Risky RE Growth Opportunity

[SteveO]

@SteveO I believe this is the MJ DeMarco of rei

I am fixed to a program for real estate. Buy low, sell high. I will accept a high cashflow deal if it is REALLY, HONESTLY high cashflow. That is usually elusive though.

All expenses, including time must be included. Most people really miscalculate the actual costs and do not account for capital expenses. Another piece that is usually missed is the cost of actual rent loss. Everybody selling shows cashflow on paper. This is where the buyer must do an extreme level of due diligence.

I used to use a model in Arizona that allowed for $300 per unit per year for capital improvements. That is for future needs. Any current needs need to be addressed at purchase. If you ever get behind on capital needs, it will end up coming out of your cashflow and pocket. Roofs, parking, landscaping, windows, appliances, flooring, etc... Don't ever fail to include them in your expense needs.

I also counted a fairly large amount for rent loss. If the area is at 7% vacancy, you will need to also account for other rent loss. Sometimes people don't pay and you need to evict. Sometimes it take a while to get units ready for the next renter. If the apartment is in good shape it should be able to be turned in 5 days. If not in good shape, there will be time while you refurbish. Some areas also have move-in specials that should be accounted for in rent loss. In some markets, I have used 20% instead of the advertised 7%.

Absentee owners are usually the best sellers. They allow the place to run down and sell with lousy tenants and vacancy. I like to use cost per unit to do my calculations. Example: Buy at 30K per unit. Put 15K into each unit for upgrades. Sell for 90K per unit. I look closely at what I could sell them for when fixed up. This usually includes a large rent bump!

I don't always finish the upgrades before selling. If I can get one interior completed and get a high rent, the buyers can usually get a picture of the upside and think they are getting a deal to finish the work. Buyers like to see that there is still meat on the bone.

Just cashflow deals will not get you anywhere near this in returns. For most people the cashflow model is folly.

 

[TurtleSprint]

*OVERDUE UPDATE TIME*

Slid back into ghosting on the forum for while but decided to suck it up and continue posting. I think it'll help get my sh*t together and focus.

Catching up up to speed:

• Bought those two properties as mentioned above in December of '17. Private lending went well and was able to refinance to traditional banking mid-year '18. Monthly payments are affordable and covered by 1/4 units.
• Started necessary renovations on property #1 fall '18 and should be finished in April. Once fully rented it will add $475/mo income. Looking at doing gutters and (hopefully not) foundation work this summer. It's been expensive but should be value-added improvements.
• Sold my Jeep January of '19 (brand new in '15- huge mistake but we live and learn) freeing up ~$750/month. Major win here.
• Hired a management company for the two new properties to start in April. This will add to costs but frees up time spent managing/maintaining/collecting. We're going to try for a year then decide to continue or not from there. Still personally managing the first two places.

Current Status:

• 4 buildings/8 units total. With vacancies cashflowing ~$1500/mo after all is said and done (Clearly the previous projections were inflated, more on that later)
• 9-5 job pays alright and doesn't drain me. Allows for plenty of side hustle time and effort.

Plan: No more BS'ing. Only real plans, results, and failures. Please call me out as necessary.

• Buy another property this year.
• Saving up has been a waiting game. I want to start another side biz with the extra time to speed up income. Rolling with web design but more to follow later.
• Actively contribute to the forum

Happy Monday

 

[WJK]

Greetings.

I am a real estate investor currently working an OK paying 9-5 to supplement building my portfolio. I’m approaching my one year mark on the first property November 1 of this year. Property 2 will reach the year mark in April. Both cash flowing well. I was wanting to hold off until spring 2018 to shop for another but a new opportunity was brought to my attention recently.
Risky but high risk = high reward, right? What do you guys think I should do? Any similar experiences?

There's always another deal out there. I know it's hard to pass up a good deal, BUT you've bought 2 properties during the last year. That's a lot of financial exposure. Make sure you have a pile of money in your savings account to cover anything that comes up. Trust me, it will. That's the nature of the beast. We long time investors have weathered many storms and financial markets. You're playing Monopoly with real money in the big boys league, which can be brutal. Our mantra is to take it slowly, thoughtfully, carefully -- all with a steady hand and a clear mind. In our world, high risk equals going down in flames, AKA bankruptcy. Now that I've said all that, if it's really good deal, can you sell it as a pass through deal? You could make a few bucks on setting it up for another investor, and take that money that you gain to make a principal payment or improvement on your present properties.

 

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[EvanOkanagan]

The housing market is definitely affordable here. Fingers crossed but I think I'm going to be able to make this deal work. Based on rents and schedule E's for rental income and after taxes, insurance, etc net ends up being just under $20k barring any lengthy vacancies. It helps that I do my own maintenance too aside from major projects. My first close was actually solid as well. Purchased at under $50k and had about a 13% cash-on-cash return the first year. Had I not lived in one unit the whole time, returns look like closer to 25%.

A $700k property is no joke! I look forward to closing some deals of that magnitude in the future. How long have you been in real estate? I can imagine it took some time to work up to nearly quarter million dollar deals.

