The right stuff

Not The Right Stuff (for this job, usually)

Not The Right Stuff (for this job, usually)

Real estate investing is all about The Right Stuff, as defined by you, the investor.  For some, The Right Stuff is a mobile home park, for others, a Unique-Fixer-Upper-Opportunity.  The Right Stuff goes deeper than the purchase though – it goes all the way to the rock bottom of your business.

Flooring sander

Flooring sander

The right tools, materials, clothing and software are all part of The Right Stuff.  The suited picture (who some have accused of being my identical twin) is Not The Right Stuff for working in a basement, but is The Right Stuff for asking for a sizable loan.

My dad is a scientist at heart (geology) and I spent a good portion of my childhood competing in science fairs (ice crystals are anisotropic crystalline solids…for those who may remember).  This love for experimentation extends to my adult life.  Never put in a hardwood floor?  A few YouTube videos and some trial and error and I’m off to the races.  Rewiring an entire house?  No problem (zapped a few times, but I’m still typing).

The right stuff for drywall on a Friday night.

The right stuff for drywall on a Friday night.

My love for experimentation previously allowed me to believe that if anyone could do it, I could do it.  Hence the floors, wiring, plumbing, drywall, plaster, etc.  This belief has probably held me back, but not necessarily in a bad way, as I have been forced to build systems to manage both a day job as well as the rental business.

The past two years studying for my MBA have taught me many things but one of the best is: the ‘rules’ of life are there for a reason, play by the ethical rules and you’ll probably get to where you want to go much faster and with less angst than by trying to create new rules.  For me, this has meant the abandonment of the ‘I’ for the development of a team.

My company has worked with five contractors with mixed results (remember this one?).  Through all of the previous contractors, I’ve fallen back to “if anyone can do it, I can do it”, which has really stifled my business’s growth, but I am still convinced has probably helped me more than it has hurt.

But I’ve continued to try.

Which gets me to the most recent contractor I have used.

The Right Stuff

The Right Stuff (finally)

Last February, I needed a contractor to help with a downed electrical service wire (the wire going from the pole to your house).  An ice storm had pulled the wire off one of my units and I needed someone THAT DAY to assess the situation and come up with a solution.  I called around and received a recommendation to hire Chris.

On that icy day in February, Chris finished his normal day’s work, then went to my apartment, secured the wire and made arrangements to fix the service wire the next day.  Since that day, Chris has been my go-to guy for plumbing and electrical work.  When the original contractor walked off my most recent project (again, should have followed my gut), I called Chris.

A sailor would blush at Chris’s command of the artsy words in the English language and his diet may be sub-par, but his work ethic and skills are far superior to all other contractors I’ve found (and his prices are exceedingly low for the quality of his work).  Chris is The Right Stuff for my business.

I am trying to purchase a duplex in need of significant rehab (if any friends have a spare $44k, I can put it to good use and give you a good return).  I decided to ask Chris if he wanted the work, and asked him to do some of the work I had intended to do.  Chris’s conservative proposal (ie: assumed high costs, actual costs should go lower), came in at a lower cost and faster turn around than if I did the work myself.

Definitely The Right Stuff for my team.

 

How you know you’ve hit rock bottom

Rock bottom

Rock bottom

I’ve been (slowly) pouring a cement floor into the house with a dirt basement (Basement post, Flooring install).  I’ve now literally hit rock bottom.  You see, the basement in the house is typical of old homes – damp, musty and wet when it rains, so I wanted to add a sump pump.  I knew the basement was rocky as I had tried to dig out some flooring supports and kept hitting rock.

My plan was to remove the old, now abandoned sewer lines and put the sump pump in a hole dug under the old pipe.  First I removed the pipe – Grind through it with my grinder (noisy and dusty), remove the pipe and dig the hole.

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Next, I dug and dug and dug and cleaned the hole out.

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Tried as I might, I realized I had hit rock bottom.

Rock bottom

Rock bottom

So I enlarged the hole and test fit the sump basin.  The basin is sitting a little high, but I’ll drill holes in the walls to allow water in which the pump can then push out.

The sump basin fits

The sump basin fits

I then had to place a $25 test plug in the old sewer line just in case there was a sewer backup, I didn’t want the basement flooding.  Nothing like spending $25 so I can bury it under cement.

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I then drilled a hole into the side of the basin and placed a 2″ PVC pipe to allow for sub-slab water to find it’s way to the basin.  I placed stones, sand and gravel around the sump pit to allow water to flow into the basin.

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I jury rigged some forms around the slab to hold the concrete in place and filled the massive hole with gravel and large stones.

