, including delivery. So I arranged that, and the tenant paid for the fridge, and then sent me $100 less for January. Other than that, everything was going quite smoothly. Twice during the year, the tenants didn’t pay the full rent, but always just by a couple of dollars. This will be either paid later, or taken out of their deposit in the end. Another good reason for having this spreadsheet, is so I can easily tell how much is missing in the end.

The good thing about these tenants is that they signed a 2-year lease, so I won’t have any vacancy in 2010.

Below is the table with the full year totals:

You can see that the Net Operating Income (Net Operating Income definition) is in fact in red numbers. The reason is the initial rehabs obviously. In the second row, you can see the NOI when counted without the initial rehab. That is something I can count on probably for the second year of the lease. Still, the HOA fees and Taxes are pretty high, and rents lower – making the Operating Expense Ratio really high, even in the “best case scenario”.

Returns: Let’s calculate again the expected cash on cash return (the same way we did for the Las Vegas property). I have expected getting around $4000 NOI or cash flow before taxes and the purchase price was $32,000. That makes the cash on cash return of 12.5%.

In reality, the cash flow (or NOI) was negative, and that makes 0 cash on cash return (or negative in fact). We can use the numbers without rehab at least, where the NOI (same as cash flow in this case) $1574 brings us to 4.9%, what is something I can at least expect in the future.

Result: Again, I have borrowed part of the money, so it makes the returns a little bit better in reality, but still it’s much worse than what I was hoping for. In Phoenix, the main problem is the huge inventory of houses and vacancy rates. This brings the HOA fees and taxes really high and the average rent low. Similar as in Las Vegas, now I would probably rather look for a single family house or even multifamily, because it’s much easier to rent them out, there aren’t HOA fees and this will make the returns better.

Strategy: I bought the property very cheap (bank owned) and in the low of the market. It will obviously barely provide any positive cash flow, and therefore it doesn’t work that well with my initial strategy. The best I can hope for will be speculating on appreciation now, and just holding onto the property for a few years. 1031 also a possibility or options is to exchange for a single family house.

Overall, you can see that both of my properties have at least some positive cash flow after the first year, but definitely it’s much worse than what I was expecting 2 years ago. I have learned a lot though, and that is the most important part. I am not losing money on them, just not making as much as I expected. This is however hugely improving my strategy for the future investments. As you can see, I am now selecting the markets in a different way, I am choosing different types of properties and just carrying on – and enjoying every minute of it! ;o) This year I will focus mainly on my new investment property in Topeka, KS, because this one can be the game changer!

 

Tuesday, May 24th, 2011 at 8:11 pm and is filed under #2 - Condo in Phoenix, buying property in usa. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

12 Responses to “One year of investment property operation data in Phoenix, Arizona”

  1. Posted by Eamon 29th May, 2011 at 7:56 am

    Very insightful stuff, when first purchased my US properties I did weight HOA fees and to me they were additional burden, something investors needs to watch out for. Secondly I’m still struggling to get a couple of my units rented, which kind of dents the meaning of renting. Likely I did buy two duplexes and having half rented has helped alot. I have figured my real profit is going to come from the other two units bring fully rented. I like ur spreadsheets too!!

  2. Posted by admin 13th June, 2011 at 3:12 am

    Thanks Eamon, I am glad you like the spreadsheets. Where did you purchase your properties?

  3. Posted by emptyvessel 30th May, 2011 at 4:53 pm

    Nice blog. Slowly reading through your journey so far to see what I can learn…alot!

    I am very interested to see that your returns were much lower than expected. With hindsight, do you think there was anything you could have done differently at the time to predict and avoid this? Or is it just one of those unknown risks you learn from.

    I am considering a U.S. investment over the next 6-8 months and have much to learn.

    Thanks again for your blog.

  4. Posted by admin 13th June, 2011 at 3:09 am

    Thanks for reading! ;o) Well I definitely had some higher expectations about the rent and on the other hand lower expactations about the HOA fees. Also in my initial calculations, I haven’t counted much with repairs and maintenance, because on my first investment apartment I own in Europe, I have never had to spend so much money on maintenance. The tenants take care of little things by themselves. In the US, they call you (or your property manager) with every little thing, such as the window would need new weather stripping, or the faucet is leaking. All these little things then cost quite a bit of money, because the property manager has some minimum charges, and you usually end up paying over $100 for each of these little things.. ;o/

  5. Posted by grace 2nd June, 2011 at 3:12 am

    Hi there

    Can a foreigner able to just invest a property in the States? Do they require to have a valid visa? I read somewhere that you have to live in the country for at least 2 years before u can purchase the property.

  6. Posted by admin 13th June, 2011 at 2:53 am

    Nope, you don’t need to live in the US to purchase the property. You can purchase it simply as a foreigner on tourist visa. You will probably also create an American LLC company, which will “own” the property. Check my older posts here, you will see the process.

  7. Posted by Sumith 9th August, 2011 at 10:11 pm

    You provide really good information for potential investors. I am also thinking about a property may be in Florida or LA. If I can pay all the expences from the rent it would be really good. You mentioned about your NOI is not bad but I haven’t seen the money you pay for the mortgage. Is this NOI before the mortgage payment?
    Second thing is when you buy a property in USA, do you get the bank loan from USA or Australia?
    sumith

  8. Posted by admin 18th August, 2011 at 5:16 am

    Hi Sumith,

    I got the little bit of money for the first two properties from a family member, so I don’t consider it as an official “mortgage”. Therefore the calculations are done as it would be full cash investment. The property in Topeka was bought with a mortgage though – seller financing, directly in the USA.

  9. Posted by luke 14th October, 2011 at 6:45 am

    Thanks for the website! I live in AUS, am looking at buying in usa. The HOA fees look huge! almost taking half the rent is unbelieveable. Can you tell me what is the best way to know what the HOA fees are? Are they decided by a strata? Do they differ from state to state? What do they o with all that money? I really dont want to buy a house due to maintenance. Thanks in advance.

  10. Posted by admin 2nd February, 2012 at 8:39 am

    Hi Luke,

    yes, the fees are huge. They differ from one HOA to another, however they are always higher in the regions which struggle with higher vacancy rate. Vacant condo doesn’t provide any HOA fees and therefore the others have to pay more. My experiences with condos made my decision to concentrate more on houses or even better multifamily properties.

  11. Posted by Warren 1st May, 2012 at 10:09 am

    But a house investment will never mean positive cashflow, corect? Once the renter knows the rent rate gets closer to to the payments on a mortgage then they will leave!!

  12. Posted by admin 27th June, 2012 at 5:29 am

    Well, the thing is that they might not have a good credit to get a mortgage by themselves. It’s pretty difficult to get loans in the US right now, so I am not afraid of the tenants leaving much.