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EXECUTION Build a real estate company in a D area

Discussion in 'Progress/Execution Threads' started by JohnD Realestate, Mar 5, 2018.

  1. JohnD Realestate
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    JohnD Realestate Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    This will be my progress thread. I’m getting my head kicked in right now. Feel like I jumped off the boat with cement floaties. I have been meaning to start writing for a while but with things getting worse every day I found it hard to get out of bed. Let alone document my weakness and failures. It’s definitely my problem. I have made a lot of mistakes.

    I’ve been a real estate as hobby investor for 12 years. Done mostly live in flips. I’ve bought and sold 4 houses and currently own 12. Started out with one three family in 06. I sold that last year and did a 1031.

    In the 1031 I purchased a package of buildings from a slumlord. It’s comprised of 37 stores, apartments and rented rooms. They need a ton of work.

    I bought these houses knowing that they were in a depressed area of NYS. I knew the city had a reputation as the “murder capital of New York State. I looked for the worst part of the city. There I found a building that seemed worse than those around it. Luckily for me the owner was easily convinced it was time to sell.

    Edit: If this sounds like a complaint that’s not how I mean it. All of my complaints right now would not exist if I had not handled executed better.
     
    Last edited: Mar 6, 2018
  2. WJK
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    You sound overwhelmed. Is it the 1031 properties that you're working on? That's a lot to take on, both in energy and investment dollars. Been there, done that... in the ghettos and barrios of Los Angeles. It a tough world out there in that type of neighborhood...
     
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  3. JohnD Realestate
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    Yes overwhelmed is a good word, yes also it is 1031.

    Thats was as much as I could put down before getting the kids to bed and spend a bit of time with my wife. I think the situation would be much different up there if a few things were different.

    One is money. I went in with a 6 month reserve and 100k or so for Reno work. I hadn’t planned on doing much reno going in on the residential units. That was going to happen after a cash out refi at 12 months. But I went in with a lot of equity. I’m about 55/45 on the loan. Purchase was 1.55m I put down 729k.

    The second thing I’m short on is time. I’m still working, I’ve been at my job 12 years. We need the money to pay bills. My job is a good job for this type of thing bc the schedule is flexible. I work 4 days a week and can take vacation days when I need to. If I spent 5 days a week up there things would be very different.

    I have a management company. They collect rent pay bills and do books...only on the rentals tho not my reno biz. Plus they don’t deal with my bad Building. It’s too scary for them.

    I have an on-site manager there and a super.
    The guys I have working up there are kind of like the three stooges. But it’s tough to find good help in the ghetto, I could but I would have to pay big. Right now I think what I’m doing is good enough. They live on site and they don’t mind chasing hookers, and addcits out of the hallways.

    Most of the residential properties had tenants. There are 7 commercial spaces and five were vacant. Most of the buildings have apartments above the commercial. The commercial is were I planned to spend the 100k. What happened was a little different. I had to vacate some tenants going in. There was an illegal SRO that should be two apts. One mistake I made was spending too much time negotiating with tenants. A few seemed like they wanted a quick buyout. The city also told me they might vacate for me based on safety. After a few weeks that didn’t happen. I was busy with other projects so it took about a month before I began to evict. Big mistake. I knew that one already but had to relearn. I also had three tenants move out within weeks of taking over. The apts were shot. Long term I wanted those apts empty to renovate and get better tenants but short term...I didn’t want them empty. So I had to use some cash to get those ready.

    I was able to rent 4 commercial spaces pretty quickly. I made some improvements and things went well on the commercial side. But two tenants were unhappy with conditions after a few months....one was just trying to get out of paying rent. I let him go.

    The second tenant and I had an agreement that I would install heat and a bathroom in his space. I made the deal quickly and later learned the city wouldn’t approve my plans. It took the city a month to tell me this. They wanted a handicap accessible bathroom in the space. The issue with that was that the bathroom was very far from the sewer line. To get proper pitch on the plumbing I would need a 20’ ramp....eating up the tenants space. I also had loads of problems getting gas to the space for heat. Plumbers in that city are in limited supply. End up was I failed at my side and the tenant walked. Space is still empty.