Next I mixed concrete (this is from a previous pad in the same basement):

My back is screaming at me again, but here’s the finished product:

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Pouring a concrete floor in a dirt basement

Waste lines

The most recent house I’ve been working on has dirt basement.  I was excavating a portion of the basement to install a wall between the two units and had to cut out a tree root.  The long term plans for the house are to install a cement floor in the basement and convert the basement to a tall crawlspace.  My plumber still thinks the space would be great for a work space – I’m skeptical.

Anyway, I’m slowly adding portions to the floor (currently about 15SF installed…it’s a slow process).  There is no window into the basement, so I have to hand mix each of the 80lb bags of cement.  It’s heavy, slow work.  Here’s a quick set of pics of my work yesterday.

The plumber will be installing the new water lines this week so he needs a spot for the water heater.  The pile of junk on the dirt floor is exactly where the water heater will go.  Time to move the pile and prep the floor.

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I moved the junk pile and spread some gravel then a 6mil vapor barrier.  The plastic is a little thin for my liking, but it’ll do.  The gravel is there to allow any water that gets into the basement to flow to a future sump pump.

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I cut and built some concrete forms for the 3’x3′ pad.  I cut the 2×4’s in half so I could insert the steel remesh for strength in the concrete.

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I then used some scrap to hold the top and bottom of the form together:

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Next the form was checked and leveled with small stones in the low corners:

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Then the mixing began.

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Bag by bag, the forms filled up.

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While it felt like a long day, the actual mixing only took about 30 minutes.  Setting and leveling the forms took almost an equal amount of time.

I need an official HBS shirt!

I need an official HBS shirt!

Finished concrete - a little soupy.

Finished concrete – a little soupy.

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Just something fun

I’ve been installing hardwood floors for the past week or so at the most recent UFUO.  I’ve now got all the hardwood installed and ready to be finished.  Then the trim (and painting and carpeting and toilet/bathroom and kitchen and…)  But I’m really nearly finished.

Anyway, I splurged and spent $1.99 to purchase a time lapse app for my phone and recorded the following:

I was feeling pretty great for myself.  I felt I set a good pace, was quick on the install, etc.  Then I found this video:

I got put in my place.

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.

 

UFUO #1

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.

UFUO #2 – Update 4

Plumbing:  Many people really dislike plumbing.  For me, it’s more like putting Legos together.  First comes this elbow, then a 24″ straight run followed by a quarter turn ball valve…

UFUO#2 needed some minor plumbing improvements.  Most of the plumbing issues were ‘trim’ issues, meaning the previous owner had never properly supported the pipes or simply used a convoluted plumbing design.  The water pressure is incredibly high at UFUO#2, so for better or worse, I installed an expansion tank.  I should get a plumber to install a backflow preventer and a pressure reducer…all for another day.

The plumbing to the kitchen is stubbed out below the floor.  I plan to use Sharkbite fittings to convert from copper to PEX.  I’ll get these fittings at Home Depot.

 

Unique Fixer Upper Opportunity (UFUO)

Single Family Home #1

Single Family Home #1

I always want to reduce my risk when I am shopping for a potential rental property.  I accomplish this two ways: 1) Do enough research to feel confident the rent will cover the costs of ownership (including ownership disbursement) and 2) Hidden equity.

Hidden equity takes a few different forms, but normally I am looking for what I call UFUOs – Unique Fixer Upper Opportunities.  These homes generally offer the greatest potential return, if I am willing to put in the time to fix the house.  Once the house is fixed and rented, I will refinance to extract the equity and keep my portfolio growing.  I think of this as a “flip-to-hold”.  I still control the houses (and associated cash flow) while monetizing my time and efforts through a cash-out refinance.

When you look to purchase a UFUO, you again want to minimize your downside risk.  When I look for properties, I specifically want to know the following: Will the rent from the improved property easily cover my loan plus the improvements?  Will the equity cover the improvements?  Am I comfortable completing the improvements myself?  Am I able to exactly pinpoint the necessary improvements?

On occasion, I will purchase fully rented houses or duplexes which need to be improved only if the current rent will cover the operational costs plus loan servicing.  I know that when a tenant leaves, I can then fix the building, which will improve the rent to the next tenants while increasing my equity stake in the building.

Everyone’s definition of a UFUO is different.  Maybe you only want to paint and replace the carpeting.  Maybe you’re willing to purchase a real dump for $10,000 (they do exist) and completely rehab the entire place.  I usually look for something in between.

