Just Do It

For some reason, the Nike quote “Just Do It” reminds me of my brother, Ethan (along with the simple quote “Whatever…”).  Regardless, “Just Do It” is a great way to live your life.  There is no reason NOT to try something.  For instance, about one month ago I sent an email to a county official requesting a meeting to discuss a project.  An email is easy to send, and if it wasn’t answered (it wasn’t) and I was still serious (I was), I could call the official.  Never did I think I would willingly sit with a government official.

Well, today, I did.

I presented a project I want to pursue to two officials with the county’s Planning and Community Development team.  The project is a 10-unit building with 8 apartments and two commercial spaces that needs a gut rehab (UFUO #4?).  If I am able to get this project off the ground, it’s going to be tight, as in, I’m going to have to raise almost half a million dollars to see this project through to the end and if I OWE $500,000 on this project, the cash flow isn’t great, but it’s there.

The biggest stumbling block is “How do you raise $500,000 to see this project through to the end”?  A lot of people would simply stop with that question.  Their answer: “It’s impossible.”

Well, after my meeting today (with my Just Do It attitude) I learned there is a state grant available to developers (eg: me), of up to $150,000 to develop or redevelop properties that will house income qualified individuals.  For my county, “Income Qualified” translates to housing costs of up to $668.75/month for a family of two.  In addition to the grant being available, the county officials “would really like to see development in the town” where the building is located.

Without a “Just Do It” attitude, I probably wouldn’t have emailed and called the official and wouldn’t have learned about the grant, so I would be stuck trying to figure out how to raise 25% of $500,000.

What have you got to lose?  Just Do It.


Energy Efficiency for Landlords – A lighting example

[I don’t have a snappy picture for this post, but please read on]

Why do we invest?  Generally, we invest because we feel that our money is better spent purchasing an asset than spent on a night out.  We want the money we invest in an asset to be worth more at some point in the future.  When we are evaluating different properties to purchase, what is one way to evaluate dissimilar properties?  We can use the cap rate.

Cap rate is calculated by dividing the Net Operating Income (NOI) by the cost of the asset (Value).  Cap rate = NOI / Value.  I won’t go into the specifics here, but this equation is useful to investors.  We can rearrange the Cap Rate equation to determine the value of our asset   If we solve the equation for Value, we get Value = NOI / Cap Rate.  The new equation tells us that there are a two ways to change the value of your asset: 1) An increase in NOI or 2) a decrease in Cap Rate.

For a given property, I generally assume the cap rate remains the same, meaning the only way I can influence the value of an asset is by addressing the NOI.  NOI is simple to increase: Increase rent and/or decrease operating expenses.

To illustrate this point, here is a quick example before we jump into the introduction to Energy Efficiency (EE).

I purchased UFUO #2 for $40,000.  Half the building was rented and rent was $485/month and included the entire water bill as well as trash (water is separately metered).  Trash is $30/month (for both sides) and water runs anywhere from $100 – $140/month.  Let’s say it’s an average of $120/month.  This was a mismanaged investment.  The local trend has been to no longer include water with the rent.  In addition, rent had not been increased for 5 years, the rent was about 30% below local market rates.

Calculating NOI ($485 – $120 – $30 = $335/month) = $4,020/year
Our Cap Rate is then: $4,020 / $40,000 = 10.05%

I immediately increased the rent and shifted the water/sewer bill to the tenants.  Again, assuming the Cap Rate remains the same, the new value is:

NOI(new) = ($515 – $30 = $485/month) = $5,820/yr
If we now calculate for Value, we get Value = $5,820 / 10.05% = $58,000, an increase of 45%.

We’ve reviewed an extreme example of how your NOI affects the value of your building.  Our example above is relatively basic economics (increase rent and decrease operating expenses = higher valuation).  I want to introduce you to how energy efficiency improvements to your buildings can lead to increased valuations.

Suppose you own a building and have common spaces in which you pay all the utilities.  Next suppose that common space has four light fixtures with four T-12 fluorescent light bulbs (called lamps).  Lets further assume those lights are required to be on 24/7.  We can easily calculate how much those lights cost to operate: 4 lamps x 4 fixtures x 40 watts per ballast = 640 watts per hour.  At 24 hours per day, 365 days per year, at a cost of $0.10/kilowatt (inclusive of all taxes, transmission, etc.), we arrive at a total cost of $560/year to operate those lights.

In order to improve the energy efficiency, the old T12’s can be reduced to newer T8 lamps and ballasts.  In addition to reducing the size of the lamp, you are generally able to “delamp”, meaning reduce the total number of lamps present while maintaining the same amount of available light.  Newer T8’s consume between 28 and 32 watts per ballast.  We’ll use the average 30 watts for our calculations.

