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One year of investment property operation data in Phoenix, Arizona

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.