It'll be 5 years as of next February when I bought my first property. I always buy with cashflow as #1 priority followed by "options" I have with the actual property (can I subdivide it? is there development potential ie: building a carriage house? Can I stratify it?). The more options the more flexibility you have and more buyers you'll appeal to if you have to sell.

One thing I've done over the years is get more and more realistic with my "true" cashflow numbers, similar to what SteveO's pointed out. When I first started out I only calculated mortgage, taxes, and insurance which is a rookie move.

Now my criteria is pretty strict when I'm buying, and I've added much more to the equation:
- Vacancy rate (in my city it's at 0.6% right now... I'll use 7.5-10%)
- Property management (only about 20% of my units are property managed right now, but I still factor in the management cost-- 8% of rents)
- At least $2,250/year in repair/maintenance
- Utility loss (all my tenants pay their own utilities, but if I have a vacancy ultimately I'll have to be the one paying the bills for a month or two)
- Rents calculated on the "conservative" side (lower end)

Once all this is calculated, I can see the ACTUAL cashflow that I can expect. Some people THINK they're making money because they pocket $200/mo after the mortgage, taxes, and insurance--but what about that new furnace that cost you $3-4g's last year? That ate up nearly 2 years of the money you pocketed. At least this way that I do it now, I know that it's ACTUALLY making cashflow even when I have to pay for a new roof, or the hot water tank goes, etc because I've done all of those calculations beforehand. I take home MUCH more than what the calculation is, so it's a worse-case-scenario type cashflow which I think is the way to go.

As far as my deals go, they've slowly progressed both based on the number of units and also market going up. I started with 20k and zero assets before property #1 and from scratch (I just became a Realtor, and no previous experience with Real Estate--didn't even know how a mortgage worked lol) so anything is possible! Here's the chronology as far as my residential purchases went:

1. $375k
2. $675k (had a partner & sold after 3 years)
3. $275k (had a partner & sold after 2 years)
4. $450k
5. $550k
6. $650k
7. $635k (plus $60-70k reno)

 

[EvanOkanagan]

What are you using to calculate the 20k/yr cash flow?

If that’s “true” cash flow that’s an amazing deal and I would borrow, beg, or steal (joking ) to get the cash to come up with it. That means (with 20% down) you’re getting nearly a 50% cash-on-cash return if you’re paying 200k or less.

I just bought a place over $700,000 to achieve approximately 20k/yr cashflow in my city, and even at that price there are investors frothing over finding a deal like I did.

 

[TurtleSprint]

Last week's learning...

On Tuesday I got word of a repossessed house in a great area that needed a TON of work (Value add potential). Bidding started at $31k and the house last sold a few years back at $148k! Went to view it on Wednesday and it was clear why the price tag was so low. It was basically a shell that didn't even have plumbing, duct work, or electrical service to the structure any more. We estimated about $70k-$80k in renovations were required. Bids were due Friday at noon which was a stretch for me to make in its own. Long story short, the house sold for $73.5k and I realized I was not ready for this type of opportunity yet. At that price though I think profit margins will be very low, if any at all, and I'm glad I didn't bid high.

Takeaways:

• I requested to be on the list for notifications on these types of listings in the area. Too late to the party last time.
• Need to get familiar with local, residential construction companies to ease the process of getting pricing on renovations next time. Would have gone into this property bidding "blind" to the costs that loomed ahead. A mistake I was absolutely aware of and didn't place a bid as a result.
• I was able to meet and work with 3 new bankers in the process which will come in handy next time. Their feedback was encouraging as far as we progressed.
• Compiled a spreadsheet for renovations and costs that will be ready next time.
• A mentor/fellow investor showed interested in partnering on this deal until we dove further into the financials and decided to no-bid. Showed their confidence with me and hopefully will materialize on a future project.
• Re-thinking starting the web design business. Had I been rolling with that I would have been completely overspent balancing it all.

Overall, I was NOT prepared to take on any project of this magnitude. I think a bullet was dodged.

Feedback from anyone with experience doing rehabs and flips would be greatly appreciated!

 

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[EvanOkanagan]

Looking for some advising here and need your thoughts...

I've got some good equity built into one of my properties that would sell for enough to put a down payment for a larger complex. Considering it but am hesitant because it's my most "hands-off" property and brings in good revenue with long term tenants. There's no specific target property in mind currently but I've passed up even looking at a few because their numbers didn't appeal.

Just looking ahead if one comes up. Would it be worth taking on potentially more headache to leave this gem behind? Part of me says go for it and the other part says hold the reliable duplex for a while.

Any advice appreciated!

Instead of either/or, why not do both?

Depending on your financial situation, there might be an opportunity to get a Home Equity Line of Credit made available tapping into the equity of your Duplex. If you were to do this, the funds would be available but accruing no interest. Some banks will even lend up to 80% of the value of your property in the form of a HELOC.

