REAL ESTATE knowledge or action?

[yveskleinsky]

I have (and get) conflicting opinions on whether or not I should take the time to learn more and develop our systems or move forward with the next deal. To those of you who are involved in commercial real estate, what would you recommend I do? Can I do both at the same time? Knowing what you know now, what would you have done differently?

To those that are involved in commercial- can you break down how you did your first deal more in depth. Numbers, units, financing, where you were financially when you did this deal, how much you had in reserves and how much experience you had ? Greatere insight would be really helpful- thanks a million!

 

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[JesseO]

Perhaps if you had a specific property with all the numbers to share, there could be some good discussion as to the "to buy, or not to buy?" scenario. otherwise, I would say action is the most important, but you're already investing in real estate. Is this about that cabin deal you're looking at?

 

[Russ H]

DISCLAIMER: B&Bs and Vacation Rentals are different animals than renting out houses or apts. They are much more labor--- and mgt-- intensive. The post below applies specifically to B&Bs and Vacation Rentals

yveskleinsky-

Do both.

You're already investing, so that part is happening.

And you're gobbling up the learning part, too.

Back in 2002, my wife and I had some good investment capital and were itchin' to do something with it.

We had chosen the B&B route for a number of reasons, one being that her family is based in CA, and running a B&B was one of the only ways we could find to get property that cashflowed in CA.

We had planned on getting a good mgt team in place, and having a great life.

Which is kinda where we are now, 4 years later.

In truth, we've gone on to make the business grow, so we're not the relaxed B&B owners we originally planned on being. We're actually crazy busy developing other properties.

The reason I've urged caution re the cabins is that we bought an underperforming property from a motivated seller (he was terminally ill), for WAY under market value.

But we never calculated that bringing the property up to speed would literally take ALL of our time, for 2+ years!

During that time we lived on our savings, and the meager dribble I had coming in from my old business that I was spending NO time on (about $80-120K/year, net, at that time). The B&B ate about $60K/year of my biz income, giving the both of us only $20K to live on one year (not easy, in CA).

A year into it, I had to choose between shutting down my biz and focusing on the B&B, or vise versa. The biz had far more regular cashflow, but zero future (high tech jobs can be like that).

And the B&B had a HUGE upside, but was not making money.

We chose the B&B.

But it wasn't an easy decision. Esp when we had to cash in virtually everything we owned to live. We sold all of our RE-- all of the houses we owned-- since we had borrowed against them to fix up the B&B. We also had an enormous garage sale (rented out part of the fairgrounds in Napa), and sold as much of our belongings as we could part with for pennies on the dollar.

We made a lot of sacrifices to make this B&B work.

I realize rental cabins may not have *nearly* the same kind of upkeep. But realize that you will have:

1) A much bigger alligator to feed every month (ie, mortgage payments), and

2) Be much more dependent on reliable, efficient staff.

So the 2 questions to ask are:

1. Will the income from my current job both support me, and pay ALL of the mortgages/taxes/insurance for this investment each month? If not, how long will my savings last? (it better be a minimum of 18 months, b/c that's how long it takes to sell resort property).

and

2. Will I be willing (and able) to physically perform all the labor required for this investment, if needed? (e.g., weekly cleanings, if your cleaning staff walks out).

If the answer to both questions is "yes", or if you have at least 2-3 back-ups ($$ and staff) for the above, than I say-- go for it!

If not, I'd strongly suggest you reconsider.

Buying vacation rentals or a B&B takes much more time than your average RE investment. That's why it has such a great upside.

 

[yveskleinsky]

Russ-

I just want you to know that after reading an earlier post from you, I spent about 4 hours cleaning an organizing my office. I will get to "know my finances like the back of my hand" in the very near future. My current situation is that I really want to keep moving forward, but I don't want to dig a hole. (Who does, right?) I have 3 months of reserves saved up, plus income from my day job.

You mentioned 18 months to sell a resort property. Out here is takes much longer...which is another concern. I really do like the idea of buying either 5 of the 9 cabins (asking $275k for 5 or $550k for all) or trying to figure out this foreclosure property. If I get in for $275k (or less) that is a comfortable level of debt for me. We are still working on getting our team together. ...Who all do you have on your team? What type of software do you use? How did you structure the financing on your B&B?

 

[Russ H]

Who all do you have on your team?

To run the Inn, we have:

-Housekeepers
-Innkeepers (incl our live in innkeeper)
-Chef
-Landscaper
-Contractors (painters, plumbers, HVAC, electrician, etc)
-Community Partners (Convention Visitor's Bureau, Chamber of Commerce, BBB)
-Marketing Partners (B&B websites, PPC folks, IT designers, travel sites, etc)

To run our RE development part of our business (incl upgrades to the B&B), we have:

-Contractors (the full range, everyone you can think of)
-City of Napa Building Dept plan checkers
-City of Napa Building Dept on site inspectors
-City of Napa Planning Dept
-City of Napa Waste Mgt Dept
-City of Napa City Council for any use permits
-City of Napa City Clerk for paying other taxes (business license, hotel tax, etc)
-City of Napa Assessor's Office for paying property taxes

For our PLAN, we have:

-Accts/Wealth Planners (same folks, ProVision)
-Corp Structure (Attys, other state contacts)
-Bankers
-Mortgage Brokers (1 in particular who is amazing)
-Lenders
-RE Broker (just one, b/c she is also, amazing)
-Bookeeper (It took us years to find someone this good-- what a great person)
-Self Directed IRA folks (Pensco)
-Stock Brokers/Trade accts (not currently using any, transfering all to our REIs)
-Trust Attys (part of our structure, provides for our estates in case of death)
-Insurance agents (Essential, esp property, car, health, commercial policies, etc)
-Day Care (now an important part of our team! )

. . . those are what I can think of off the top of my head. I'm sure there are more.

What type of software do you use?

For what?

We use Rezovation as our PMS (property mgt software), with a link to Webervations

How did you structure the financing on your B&B?

THAT is a long story. Fast answer is:

15% downpayment
50% First (local bank)
35% SBA loan

And I may have the 50/35 part wrong-- it's been a while.

-Russ H.

 

[yveskleinsky]

Thanks for all the detail! Your operation is about 10,000 times more work than what I am doing. I currently spend about 1 hour a week with reservations/customers! Of course, there are only 3 cabins. We have a housekeeper- who I would actually like to get to the point where she was a live-in housekeeper of sorts. How do you arrange things with your housekeeper as far as payment- or do you just trade room and board? Does your software let her know when guests are checking out? How automated is your software? ...I am looking for something that guests can book online and bypass front desk if they want. Also, something to where a reservation triggers an email to the housekeeper to let her know she needs to clean on a certain day. Thanks again for all the insight.