    In the meantime I had spent my 100k. I waited for rents to come in and do renos but collecting rents was going badly. I’m supposed to collect 30k on a good month. I need 23k to break even and pay the 12% loan. Some months I collected 14,16,18. Went to my wife to borrow and she agreed but had some terms. I suck at keeping records, reciepts and tracking expenses. She wanted a full accounting. For one.

    She also wanted: I have numerous projects in the works. She wants me to sell a few. She has always wanted me to sell. She hates real estate. Even when I make ten years salary on one deal she still hates it. So I’m trying to hold off on borrowing from her. I brought in a partner on three residential properties. Hated to do it but I don’t have many choices. My wife would give me the cash but I’d have to sell something first.

    I still have 3-4 commercial spaces for rent. But now cash is tight so I working on getting them rented to artists or tradesmen as a workshop.

    I also have the bad Building to deal with. When I first saw the place I underestimated how bad it was. I’ve dealt with things like this before so I thought I could see how to fix it. It’s a drug den. 2-3 tenants are long term drug dealers. They sell heroin and cocaine Day and night. I put cameras in the hallways and they screw around with the cameras. I started to evict the tenants. I would move someone out and find a tenant that looked ok on paper. A few days later they would be all cracked out. I’m still not sure if this was because the dealers told them to apply or they just moved in and discovered they had a drug problem.

    So now I’m evicting more people. The dealers got busted in a drug raid. Tanks, helicopters, swat team. The came in with combat gear and swept the place clean. That night after the cops left neighborhood folks busted my front door broke in to the dealers apt and stole all his stuff and trashed the place. Next day I found two people barricaded in a junk filled room with a refrigerator wedged up against the door.

    I’ve had many many calls to the cops and they come out and arrest trespassers but they just keep on coming. Hard to get good people in bc the building has a reputation. The cops say it’s the worst building in the city. I knew that going in tho. I had months of 50% or less occupancy. Right now I’m at 90% but it took a lot of time and I had to offer specials.

    I need to work harder, that’s my solution. Between my work schedule and my family it’s hard to squeeze in 2 days a week. I used to get up at 4 or 5 and do work. But lately I just sit in bed and my brain is like a washing machine filled with what-ifs. What if the dealers come to my house. Maintenance stuff things I forgot to do. Etc.
     
    Last edited: Mar 6, 2018
  4. WJK
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    Wow! Like I said, been there, done that... I did it in the ghetto in Los Angeles for years -- but my biggest challenge was right here in Alaska -- the mobile home park that I'm still operating. Only it was $250K that I breezed through in 6 months... I had every bad guy in the area right here. I owned the "ghetto" in this small community. My mother, my partner, was addled and dying. She was bringing in MORE bad guys as fast as I could get rid of them. My parents had sold the property in their divorce and Dad demanded the face amount of his half of the note, which equaled the total market value of the trashed property -- or he's was going to plant himself in the middle of the whole mess. I was totally financially supporting my mother, and she cried the whole time. I had a high powered RE career in LA and I lived 5,000 miles away. And my financial world was crashing...

    I survived. So will you.

    First of all -- take a day off and enjoy your family. You've lost your perspective. Tell you wife that you love her. Take her out to dinner. That's your real base.

    Second, if you have to sell something to make this all work, you need to take a hard look at your situation. Yes, you need a way out of your hell. BUT, you need to ask what is the best thing to do here -- not the cheapest or fastest. Take a step back and crunch the numbers again. Then sleep on it before you do anything.

    Third, take a deep breath. You're doing all the right stuff. You don't need to work harder -- just smarter...

    Let me know what you decide to do. Wishing you a good night's sleep.
     
    Last edited: Mar 7, 2018
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  5. JohnD Realestate
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    Yes that sounds like a handful! All that family stuff just makes it harder.
    Working on the numbers now. I was thinking on which properties I would sell. I’m trying to hold off right now because it’s spring. With all my vacant units this time of year is not the right to lease up. Once or two months could make a big difference.