For example:
- Property is appraised by the bank at $500,000
- The bank will lend up to 80% (in this case $400,000)
- If you only have $300,000 owed on the mortgage, you could get a HELOC for $100,000. It would be a Line of Credit at (likely) quite a low interest rate and you would only start paying interest from the moment you utilize it.

This way, you don’t miss out on opportunity if something comes up and you can hold onto the well performing Duplex.

 

[WJK]

I got LUCKY!

We always talk about "learn by doing" and this was certainly a learning experience. I closed on that duplex at the beginning of October with a list of renovations in hand. In the weeks before closing I met with a siding contractor referred by a fellow investor and it turned out to be a GAME CHANGER. This was among meeting other larger contractors that aren't cheap. The boss quoted the siding and then offered up their services to work on the rest of the house since it had been left a DUMP. His siding quote was by far the least costly and I quickly realized they did very quality work. Cue the LUCK... the renovations turned out to be far and beyond what I anticipated when I bought the property. However, with the savings from a smaller siding contract and the abilities of the new crew we could budget it all in. Had I proceeded with the popular siding contractors, the siding would have been complete but hardly anything else. Had I not met this crew, I'd be paying tons to renovate the units because of my untrained eye. Shame on me for slipping with the due diligence. But hey, now I know more of what to look for and it will make me a better investor moving forward. Crisis averted.

More recently, I had a HVAC tech conclude that I needed a new furnace and the one I had was shot. In a similar fashion, I pulled in a referral resource to quote a new system between meeting other popular providers in the area. He and I simply changed out the filter which was filthy and certainly causing faults. Everything fired up and is good to go. Another fortunate experience and friendly face on the team.

Moral of the Story:
Your network is critical. Connections in the business have been absolutely PIVOTAL and saved a boat load of cash. I picked up two resources that will certainly add to my success.

Good for you. Are you going to rent it long term or flip it? I like holding things while I collect my rents. Even on flips, one year + one day is the key to long-term capital gains rather than ordinary income.

About your rehab experience -- networking IS the key to finding good help. I have relationships that go back 30 or 40 years. And now I'm doing stuff with their kids and grandkids.

Here's another tip. Make yourself a set of notebooks and 3 ring binders. Take pictures that you can print off into your notebooks & binders. Also, keep a ditigal copy for you computer that you can carry around with you. I use one computer file as a daily log for my job. Then I print it off for one of my binders with my picturres of the job as it was completed. Printing it off may seem like over-kill. BUT, I many times forget how bad the property looked in the beginning. By the time I'm done, I have forgotten all the step we took to get it done. Also, if you're in this for the long haul, years from now you'll be scratching your head trying to remember what you did on a project. Or, who helped you with one problem or another. And what was your source for something you now need to find again. No human can remember all of this stuff. It enough to keep the present project on time and within budget. Oh, and why do I make a hard copy? I can always find my notebooks and binders when I need them. My computer has eaten files from time to time. And things have gotten lost in that digital world over time. I tab everything to make it easy to look up when I busy and stressed. It fun sometimes to open a binder and see my past.

 

[C-Jay]

Imo, these are the crucial questions (aside from the actual real-estate oriented ones which you likely have locked down):

1. How BIG is the opportunity? i.e. are you getting a huge discount in price? If you pass on it, is it that big of a deal?
2. How confident are you that you can get investors and how does this effect your cashflow analysis?
3. Can you envision a possibility of your family getting left on the street if it goes south (I know this is likely extreme but I have no idea just how far out of your price range this is)?

All in all, risk is relative. You already have RE experience so it seems you're qualified to assess the circumstance. It's then up to you to determine how much risk you're comfortable with. If it's going to keep you awake at night, it might not be worth it.

 

[WJK]

@WJK Very true. If you don't mind me asking, what are your metrics for "the right deal"? I've heard 20% profit minimum. Just curious. Obviously location is important but do you decide on profit margin? Cost of renovations not to exceed $X?

Thanks!

Like all answers -- it depends... Are you going to hold and rent the property? Are you going to flip it? And is your market going up or down, or is it flat? You must to know where you are going to end up before you can answer any of those questions. Only having a 20% profit within a flip can bury you with one misstep. It can be a big advantage on a rental property.

What repairs and upgrades do you need to make? A rental property and a flip have a completely different list of work to be done. And for properties held as rentals, that list depends on the holding period. It's a matter of knowing your customer and your market. It's all based on risk analysis skills. We, in the real estate business, play monopoly with real money. It's a game that takes a lot of time and applied knowledge to create consistent wining streaks.

 

[WJK]

Hey all! Time for updates and some advising needed...

Recently put down an offer on a nice side by side duplex that seemed like a no-brainer. The seller is older and looking to cash in after holding for 50 years. Strangely enough, I was told the price was dropping 10k before we even stepped inside. The numbers made sense and the offer was accepted below the discounted price even! Lots of room for added value and good cash flow in the mean time.