If we swap the lamps and improve the ballasts and delamp (two T12’s for one T8), our potential savings would be: 640 watts –  (2 lamps x 4 fixtures x 30 watts per ballast) = 400 watts saved per hour.  This is a savings of $350 per year.  Using the Value equation above, we arrive at an increase in the building’s value of $3,480 because of the reduction in operating expenses.  $350/year may not seem like much; at my day job, we have been working with a client and were able to identify $800,000 in energy efficiency measures…imagine what those savings do to the value of your building! (there is approximately 1M square feet under roof)

The last thing to consider when making any improvement to an investment property is the installed cost.  Using some rough numbers, the total cost for the install for our example above should be: 4 x $15 (ballast replacements), 8 x $4 (T8 lamps), 4 x $55 (Electrician’s hourly rate) = $312 installed.  Obviously, markup, electrician’s rates, taxes, etc. will vary slightly, but it is not a significant cost (it really should only take a qualified electrician 30 minutes per fixture, not one hour above).

Within the first year, not only has the investment paid for itself with the electrical savings, but your investment property is now worth more ($3,480 more in our example).  Not all improvements will have a simple payback of less than one year, but most improvements will easily pay for themselves a couple of times over their useful life with the savings from the operating costs.

Check back for additional energy efficiency improvements for your MF investment.


A Lesson from the Past (#1)

Quarry Climbing

In order to make sure you do not fail at ANYTHING in life, you must study the past.  More specifically, you must study the history of your current pursuit in which you want to succeed.  Studying art history does not help with an environmental engineering degree.

I didn’t understand this when I was studying to become an engineer.  (Note to my parents: Don’t read the next few sentences)  Rather than study the history of my specific engineering specialty, I spent my time studying investment theory (specifically stocks) and rock climbing techniques (I was an avid rock climber).  Needless to say, I struggled through my engineering degree.

Fast forward a few years.  I’ve graduated from college with my engineering degree, quite a few good texts about investing, and too many pairs of climbing shoes.  My current studies now focus on real estate investment.  However, in addition to modern day investment theory, I also study the causes of problems in the past; the Great Depression, Black Tuesday, etc.  Understanding how these events came about and unfolded allows me to forecast the future, to avoid and not repeat the mistakes of the past.

I started to read “How I Turned $1,000 into Three Million in Real Estate — In my Spare Time” by William Nickerson.  In the first chapter, Nickerson has a section titled “Opportunity is Always Knocking”.  While I do struggle with depression at times, I firmly believe that there is an overabundance of opportunity, you only need to look for it (See: Opportunity).

In Nickerson’s “Opportunity” section, I came across the following quotes [edited for length]:
“In every year, in good times or bad, investment opportunities are always knocking, in spite of the pessimists who perennially lament, ‘There is no opportunity today.’ … The chances for success today offer less risk, by far, than those taken by our pioneer settlers and pioneer founders of government and industry. … Like the editors to whom I first submitted the initial chapters of this book, some of my friends now rationalize, ‘Nobody could start today with nothing as you did and build a fortune.  There just isn’t the opportunity in these times.’ … one of our friends summed up the depressing consensus of many, ‘The most you can look forward to is Social Security, and if you’re lucky a small [401k]. … Our economics instructor advised our class, ‘You might as well realize that the time for opportunity is past.  The best you can hope for is to keep a steady job and stay off welfare.  Nobody will ever again be able to build an estate big enough to produce an independent income.'”

How much of what you just read is appropriate today?  Everyone will say the perfect opportunities have already passed us all by.  They are sort of right.  The opportunities for yesterday have passed us by…the opportunities of tomorrow have yet to arrive.

Are you ready for them?

PS. Nickerson’s comment was published in 1959.


UFUO #1.  This is the house that got everything started.

My Realtor and I were touring quite a few shabby single family homes, basements completely filled from floor to ceiling with trash (coffin shaped things filled with dirt…a little freaky), mushrooms growing from the ceiling, etc.  I was getting a little discouraged.  All the properties in my budget were horrible.  Not only would I have to worry about Dracula, but I’d also have to complete extensive renovations, all on a thread-bare shoe string budget.

The day we were touring the homes, Zillow.com was indicating a new listing a few blocks away.  I convinced my agent to show me the house.  Walking through the house, I was excited.  The house needed work (it still needs some work), but beyond some moldy bread, a stained carpet and a lack of good lighting, the house was mostly intact.  As we were standing in the kitchen, my agent turned to me and said “Liam, I think this is the one.”

I agreed.  We submitted an offer the next day.

As with any deal, there were a few bumps along the road, but as a whole, everything came together perfectly.  The house needed a little work: new switches, new outlets, work to bring the panel box up to code, shut-offs and a new water meter, a REAL good cleaning and a few new lights.  I was able to complete all of the work for under $2,500.  I don’t have many before/after pictures, but what I do have are found below.

Two weeks after closing on the property, I had it rented for $825/month.  It was a pretty good deal.  I texted my brother the picture of the keys about 5 minutes after I picked them up (my parents didn’t know about the house yet).


UFUO #2 Update 6

The stairs that I poly’d have dried for a little over a week.  I removed the old stair treads (as far as I can tell, probably original), cleaned the stringers, touched up some of the paint and started to install the new treads.  As of this writing, there is only one tread left to install; its cut, but needs some poly so it all looks good.

Flooring started to be installed last weekend.  My father-in-law wanted to see the place and he helped me get the flooring started.

Tomorrow, my dad and father-in-law will help me by painting the porch while I finish the steps and start installing the flooring in the living room.