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Investing in Townhomes

Connor

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Know it's been a few months, so I thought I would share an update. We are still at 6 units, but we are hopefully about to pick up 2 more here by 8/1. We're going to have to do a bridge loan for 30 days or so, as the banks will only loan up to 75% of the value or purchase price, whichever is less, when doing a portfolio loan. Since we're going to be purchasing these two well below market, we'll have to wait a bit before including them on the portfolio loan with the 3 other units that we have yet to refi as well.

Thought we were going to close on our first 3/2 recently, but the guy ghosted us. We were going to assume his loan, but his ex-wife was listed on the mortgage, and we suspect he couldn't get her to sign off on it.
 
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Connor

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So definitely been a little frustrating this summer, as we've had a few deals fall through in a row. The last one was especially frustrating, as we've known the people who own the two units for years, but one decided at the last second that he didn't want to sell. Not even 100% sure on the reasoning, but hopefully he'll change his mind and allow us to scoop up those two units.
 

Connor

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Closing on townhouse #7 on the 9th. Funny enough, we've tried to purchase this one as a part of a 4 unit portfolio twice, and this unit was the best of the 4 that this guy had, but we're getting it for $5k less than the other 3 sold for. It's not fixed up, and the rent is commensurate with that, but the tenant is month to month, so hopefully they will leave soon and give us the ability to get it to the level of our other units in the neighborhood.

Just goes to show persistence pays off, though of course it would have been nice to pick up all 4 of his units instead of just 1.
 

Connor

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Know it's been a while since I've posted an update- not that much exciting, other than having a few move-outs and renovating one of our units before getting it leased up. Prices have mostly gone up to levels that doesn't make sense to buy, though we did just put an offer in on one unit, but it's going to require a significant amount of work even for a townhome.

Good news is that we've built up some nice reserves and should be able to acquire the next townhouse with the money we already have in the bank rather than having to put in additional money. I know it's ridiculous, since we're so fortunate to be able to afford to own 7 units already, but it's frustrating to not be able to keep acquiring deals, especially since we passed on some ones early on that would be awesome deals now. I have to remind myself that we're in this for the long haul and will be able to scoop up a lot more when the market resets.
 
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BizyDad

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I have to remind myself that we're in this for the long haul and will be able to scoop up a lot more when the market resets.

Exactly. Keep your head up Connor. It's a marathon, not a sprint.
 

Connor

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I keep saying that I know it's been a while since I've posted an update, so I'll have to come up with a new phrase haha. It's been a little crazy at work with all of the Coronavirus turmoil going on. We're still at 7 units- had one tenant move out on 3/31, and we're finishing up the clean-up/reno there. They treated it well, so going to be less than $1k to fix it up, which is great. We've gotten 5 of 6 tenants to pay us for this month, so not too bad considering all that's going on. Think we might get the 6th as well in the next few days (hope I didn't jinx us).

We're likely going to pick up another unit for 5/1. Pricier, but it looks like we'll be able to get it for $10-15k under what others have gone for in that development via a wholesaler. Also, it's funny how things can change quickly- not too long after I was complaining above about not having enough things going on, we uncovered an opportunity for a 12 unit group of townhomes for sale. While we ended up putting in an offer, the owner has put things on hold with all of the uncertainty, but we're going to refinance out our private money from the other 4 units we have to free up the capital to close that deal if it comes back up.

Hope everyone is staying safe out there!
 

Connor

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Just acquired townhome #8. As I mentioned above, one of our pricier ones, and it probably won’t cash flow as well as some others. However, it will help our balance sheet, as the ARV will help our equity overall.

We also executed our second refinance, taking our a loan across the last 4 units that we had acquired. Didn’t completely take out all the private money we had out there, but took care of 90% or so.

We want to get to 10 this year at least, and I definitely think that’s achievable.
 
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Just acquired townhome #8. As I mentioned above, one of our pricier ones, and it probably won’t cash flow as well as some others. However, it will help our balance sheet, as the ARV will help our equity overall.

We also executed our second refinance, taking our a loan across the last 4 units that we had acquired. Didn’t completely take out all the private money we had out there, but took care of 90% or so.

We want to get to 10 this year at least, and I definitely think that’s achievable.
Slow and steady wins the race. This virus situation will shake out the RE business some -- depending on how long it lasts...
 

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Great job! Keep buying them whenever you see value. When I started buying rentals, I bought primarily townhouses. They were significantly cheaper than a SFH, but the rents weren't much less. I did learn over time, that the appreciation increases have been less in the TH's(at least in my market), but I was always more focused on cash flow anyways.
 

Connor

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Great job! Keep buying them whenever you see value. When I started buying rentals, I bought primarily townhouses. They were significantly cheaper than a SFH, but the rents weren't much less. I did learn over time, that the appreciation increases have been less in the TH's(at least in my market), but I was always more focused on cash flow anyways.
Definitely agree that SFRs appreciate more than townhomes, and you're seeing more money flow into the big funds who have bought up thousands of homes (was a WSJ article about it today), so that should continue. However, the institutions don't like dealing with HOAs and that risk, so it should help us still have opportunities going forward from a cash flow standpoint, as the margins get squeezed in SFRs.
 