Since then I've been presented with another package deal for two more duplexes. However some of my funds are obviously tied up with the above. These are already completely renovated and definitely turn-key opportunities. I'd have to get creative with financing but my main concern is that there's not a lot of potential to ADD VALUE. Rents will cash flow but I hesitate because they're less of a deal and more of a safe, cash flowing grab. I'm leaning hard towards passing on these if that isn't becoming clear. Thoughts? Would you go with the additional monthly income? Or wait for another opportunity with monthly income but room for renovations?

Cheers!

You are already in a good deal. Stick with that one. The world is stuffed with more deals. A greedy heart makes for bad decisions and a sloppy execution of those decisions -- which can cause your whole life to fall apart. As you go along, you will find yourself saying NO several times before you say YES. The key to being successful is to know when to say YES.

 

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[TurtleSprint]

I got LUCKY!

We always talk about "learn by doing" and this was certainly a learning experience. I closed on that duplex at the beginning of October with a list of renovations in hand. In the weeks before closing I met with a siding contractor referred by a fellow investor and it turned out to be a GAME CHANGER. This was among meeting other larger contractors that aren't cheap. The boss quoted the siding and then offered up their services to work on the rest of the house since it had been left a DUMP. His siding quote was by far the least costly and I quickly realized they did very quality work. Cue the LUCK... the renovations turned out to be far and beyond what I anticipated when I bought the property. However, with the savings from a smaller siding contract and the abilities of the new crew we could budget it all in. Had I proceeded with the popular siding contractors, the siding would have been complete but hardly anything else. Had I not met this crew, I'd be paying tons to renovate the units because of my untrained eye. Shame on me for slipping with the due diligence. But hey, now I know more of what to look for and it will make me a better investor moving forward. Crisis averted.

More recently, I had a HVAC tech conclude that I needed a new furnace and the one I had was shot. In a similar fashion, I pulled in a referral resource to quote a new system between meeting other popular providers in the area. He and I simply changed out the filter which was filthy and certainly causing faults. Everything fired up and is good to go. Another fortunate experience and friendly face on the team.

Moral of the Story:
Your network is critical. Connections in the business have been absolutely PIVOTAL and saved a boat load of cash. I picked up two resources that will certainly add to my success.

 

[TurtleSprint]

Greetings.

I am a real estate investor currently working an OK paying 9-5 to supplement building my portfolio. I’m approaching my one year mark on the first property November 1 of this year. Property 2 will reach the year mark in April. Both cash flowing well. I was wanting to hold off until spring 2018 to shop for another but a new opportunity was brought to my attention recently.

Pros

• 2 Properties under a single deal. 4 units total
• Strong occupancy history & projections
• Solid cashflow (~$20k/yr net)
• Newly renovated interiors
• Privately financed

Cons

• Largely out of my price range- Low personal capital available
• Would require investor contributions (Don’t have any committed yet)- This could be moved to pros if I was able to gather enough investors = little/no personal funds needed upfront
• Leaves me in a very volatile financial state for 2+ months (Pending investor contributions)

Risky but high risk = high reward, right? What do you guys think I should do? Any similar experiences?

 

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[ljean]

Is it that great of a deal, what is the price?

 

[SteveO]

Greetings.

I am a real estate investor currently working an OK paying 9-5 to supplement building my portfolio. I’m approaching my one year mark on the first property November 1 of this year. Property 2 will reach the year mark in April. Both cash flowing well. I was wanting to hold off until spring 2018 to shop for another but a new opportunity was brought to my attention recently.

Pros

• 2 Properties under a single deal. 4 units total
• Strong occupancy history & projections
• Solid cashflow (~$20k/yr net)
• Newly renovated interiors
• Privately financed

Cons

• Largely out of my price range- Low personal capital available
• Would require investor contributions (Don’t have any committed yet)- This could be moved to pros if I was able to gather enough investors = little/no personal funds needed upfront
• Leaves me in a very volatile financial state for 2+ months (Pending investor contributions)

Risky but high risk = high reward, right? What do you guys think I should do? Any similar experiences?

You have some experience here. If you are confident in the cashflow numbers, where is the risk? Why get investors?

 

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[SteveO]

Risky but high risk = high reward, right? What do you guys think I should do? Any similar experiences?

Maybe. The real way to look at the equation is whether the high risk has the high reward potential. In this case, the renovations are completed. Where is the upside?

Perhaps you posted this to garner attention from potential investors? Nothing wrong with that but what makes this a great deal? Is it the 20% return? Investors are going to want 12% annually or better with low risk to them.

 

[TurtleSprint]

I am fixed to a program for real estate. Buy low, sell high. I will accept a high cashflow deal if it is REALLY, HONESTLY high cashflow. That is usually elusive though.

All expenses, including time must be included. Most people really miscalculate the actual costs and do not account for capital expenses. Another piece that is usually missed is the cost of actual rent loss. Everybody selling shows cashflow on paper. This is where the buyer must do an extreme level of due diligence.

I used to use a model in Arizona that allowed for $300 per unit per year for capital improvements. That is for future needs. Any current needs need to be addressed at purchase. If you ever get behind on capital needs, it will end up coming out of your cashflow and pocket. Roofs, parking, landscaping, windows, appliances, flooring, etc... Don't ever fail to include them in your expense needs.