    I appreciate the input. Just told the wife we should go out tmr.

    Sleep is tough right now. But I’ve been moving a bit more and some things have already gotten better. Juts writing that helped. Up till now I was mostly pretending to all that everything was A-Ok. I spent a few days working on the commercial stuff cold calling and canvassing for tenants on foot. Didn’t get anyone but it made me remember everything is my reaction...not the situation. So now I need to like you said work smarter.


    Drug bust photo below. At the time made me nervous. Week or two out feeling a bit better.
     
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  6. JohnD Realestate
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    9DE638F8-0C21-458A-8E53-2DB7E8FB85F6.jpeg
     

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    I have owned properties in D locations before. Not again. Your life will always be in churn mode with these. 5 deaths on property. 4 from guns and one from hanging (suicide). In one case the Ice Cream Truck was selling drugs. He was shot dead in the parking lot.

    I heard shots while in the office one day and came out to find that the blue shirts had just driven by and fired at the red shirts. One teenage kid was showing off the bullet scrape on his bike.

    The cousin of a tenant hammered the manager upside the head with a fire extinguisher which knocked him out cold. We had a large payout from that one.

    Collecting rent was always tense and filled with conflict. Too many evictions and tough pool of candidates to choose from.

    The police once informed me that there were known "cop killers" in one apartment building.

    It took a while but the trend for great locations finally sunk in. Crap building that I could work on in a location that everyone wanted to be. Yes... that is the ticket...
     
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    John, you know the rule -- location, location, location... and I think you've learned something about your boundaries and limits. You'll make better decisions in the future about what you will and won't do. You're to the point where you won't want to take the same risks that you took earlier in your RE career. Can you shine up your bad building and sell it? You don't want to be around all that mess!

    Drugs are pervasive here too. I try to keep them out as much as possible -- but, they sneak in sometimes. I know exactly who the red and blue shirts are. They are bad guys! They don't care if they live or die. My guys here think that they are bad guys too, but they're just wannabees compared to your ghetto rats.

    And yes, we got raided for a "grow operation" the day after Mom and I repossessed the property. No, all they found was an empty storage building and few leaves. We hadn't even had time to open and inspect that building when the black clad Troopers showed up with their big guns. All these years later it's almost funny. It sure wasn't funny then.

    I'm stuck here for the time being. This property is now a cash cow -- the rental income is 6 times where I started. Plus I've created some other income streams. It's still a PITA to manage. I made the BIG mistake of not understanding the resale market. It's way to shallow for me to get my money back right now -- and I have to be cashed out due to the nature of the property. I sure don't want to start over again with another repossession.

    Mom died 14 years ago, my first full-time winter in Alaska, and I'm still here. After paying off Dad, I didn't talk to him for over 8 years, but I've finally made my peace with him. He's turning 86 this month...

    BUT, good news concerning the property. They are supposed to build a huge LNG facility 3 1/2 miles up the road from me. It a pipeline project that will connect us with the North Slope natural gas supplies. They'll do the deep water shipping to Asia from here. They should be breaking ground in 2020, and it fast tracked by Trump. The day they put the spade in the ground to start, it will double the market value of my property. I have the only group of affordable housing in our community. They're talking about bringing 5,000 workers into a community of 6,000. It will be like N. Dakota all over again.

    Also the closed-down fertilizer plant up the road is supposed to reopen 2 of their 3 units, with a 24 to 28 month turn-around (fix-up to restart). That too will bring in a bunch of workers. It's a Trump tax-cut-blessing.

    Maybe being stuck here for all these years is going to be a back-handed blessing. I'm scared that I won't make the right decisions and really make these blessings work for me. I too old and used-up to go out and make it all happen again.
     
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    I'm assuming that you know what the shoes draped from the power lines means.
     
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    Sure, drug dealers aren't very creative with their free location ads. They've been using the old shoes draped over the power lines for the last 30 years!
     