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Connor

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Have townhome #9 under contract (hopefully just didn't jinx myself). This is an older unit, and a 2 story one, but it's a great area, so I think we'll be able to hit a good rental price. Will be a good experiment too as we try to map out our criteria for the future and where we will be able to push the boundaries versus not.

Also was able to get a rate adjustment on our first portfolio loan, which is going to save us a little bit each month.
 

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What has your experience been with property management? How does it affect your costs?

I managed my own investment property to save cash and it wasn’t terrible, I liked being onsite and knowing the tenants well. Problem is that I can’t scale to more properties.
 

Connor

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Problem is that I can’t scale to more properties.
You hit the nail on the head. It all comes down to the question of what you are looking to accomplish. Do you want to make the highest margins possible? Or are you willing to give up some margin for the freedom of not having to deal with some of the headaches, and focus more on scaling?

My brother helps run the property management firm, so I do get the best of both worlds to some degree. Regardless, if your goal is to own a bunch of units and be more "passive" (RE is never fully passive, even with a property manager), then you need a property management. Definitely need to vet them even more than you would vet a tenant and keep tabs on them to make sure the 10% that you're giving up is worth it.

Edit: Most SFR property managers aren't very sophisticated, so it is a space that is rife with opportunity, but you have to be willing to slog through the muck. My brother works very long hours and deals with so many headaches, but his efforts are really starting to pay off.
 
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Connor

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Just closed #9 last week (sellers really dragged it out, but got it done) and already have #10 under contract. It's right next to two others we own, and a good cash flow area, as the prices are still low enough to have some margin in them. I try to not look back, but it is somewhat painful to be paying $10k more than the one we got a little over a year ago, but it should still cash flow, so going to scoop it up.

Word is starting to spread that we are the people to talk to about selling townhomes, so we're seeing more off-market opportunities flow in, which is awesome. But I'm starting to run low on cash, so going to have to slow down a little bit or raise some amount of outside capital. Really didn't want to dilute our equity this early, but we'll otherwise have to miss out on opportunities, and I don't want that to happen either.
 

Connor

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And now we have #11 under contract. The 10th one closed last month, so we are making good headway on total units, though our average acquisition cost is up significantly, with how much home prices have risen. Good news is that rents remain strong, so we're still able to get pretty solid cash flow, and reduced rates for loans are helping a bit as well.

Likely will do another portfolio loan after this one closes or we get to 12, and keep rinsing and repeating.
 

Connor

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I know this isn’t the most glamorous thread ever, but I hope to be able to demonstrate that consistency pays off. Valuations have risen significantly, which has helped us a lot with our current refinance, but certainly challenging to acquire. Just got unit #12 under contract- going to be paying $95k when previously we would have only paid $85-90k.

However, our other unit in that development has had cumulative rental rate increases of 20% in the last two years, and another unit went active on MLS down the street for $133k, so I still feel good that we are acquiring below market.

We had a lead on a 12 unit opportunity, but the owner ghosted us and just bought another 13 units or so. Appears he won’t be selling soon then if he is buying more. Need to find more of these groups of townhomes as it’s tough to scale up with one unit at a time.
 
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Yes, scaling up is tough. So, it's taking some time... But, please think about this. There are times when you need to stop for a hot minute and take stock of where you are and where you're going.

I'm really big on debt reduction. OPM really scares me after living through the 1990 meltdown. At the beginning of each loan, your principal payments on these loans are SO small. At least double them. If you can get just one unit with considerable equity, or paid off, you'll sleep better.
 

Connor

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@WJK Completely agree on debt reduction. We've been fortunate to have ridden the wave up in valuations to help us refinance out most of our capital, but that certainly could change. That's part of why we're doing multiple portfolio loans- so we can eventually pay a few off to always have some units to fall back on. My brother and I are also fortunate to have enough cushion from our day jobs and other investments that we will be ok if something major happened, but it's something to make sure we stay aware of as we scale.

If we had closed on those 12, we were going to pause for a year to pay things down and settle.
 

Connor

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Closed on unit #12 earlier this week- was touch and go as the owner had a second mortgage that was larger than our wholesaler initially informed us. While again we're having to pay more than we did a year or two ago, the spread on off-market properties is so substantial. One unit just sold right across the street from the one we bought for 35% more.

Good news is that we'll still be able to cash flow this acquisition decently, with how much rents have risen as well in that area.
 
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Connor

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I feel like this is such a boring thread, but I keep posting as I guess I partially want to show that it's not super exciting on a day-to-day basis and more about consistency of the process. We've closed two more units since last time I've posted, and we're currently looking at doing a refinance across our entire portfolio, pulling out some additional equity to help us acquire properties. The additional leverage does give me some pause, but our rents are going up rapidly, and we're putting it on a non-recourse, longer-term note that will help maintain a good level of cash flow.