I also counted a fairly large amount for rent loss. If the area is at 7% vacancy, you will need to also account for other rent loss. Sometimes people don't pay and you need to evict. Sometimes it take a while to get units ready for the next renter. If the apartment is in good shape it should be able to be turned in 5 days. If not in good shape, there will be time while you refurbish. Some areas also have move-in specials that should be accounted for in rent loss. In some markets, I have used 20% instead of the advertised 7%.

Absentee owners are usually the best sellers. They allow the place to run down and sell with lousy tenants and vacancy. I like to use cost per unit to do my calculations. Example: Buy at 30K per unit. Put 15K into each unit for upgrades. Sell for 90K per unit. I look closely at what I could sell them for when fixed up. This usually includes a large rent bump!

I don't always finish the upgrades before selling. If I can get one interior completed and get a high rent, the buyers can usually get a picture of the upside and think they are getting a deal to finish the work. Buyers like to see that there is still meat on the bone.

Just cashflow deals will not get you anywhere near this in returns. For most people the cashflow model is folly.

I didn't approach the properties that I have now with buying low/selling high for the most part (something to focus on more moving forward). Although I did get them for under the assessed value, I went for cashflow vs. expenses and planned on holding them for the foreseeable future. You're right though, just cashflow deals don't have the magnitude of returns.

I can take from this that I definitely need to intensify my due diligence. Definitely got bit with property #2 on capital investment. We ended up completely renovating one unit and I just recently renovated the bathroom on the other side. It'll take some time to pay for itself but the property value increased (potential to sell higher?) and I was able to raise the rent $100 between tenants.

Property #1 and this potential property #3 are both absentee owners. Operating from afar and just trying to unload their distance investments quickly. Mismanaged exactly as you describe. Although, with the sub par due diligence that I did, I bought in to existing quality tenants. Ironically, property #2 was locally managed and had a terrible tenant. Luckily they left with the old owner.

All good info. Takeaways: Don't slack on the due diligence and consider buying/selling at a quicker rate to realize larger gains. Thanks for the feedback.

 

[TurtleSprint]

You have some experience here. If you are confident in the cashflow numbers, where is the risk? Why get investors?

The risk that has me anxious arises from taking into account those capital investments and unforeseen expenses that you mentioned above. If this deal goes through I'd just be in a very volatile spot for a few months (if a furnace went out for example). From the due diligence that I have done I don't expect it, but things happen. The cashflow numbers look good but my upfront cash reserves isn't where I feel it should be. Investors would allow me to retain contingency funds and still get through the first few months (all the while still saving $ from my 9-5).

 

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[TurtleSprint]

It'll be 5 years as of next February when I bought my first property. I always buy with cashflow as #1 priority followed by "options" I have with the actual property (can I subdivide it? is there development potential ie: building a carriage house? Can I stratify it?). The more options the more flexibility you have and more buyers you'll appeal to if you have to sell.

One thing I've done over the years is get more and more realistic with my "true" cashflow numbers, similar to what SteveO's pointed out. When I first started out I only calculated mortgage, taxes, and insurance which is a rookie move.

Now my criteria is pretty strict when I'm buying, and I've added much more to the equation:
- Vacancy rate (in my city it's at 0.6% right now... I'll use 7.5-10%)
- Property management (only about 20% of my units are property managed right now, but I still factor in the management cost-- 8% of rents)
- At least $2,250/year in repair/maintenance
- Utility loss (all my tenants pay their own utilities, but if I have a vacancy ultimately I'll have to be the one paying the bills for a month or two)
- Rents calculated on the "conservative" side (lower end)

Once all this is calculated, I can see the ACTUAL cashflow that I can expect. Some people THINK they're making money because they pocket $200/mo after the mortgage, taxes, and insurance--but what about that new furnace that cost you $3-4g's last year? That ate up nearly 2 years of the money you pocketed. At least this way that I do it now, I know that it's ACTUALLY making cashflow even when I have to pay for a new roof, or the hot water tank goes, etc because I've done all of those calculations beforehand. I take home MUCH more than what the calculation is, so it's a worse-case-scenario type cashflow which I think is the way to go.

As far as my deals go, they've slowly progressed both based on the number of units and also market going up. I started with 20k and zero assets before property #1 and from scratch (I just became a Realtor, and no previous experience with Real Estate--didn't even know how a mortgage worked lol) so anything is possible! Here's the chronology as far as my residential purchases went:

1. $375k
2. $675k (had a partner & sold after 3 years)
3. $275k (had a partner & sold after 2 years)
4. $450k
5. $550k
6. $650k
7. $635k (plus $60-70k reno)

This goes back to what I noted to @SteveO. It's clear that I need to add some more criteria to my upfront investigations. Not that I've been completely oblivious but I clearly have some shortcomings. What you say is correct about "true" cashflow. While I've still been able to cashflow, each time so far it has been less than originally calculated.