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    .... and it always amazes me that everyone does not know this... But, here it is in this picture in front of God and everyone. And, they are getting busted.
     
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    Drug dealers are sometimes sly about their business, but I wouldn't call them particularly bright or far thinking. If you do the wrong thing often enough, you will get caught. I guess they missed that lesson.
     
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    John, you do need the shoes down from the power lines next to your building -- as noted in these posts. You're right, your building is marked, both figuratively and literally. Remember, those are live wires and the companies who own those lines have to take them down.
     
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    Thanks that success story helps.
    6 times rent? That’s awesome. I might move on from D properties one day, but not yet.

    I worked for my cousin when I dropped out of high school on a similar project. He had about 30 units in Queens NY in the late 80’s. I learned a lot of what I still do from him. He would buy stuff no one wanted to touch and work at cleaning it up. He focused on a few blocks. Today he still owns the property.

    I later worked for a real estate company doing similar stuff in front neighborhoods in lower Manhattan. I still plan to do this type of investing. Trying to learn from my errors. Working on fixes now. I know a lot of it is how I reacted.
     
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  15. JohnD Realestate
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    I’ve heard that before, and it def cold be true here.
     
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    JohnD Realestate Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    Good idea. Help the visuals. I’m working on filling vacancies right now and one of the things I’m trying to do is make sure no dealers get in.
     
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    When I put cameras in the hallways I went to the dealers and showed them the cameras on my phone. I told them I was going to give access to the cops. I showed them that the cameras had microphones. I was working on evicting them but the process is a few months and they always paid rent on time.

    They were just too stupid. I told the cops that o told them too. When I brought the camera to the attention of the PD they said thanks well take a look.
     
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    There is a crime-free addendum that the tenants sign in Arizona. This addendum allows for a 24 hour eviction for crimes. It can actually take 3 days to get them locked out if they refuse to leave. Do they have anything like this where you live? I used it many times.

    Drug dealers are not easy to work with. They usually have a loyal following of people that would be happy to hurt you or your property. I found that a professional approach worked best. Calm words and straight facts of observation. I would usually tell them that the easy way for all of us would be for them to move. It would be less attention all the way around.

    My experience has been that evictions, payment problems, trashed units, and other problems associated with D locations would eat through the cashflow. Numbers would look good on paper but real life showed a different story. This sounds like what you are experiencing as well.
     
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    I never found the police to be very helpful.
     
  20. JohnD Realestate
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    Yes that’s very true. Definitely losing out on cash flow right now. I expected it to be a problem but not to the degree that it is. Part of it is that I stretched myself to get this deal done.

    I have a lot of confidence in the market long term. I also know that long term my strategy works in this arena.

    The city and the area I am in is rough, my buildings are the worst in that area. In two buildings...the worst I have I had 25 tenants. I’ve evicted 20 of those. The replacements in the beginning were no better than what I had evicted. I adjusted that and lately have had much better success. Based on that I’ve accomplished one of my major goals. Cleaning out two of the worst buildings in the city. I can’t take advantage of it yet but down the road that will drive up the values.

    When I bought the house above there was always 5-6 guys hanging out in front of the gates. Now they moved about 50’ to the opposite corner. Just that little move was hard won.


    I’m not alone up there. I went up with a small group of investors. And once I got involved I found others that have used the same strategy in the past. We mostly came from Brooklyn and Queens. Between us we bought over 125 buildings. A few from other cities upstate. Most of them agree I took a huge risk. I do as well. We meet up once a month to exchange info and they are rooting for me, but also hoping that I make it. My area is so bad if me and the 5 landlords trying to fix my blocks succeed it will help the whole city. Vacancy is low up here but security is a huge issue. Provide security and you can raise rents...thereby raising values. That’s one of my other goals. Provide security.
     
  21. JohnD Realestate
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    I had that experience as well.
    I’ve had a bit of success though also. At least in newburgh I’ve been a bit more successful at it. In Brooklyn my first property was next to a halfway house. I called the cops many times and had mixed results.