With real estate so hot, pricing of these townhomes continues to rise, especially with so few people selling, so we're starting to look more at smaller multifamily as a way to continue to grow while not overpaying on a per-unit basis. Still love the townhome thesis, as it's done well for us, but tough to get them to cash flow well enough with the increasing costs to renovate. Those are up about 30-40% from pre-pandemic levels, whereas our rents are up 15-20%.
 

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I feel like this is such a boring thread, but I keep posting as I guess I partially want to show that it's not super exciting on a day-to-day basis and more about consistency of the process. We've closed two more units since last time I've posted, and we're currently looking at doing a refinance across our entire portfolio, pulling out some additional equity to help us acquire properties. The additional leverage does give me some pause, but our rents are going up rapidly, and we're putting it on a non-recourse, longer-term note that will help maintain a good level of cash flow.

With real estate so hot, pricing of these townhomes continues to rise, especially with so few people selling, so we're starting to look more at smaller multifamily as a way to continue to grow while not overpaying on a per-unit basis. Still love the townhome thesis, as it's done well for us, but tough to get them to cash flow well enough with the increasing costs to renovate. Those are up about 30-40% from pre-pandemic levels, whereas our rents are up 15-20%.
Keep posting. It is appreciated. You never know who you'll inspire or educate.
 

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Real Estate, in general, is usually a big yawn when you look at the day-to-day operation. It's getting one foot in front of the other while quietly taking care of business, problem after problem, as they come along. It's not a get-rich-quick scheme - or at least that's a very rare event. The "hares" of the world need not apply. It's a turtle's slow and steady race to the finished line. But, the basis of most great fortunes is real estate -- so it worth the daily grind.
 
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Connor

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Thanks guys. Those were my thoughts as well, so glad to hear that! Real estate (especially buy & hold) is an exponential curve, so hope I can one day share the full payoffs of this process.
 

Connor

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Sorry for the radio silence- been dealing with some health issues as of late. Fortunately, nothing life-threating, but a lot of things hitting at once. On the plus side, the real estate portfolio has grown considerably as of late! We picked up another one-off unit that a SFR fund had under contract until they realized it had shared walls, so we closed on that one back in August. It's under-rented, but we've already pushed that up a bit, and we've not had to outlay cash to renovate it. Have had a few moveouts but only one turn that cost us more than anticipated.

The biggest news is that we simultaneously refinanced 14 of our 15 properties and acquired a group of 12 townhomes on the same street. The financing aspect almost blew the deal as there was so much back and forth between the lender, our banker, and us, as we had to create new legal documents and entities to satisfy their requirements. We did learn a lot throughout the process and fortunately are in a better position now with several local and regional banks that we could get fairly similar terms than going the agency debt route with less headache. But we made the right decisions at the time even though ended up taking us almost twice as long as anticipated, and the seller got very nervous with it taking so long.

We did spend a little bit more than we initially planned, but with the market continuing to rise, there was no way we could purchase this many units at this price point on the open market and could sell it now for probably 10% more than we closed it for. The former owner has been self-managing the property and was the original builder, so his cost basis was next to nothing at this point, and we think he cared more about minimizing turnover than maximizing profitability. So we have a lot of room to push rents up, especially as we start to renovate units. After making such a big acquisition (for us) and growing our portfolio so much this year, we will probably take a pause next year on buying to renovate more units and pad our cash position a bit before we make any more moves. A great way to end the year though it was an exhausting process!
 

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@Connor gz on the growth, seems like you are building momentum slowly but steadily.

Because you are getting to a pretty good unit count I'm curious to hear about your experience with rent growth in recent years? I've personally seen ~10% rent growth in the past 6 months alone. It feels like this is a nationwide occurance, at least in residential properties that has been creeping behind either wage growth, inflation and /or rise in home prices.
 
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Connor

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@BD64 We've definitely been able to push rents a good bit with those factors you mention. To me, the growing affordability crisis on buying homes will push more people to rent long term and help push rents further. We're in the Southeast, though our rentals aren't in one of the super hot markets like Charlotte or Charleston, but we're benefiting from the demographic shifts too.
 

Connor

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Been too long since I’ve updated this- while my primary focus has been work, we did just close on another townhome. This year has been slow on the acquisitions front, but we bought 9 more last year, so this is our 37th. Had some cash flow challenges in Q1 with renovations, but now we are back on track and I’m also in a position to contribute more to our investments this year. 8 of the units we acquired last year need heavy renovations when the existing tenants move out, so that's been a drag on cash flow.

Think we will keep it calmer this year, but hope to pick back up the acquisitions next year when some distress enters the marketplace and hopefully have more cash to contribute to buying more properties.
 
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Great progress! I enjoyed reading your thread and look forward to your future updates!
 
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