I'll definitely use this post for reference moving forward. Congratulations on what appears to be some solid investments. Judging by your advice on the standards above I'm sure you're seeing good things out of them. Like I said before, I'm excited to one day be doing deals of that magnitude. Thanks for the advice.

 

[WJK]

Last week's learning...

On Tuesday I got word of a repossessed house in a great area that needed a TON of work (Value add potential). Bidding started at $31k and the house last sold a few years back at $148k! Went to view it on Wednesday and it was clear why the price tag was so low. It was basically a shell that didn't even have plumbing, duct work, or electrical service to the structure any more. We estimated about $70k-$80k in renovations were required. Bids were due Friday at noon which was a stretch for me to make in its own. Long story short, the house sold for $73.5k and I realized I was not ready for this type of opportunity yet. At that price though I think profit margins will be very low, if any at all, and I'm glad I didn't bid high.

Takeaways:

• I requested to be on the list for notifications on these types of listings in the area. Too late to the party last time.
• Need to get familiar with local, residential construction companies to ease the process of getting pricing on renovations next time. Would have gone into this property bidding "blind" to the costs that loomed ahead. A mistake I was absolutely aware of and didn't place a bid as a result.
• I was able to meet and work with 3 new bankers in the process which will come in handy next time. Their feedback was encouraging as far as we progressed.
• Compiled a spreadsheet for renovations and costs that will be ready next time.
• A mentor/fellow investor showed interested in partnering on this deal until we dove further into the financials and decided to no-bid. Showed their confidence with me and hopefully will materialize on a future project.
• Re-thinking starting the web design business. Had I been rolling with that I would have been completely overspent balancing it all.

Overall, I was NOT prepared to take on any project of this magnitude. I think a bullet was dodged.

Feedback from anyone with experience doing rehabs and flips would be greatly appreciated!

Good decision. I've seen people get buried on these projects. You have to really know what you are doing BEFORE you take on this type of rehab. You probably saved yourself a bunch of money and prevented horrible headaches. The guys who come out on big projects are contractors or those who have their own crews. It also takes a lot of cash on hand to make them work.

 

[WJK]

Last week's learning...

On Tuesday I got word of a repossessed house in a great area that needed a TON of work (Value add potential). Bidding started at $31k and the house last sold a few years back at $148k! Went to view it on Wednesday and it was clear why the price tag was so low. It was basically a shell that didn't even have plumbing, duct work, or electrical service to the structure any more. We estimated about $70k-$80k in renovations were required. Bids were due Friday at noon which was a stretch for me to make in its own. Long story short, the house sold for $73.5k and I realized I was not ready for this type of opportunity yet. At that price though I think profit margins will be very low, if any at all, and I'm glad I didn't bid high.

Takeaways:

• I requested to be on the list for notifications on these types of listings in the area. Too late to the party last time.
• Need to get familiar with local, residential construction companies to ease the process of getting pricing on renovations next time. Would have gone into this property bidding "blind" to the costs that loomed ahead. A mistake I was absolutely aware of and didn't place a bid as a result.
• I was able to meet and work with 3 new bankers in the process which will come in handy next time. Their feedback was encouraging as far as we progressed.
• Compiled a spreadsheet for renovations and costs that will be ready next time.
• A mentor/fellow investor showed interested in partnering on this deal until we dove further into the financials and decided to no-bid. Showed their confidence with me and hopefully will materialize on a future project.
• Re-thinking starting the web design business. Had I been rolling with that I would have been completely overspent balancing it all.

Overall, I was NOT prepared to take on any project of this magnitude. I think a bullet was dodged.

Feedback from anyone with experience doing rehabs and flips would be greatly appreciated!

Good decision. I've seen people get buried on these projects. You have to really know what you are doing BEFORE you take on this type of rehab. You probably saved yourself a bunch of money and prevented horrible headaches. The guys who come out on big projects are contractors or those who have their own crews. It also takes a lot of cash on hand to make them work.

@WJK Thanks for the feedback. My mentors also had similar comments. Like I said, I'd hoped to get it much cheaper than it sold for where I think I could have made it work. I'm interested to see what the new owner can do with it and if they will turn a profit. I have somewhat solid resources but with such little volume for now its hard to have them readily available.

Nearly secured some pretty cool financing though that would finance as appraised with renovations for 10% down. Also, with that investor we would have been fine I believe. No harm done though. Back to saving and will be better suited to fund the next project!

SKIM THE CREAM! You only need one "killer" deal at a time. The trick is to choose the right deal at the right time. I walk away from most deals and only say yes when the stars line up in my favor. There's always another deal out there IF you just keep looking.

 

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[WJK]

Update time...

Last week I put in a bid on another single fam property located in the best area of town. Less renovations needed than last time and still would have profited once complete. The seller was asking $85k and the surrounding houses all appraised around $150k-$180k. We estimated ~$20k max for renovations. I didn't end up winning the bid but it was worth a shot at that price.

No harm done though and I'll keep my eyes out for other killer deals. In the mean time I plan to fill vacancies, pay down debt, and purge unnecessary items around the house.