    I had some success once I found one boss to communicate my problems to. It’s hit and miss if you call. A lot of times they are just stressed and busy and they don’t want to be bothered.

    I’ve been dealing with a higher up and he has gotten my Building added to the schedule for sweeps on an inconsistent basis. So a few times a week they pass by and sweep the hallway for trespassers. 4 arrests so far. That has helped me a lot.
     
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    Well, I totally understand. I'm still operating my mobile home park after all these years. Cash cows are nice assets.
    To start, just get rid of the shoes strung over the power lines. And make sure your dealers don't hang out their shingle again.
    Another thing, hand write your wife a love letter. It doesn't have to fancy or long -- just from your heart & gut. If you can get her on board with you, you'll have a much easier path.

    I married my husband after Mom died (I was 50+) and he's my best friend. He wrote me one of those wonderful letters a year or so ago. I have it folded up in my computer bag. I smile everyday when I see it in there. When my husband notices that I still have his love letter, he always assures me that he means every word of it...

    Anyway, tell you wife why you love her and why she's so important to you. It will mean the world to her. Having her moral support will mean the world to you!
     
    Last edited: Mar 8, 2018
  23. JohnD Realestate
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    Thanks, I’m listening to a lot of the above. I read it the other day on the run but didn’t have time to respond.
    She is on board with me doing RE. I still have a full time job. It’s just when I have to borrow that it gets sticky. I acknowledge openly that I take big risks with RE, that’s a fact. So when I ask to borrow( and it’s from her savings, retirement and emergency fund) we both know it could be at risk. And not even liquid at that.
     
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    I totally understand her feelings and yours.

    Matt and I have had some rough times over my properties. He has a love/hate relationship with them. He doesn't have my business head or people skills. He can fix or build anything -- BUT most of the time, he thinks like a workman rather than the owner. He's getting some better over time.

    Also, in the past, he became sure that he could run the overall jobs, rather than just being the lead man on the crew. At that time, I couldn't do anything right in his eyes, so I let him try. It was #.$&* disaster. He gave it all back to me 2 years ago. Our current agreement is that I consult with him, but the final decisions are mine, and mine alone. He's become very happy with just getting the work done, most of the time.

    I guess that the long answer as to why I understand your situation. Matt and I have re-built our friendship and our marriage over the last couple of years.

    Relationships and marriage are a set of ground rules and agreements. It sounds like you need to re-make your agreements with your wife -- up front and spoken out-loud. To get to that point, you're going to have to do a lot of listening. When she feels that you hear and understand her, then you can start to find some middle ground.

    I'm sure that your risk taking scares the hell out of her. I'd start by listening to her fears and how they effect her. Once you listen to her, she'll be a lot more willing to listen to you.

    You have recently been immobilized by the overwhelming situation you were in, and your fears. We've talked about it. You are coming out of that place in your head. You're getting your RE sea legs back. Time to reach back for your wife's hand and pull her along with you.
     
    Last edited: Mar 10, 2018
  25. itsemdub
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    itsemdub Contributor Read Millionaire Fastlane

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    @JohnD Realestate I’d ask the question that @WJK already asked you: why don’t you sell? It appears that you stabilized the multi family piece (50–> 90% occupancy). Capping that out you should be able to at least get out with your cash and cover any potential loss on the commercial component. Are all of the properties wrapped in the same loan?
    Unlike WJK’s example of stabilizing his property and getting higher rents, it doesn’t sound like this is the sub market that will happen in (speaking only from the info you’ve provided). What are the economic drivers/long term sub market growth opportunities? Along the similar vein as the LNG plant for WJ... if there are none, you can expect the future of your property to always be like this. Having the best building on the worst block, which it sounds like you’re pushing for, is the worst investment you can have. I don’t own, but have sold properties in similar scenarios. They continue to change hands for years. Push the headache on someone else, or you’ll likely come back to this thread a year from now and be in a worse place. Sleepless nights suck and I empathize with you man.
     
    Striver and JohnD Realestate like this.

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