UFUO #2: Fail?

[Sorry for the premature email blast earlier today…hit the wrong button!]

To say that yesterday was a disappointment is quite an understatement.  I knew I had two huge ‘at bats’.  I hoped to at least get a single from one of these two.  In addition to these two at bats, a third ‘at bat’ came my way.  In all three cases I struck out.  Sort of made me want to go out and scream “WTF!?!?”    Trying to keep my head up and make the best of disappointing situations.

At Bat #1: I met with a potential investor to discuss a multifamily investment.  I was hoping the investor would be open to the idea of working together on this project.  The property is 80% rented and currently makes a profit.  Fixing and renting the last unit would only add to the cash flow.  Once the conversation turned to financing on the project, the entire discussion got frosty.  I was fortunate enough to have worked up an ‘alternative’ financing package that we were able to talk through, which eventually lead to a thaw of our conversation.  We left on good terms, will meet again in the future, but man, I really whiffed this one.

At Bat #2: I met with the boss today to discuss moving my Day Job in a different direction, but within the company.  Essentially, my proposed plan is to purchase run down houses, fixing them and holding onto them for rentals (sound familiar?).  I was hoping for some buy-in to start this process this year, including the purchase of at least one property.  While I wasn’t entirely shot down, the initial reaction was “let’s discuss it this year and maybe consider moving this direction in 2015 or 2016”.  While not a total loss, it wasn’t the reaction I was looking for.  I’m searching for creative ways to make this shift a reality this year.

At Bat #3.  I knew this ‘at bat’ was coming at some point, but didn’t anticipate it happening on Thursday.  I’m in the process of refinancing UFUO#2.  Gross receipts (monthly) are $1,170, which is a FAT paycheck.  Obviously, loans, insurance, taxes, etc all eat into that and the profit is significantly less, but it still leaves a tidy sum at the end of the month.  As part of the refinancing process, I pulled all my receipts to see how much I actually spent improving the property.  Net receipts were about $15,000, excluding my time.  Given the improvements to the property, I wanted to at least cover the cash expenditure on the property.  Well, the appraiser determined the property was only worth $10,000 more than when I purchased the property.  At 75% LTV, I’m only able to access about $7,500 of the improvements.  Not only is this a frustration, it significantly slows my ability to continue investing this year, which compounds my frustration on a bunch of levels.

While I could be really down about yesterday, I instead chose to do my best imitation of Brian from Monty Python’s “Life of Brian” (If you need a refresher, check here).  I returned home, consumed an adult beverage and pulled out the spread sheets to review.  I also started to question some of my personal investment theses.  Do I really need to continually purchase extreme fixer-uppers?  (Answer: No).  Should I focus on single family fix-to-rent projects?  (Answer: Probably not in the markets I am currently able to afford.)  Should I look for capital appreciation in these B-/C+ neighborhoods?  (Answer: Probably not, look for excellent cash flow).


What did I learn from the spread sheets?  Well, for the markets I am currently able to afford, a duplex, triplex and even a 4-plex costs marginally more than a single family home.  Sure, you have to deal with exponentially more resident issues (MY NEIGHBOR JUST BURNED SOME POPCORN…CAN YOU FIX IT FOR ME?  yes, I really got this phone call this week).  However, even after dealing with the resident issues, duplexes, triplexes and 4-plexes usually offer significantly more cash on an annual basis.  In addition, with smart purchases, one or two units will carry the whole building, meaning that additional units simply add to the bottom line.

While continuing to look on the bright side of life, my Realtor and I toured the apartment building today.  The building is in AWESOME shape; the price is perfect; the property cash-flows (at it’s current 80% occupancy); the property is in a market I want to move into; and, after our tour, I learned that the rents the seller’s agent had advertised were LESS than the actual rents (which I verified through signed leases), meaning there is even more money dropping to the bottom line than originally advertised.  This single property would satisfy all of my 2014 investment goals.  Using my cash flow projections, I would then enter 2015 with a huge (for me) war chest ready to begin purchasing additional rental properties.  My Realtor jokingly said “I don’t know Liam…this property may be in too nice of shape for you to buy!”

My biggest hurdle for this apartment building is the down payment.  I have some ideas and will be submitting an offer, probably Saturday, with my ‘creative’ package.  We’ll see if the current owner is interested in ‘creative’ offers.  More details to come as this project progresses.

In addition to seeing the awesome apartment building, I had a major epiphany regarding investments with my Day Job.  One of the problems with my Day Job is that the company has nothing to capitalize (use as collateral on a loan), so when we pull loans, the banks put a lien on owner’s houses.  If the company were to collapse, some owners could possibly lose their homes…not a pretty prospect.  My idea is to enter into a partnership with the houses-on-the-line-owners and myself.  We would look for fixer-upper single family homes and do the old fix-and-rent.  Then, rather than refinance the property, we would use the equity in the property to reduce the houses-on-the-line-owner’s exposure by ‘swapping’ the rental property’s equity for the owner’s equity.  Obviously, it’s a two way street.  The partners get access to the equity; in my proposal, I would get access to all the cash flow (depreciation would be split).  I’ve pitched the idea.  We’ll see how it is received.  (However, after seeing the apartment building today and the associated building’s numbers, I actually question this partnership pitch, but I should probably have a few lines in the water).

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