Good for you -- I LOVE the idea of paying down your debt and purging around your house. Run lean and mean. Get your debt down to 0 and hoard your cash for that perfect deal. You can make more money on one "stud-card" deal than you can make a bunch of so-so deals. And the key to buying those killer deals is having a pile of cash on hand when everyone else is running on OMP (other people's money).

 

[WJK]

Looking for some advising here and need your thoughts...

I've got some good equity built into one of my properties that would sell for enough to put a down payment for a larger complex. Considering it but am hesitant because it's my most "hands-off" property and brings in good revenue with long term tenants. There's no specific target property in mind currently but I've passed up even looking at a few because their numbers didn't appeal.

Just looking ahead if one comes up. Would it be worth taking on potentially more headache to leave this gem behind? Part of me says go for it and the other part says hold the reliable duplex for a while.

Any advice appreciated!

Personally, I like the comfort zone and high equities... but, I gave up risky moves a long time ago. Growing older makes me a lot more conservative.

But, on the other hand, you're talking about a duplex. Why don't you buy another small residential rental property (2 to 4 units) and move into it? You could buy it with very little down since it would owner-occupied financing. Then after a couple of years, rent it and move on and do it again. It depends on your stage in life.

 

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[WJK]

It's been a busy month! In the midst of closing on the side-by-side I've hit a few road bumps that have made it all the more enjoyable.

Event #1: The sewage drain at another duplex started backing up on the tenants so I was advised by my preferred (no longer) plumbing company to have it "jetted" out to clear what's called a belly in the line. Long story short, it turns out the damage was more than a belly but rather collapsing orangeburg pipe... for those that aren't familiar, not good at all. So basically I shelled out a ton of money to expedite the pipe collapse. Ended up having to have the front yard dug up to replace everything and the bills rolled in.

View attachment 27598 View attachment 27599

Learning & Outcome: If your city offers insurance for the drain, GET IT. This was my only property that I didn't have covered and thus will take a large L and pay every cent out of pocket. However, I now have very happy long term tenants again who gave huge praise for timely action.

Event #2: A huge gopher decided to set up shop under another duplex crawlspace. (Anyone see Caddyshack?) I caught him in the act and after a few failed home remedies I swallowed my pride and hired a pest removal expert to relocate it.

View attachment 27600

Learning & Outcome: It appears that any significant foundation damage has been avoided but it ate duct work and the holes will have to be covered and blocked. SAVE YOUR MONEY and skip to just hiring a professional. Ended up being kind of a blessing in disguise though because the hired hand is another local RE investor (albeit much more accomplished) that I plan to learn from and maybe someday collab with. The network continues to grow.

Lastly, I made arrangements to part ways with the management company that I'd hired to handle the gopher location mentioned above. In my short experience I'd advise,

a. Handling your own investments as long as possible
b. If you don't want to, properly vet the new management to make sure your expectations will be met.

Cheers!

Your right. I do my own management. Your right. Things do go wrong. Your right. You will have unexpected repairs. You must have an emergency fund for those moments.

Here's my other advice. Inspect, inspect, inspect. I change my tenant's furnace filters and service the on-demand water heaters myself. That way I inspect the interiors and exteriors of my rentals both in the spring and in the fall. That way, I see the inside of each unit. I ask them if there are any maintenance issues. I get them to sign a sheet marking off what I did, their concerns and anything that I see that needs to be done. I walk around the outside. It's amazing how much better they keep my rental units. They co-sign the inspection sheet, so they can't say that we don't do any maintenance. That's particularly helpful if I must evict them.

 

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[TurtleSprint]

Good for you. Are you going to rent it long term or flip it? I like holding things while I collect my rents. Even on flips, one year + one day is the key to long-term capital gains rather than ordinary income.

About your rehab experience -- networking IS the key to finding good help. I have relationships that go back 30 or 40 years. And now I'm doing stuff with their kids and grandkids.

Here's another tip. Make yourself a set of notebooks and 3 ring binders. Take pictures that you can print off into your notebooks & binders. Also, keep a ditigal copy for you computer that you can carry around with you. I use one computer file as a daily log for my job. Then I print it off for one of my binders with my picturres of the job as it was completed. Printing it off may seem like over-kill. BUT, I many times forget how bad the property looked in the beginning. By the time I'm done, I have forgotten all the step we took to get it done. Also, if you're in this for the long haul, years from now you'll be scratching your head trying to remember what you did on a project. Or, who helped you with one problem or another. And what was your source for something you now need to find again. No human can remember all of this stuff. It enough to keep the present project on time and within budget. Oh, and why do I make a hard copy? I can always find my notebooks and binders when I need them. My computer has eaten files from time to time. And things have gotten lost in that digital world over time. I tab everything to make it easy to look up when I busy and stressed. It fun sometimes to open a binder and see my past.

@WJK I plan to rent it long term. At least for the foreseeable future. The cash flow is just too good. We'll see what the next couple years brings. I like the idea of notebooks and binders. I've been trying to take pictures to update social media but it hasn't quite caught on for me.

 

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[WJK]

@WJK I plan to rent it long term. At least for the foreseeable future. The cash flow is just too good. We'll see what the next couple years brings. I like the idea of notebooks and binders. I've been trying to take pictures to update social media but it hasn't quite caught on for me.

OK. Make it catch-on with yourself. Someday you'll need it! Here's the hidden reason for the pics and the notes. WHEN you must go to court, I have learned that business records kept in the normal course of business are an exception to the hearsay rule. You must be able to show that you always keep those records on every property and every deal you do -- in your normal course of business. Otherwise, your data gets thrown out of court. In other words, on your worst day while you're standing up in court -- and your tenant is talking smack about you -- you can pull out your binder and say, this is what we did, this the way we did it, and this is when we did it. I many times show up for court with a whole pile of binders. For example: When the tenant says that we never do maintenance on a unit, I flip to their record and reply that we did XXX on this date and XXXX on that date and XXXX on another date... and on and on. Then I ask if the judge wants to hear more details or review my pictures. Funny, I win just about every time I must show up in court. This is not legal advice. I do NOT practice law. This is how I learned to do it when I went to law school and it works for me. Talk to your attorney and try it. What do you have to lose?

 

[WJK]

Interesting learnings as of late...

I dove into what seemed like a great deal. Two 4-plex buildings in a somewhat lower income area with little immediate work to put in. Not quite my typical tenant pool but for the income I was all in. A little over $5k/mo gross. Bonus- seller would be lending me the entire down payment. A red flag? Maybe. But from my perspective I'm getting to the point where I can buy with low/no money down.

Near closing the appraisal came back ~$70k lower than the agreed sell price. Ouch! Obviously a deal-breaker. I didn't agree with their metrics so decided to have 1 of 2 buildings re-appraised by another company. Only to have them come back ~$50k lower. The deal is dead. I feel good about spending on the extra appraisal though. Had the results been positive the payback period was quick.

I'm going to take this as a sign that it wasn't meant to be. Although I spent a lot on inspections, etc. there will be better deals out there and clearly I need to brush up on my prospecting. I know the seller so it'll be interesting to watch what happens moving forward. It sucks losing some money but was worth trying. Calling it a blessing in disguise.

Anyone else been through similar? Worth it?

Yes. Been there, done that. The end of the 1980's was all about OPM (other people's money). I got a divorce and sold out. The market didn't feel good to me. Everyone in my circle felt sorry for me. Then the bottom fell out of the RE market and I was suddenly a genius for selling out. My friends almost all ended up in bankruptcy court, with their hats in their hands, losing everything. Overpaying and having no equity is right up there with jumping off of a cliff without a parachute. Yes, spend the money so you know what you are getting into.

 

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[WJK]

Not quite. So just using imaginary numbers, sell price was $300k but it appraised at $230k. The bank was going to pay $184k and the seller would lend $46k. Still leaving me on the hook for the $70k difference with a $230k investment that I paid $300k for. Not a good deal any more.

So, IF you don't tell your bank that you are borrowing the down payment... and all banks are insured by FDIC, a Federal agency... I have seen that "little lie" be called fraud... and I have seen the FBI come and put bracelets on the individual and haul them off... It's a no-brainer for the FBI because the seller will record his note and TD. The money is totally traceable -- even if the note is recorded against one of your other properties (electronic banking). IF you disclose on your bank application where you are getting the down payment, you're OK. Otherwise, you can be totally screwed and charged with a "white-collar crime". The years in jail just aren't worth it to me. I can make plenty of money without cheating. Money is fungible. Maybe you feel differently?
By the way, banks lend -- they don't "pay" anything -- other than their rent, business expenses, and employees...

 

[TurtleSprint]

Imo, these are the crucial questions (aside from the actual real-estate oriented ones which you likely have locked down):

1. How BIG is the opportunity? i.e. are you getting a huge discount in price? If you pass on it, is it that big of a deal?
2. How confident are you that you can get investors and how does this effect your cashflow analysis?
3. Can you envision a possibility of your family getting left on the street if it goes south (I know this is likely extreme but I have no idea just how far out of your price range this is)?

All in all, risk is relative. You already have RE experience so it seems you're qualified to assess the circumstance. It's then up to you to determine how much risk you're comfortable with. If it's going to keep you awake at night, it might not be worth it.

1. It's not once in a lifetime but it's a solid deal. Will there be more like it next year? Possibly. The real draw is that all renovations are done, motivated seller who lives far away, great location to rent, and desirable cashflow.

2. Still in discussions w/ investors. I don't currently have enough lined up but pending that happens I want to be able to move on it. The investors are there, now I just need to convince them. If I decide it's worthy.

3. Luckily I am a bachelor with no one directly depending on me. Trying to build this empire before I get there!

 

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[TurtleSprint]

Is it that great of a deal, what is the price?

In the grand scheme it's not a HUGE deal. It would be a good win but nothing I'd lose sleep over passing up on. Given I had the money to freely spend I would jump on it. Looking at just under $200k expecting about $20k/yr net income.