UFUOs offer ‘hidden equity’ if you are willing to complete most of the work yourself.  An appraiser will consider ‘replacement cost’ as part of the appraisal (this is only one part of the appraisal).  The replacement cost includes the cost of materials as well as the cost of labor and any associated markup on materials.  The ‘hidden equity’ is created by saving on labor and any associated mark up on materials.

The first house I purchased needed minor repairs; new outlets and switches, some plumbing work and a really good cleaning (also a paint job, but that was minor).  Then I needed to find tenants.  While the first house needed very few repairs, the whole experience was so new to me that I was pushed to the edge of my comfort zone.  When I signed and handed over my $17,000 check, I nearly cried because I was so scared of this investment.  Leaving my Realtor’s office, I thought “what have I done?”

Driving home, I knew my brand new rental business was no longer a game.  Not simply a pastime of mine, looking at dilapidated properties with my Realtor, imagining myself owning them with cash coming in every month.  Now I was into it.  I owned a property that needed to have work done.

When I picked up the keys and walked into the house, I felt like vomiting.  I was that scared.  I told myself that I was dead if I stopped moving; if I became paralyzed with fear.  I had no choice but to keep pushing forward, so I did.  I got the plumbing system working, I fixed the electrical system and I found tenants.

I chilled my heels for, oh, about four months.  Then I was on the hunt for another property.  This time, I wanted to bag a big one.  A real UFUO!

After my first experience, I learned that traveling 25 minutes to the investment property wasn’t a huge deal, so I decided to allow my MLS search to extend to a 25 minute drive from my house.  This opened up a few additional markets for me to explore.

The most recent UFUO I purchased was a half rented duplex.  The rented side was in OK condition.  It needs a paint job, new flooring and minor touchups to the kitchen.  The rented side was also under market rate by about 15%.  Upon my purchase, I immediately increased rent 7.5% with a planned increase of 7.5% at the beginning of the lease’s renewal.

The unrented side almost needed to be gut rehabbed.

There was human and pet urine soaked into the subfloor, the wiring was old knob and tube (with a shoddy Romex patch job), the bathroom was horrendously small, there was pet urine on the walls, the kitchen had two different counter types at different heights, there were moldy things left in the cabinets, and last but not least, the steps going to the second floor were falling apart (as in the treads were not secured to the floor and fell out as I walked on them).

I purchased the duplex knowing that it would cost me between $40 and $80 per month to own, excluding utilities.  These losses were paid for through the profit from my single family home.  Using my APOD calculator, I knew that once the full duplex was fully rented, I would make about $500 per month, or I could cash out the equity to purchase another property and still make about $100 per month.  This $500 per month actually represents a swing of approximately $600 in profit from the $500 per month plus the $40-$80 and utilities.

When I brought my parents through the duplex, I had only been working on the wiring.  Looking back at that visit, I’m surprised my mom actually set foot inside.  I had completed the wiring in two rooms plus the basement.  There were still urine stains on the floor, dirt and debris from some demolition, stained walls and ceilings, two HUGE holes in the kitchen ceiling from where the ceiling collapsed on me and a huge hole in the bathroom subfloor from where the toilet had leaked for ages and rotted the floor away (yes, really disgusting).

Most people could not get past the current state of disrepair in the building.  I could see the potential; what the duplex could become.  There were good bones in place.

The duplex was a potential goldmine; it just needed some work to unlock the $500 per month cash flow.  If you do the math, that’s a $3 per hour raise for completing the rehab work and managing the property.  When this whole project is complete, I estimate that I will have between 400 and 500 hours working on the duplex, which roughly equates to three month’s work.

Before I purchased the duplex, I knew I was going to have to spend a lot of time getting sweaty and dirty and spending time away from my family, but my wife and I knew this temporary sacrifice was worth it.  Specifically, this property represents 16.6% of my goal of bringing home at least $3,000 monthly from my rentals.

This UFUO presented an excellent opportunity for me.  This property may not have been the best opportunity for you however.  The duplex was an excellent opportunity for me because I knew I could accomplish all of the tasks by myself, saving all of the labor and materials markup expense.  When I purchased the duplex, I did contact a variety of contractors to determine what they would charge for various improvements.

I received quotes for the electrical work ($5,500), painting ($3,000 excluding materials), flooring refinishing ($4,000), misc carpentry work ($3,500), new bathroom ($3,500) and new kitchen ($4,200). The total expenditure, if I had used subcontractors was $23,700.  I knew I could save at least half of that amount if I were to complete the work myself.  I have decided to sub out some of the work, but my total investment into this property will be approximately $13,000, or a savings of nearly $11,000.  That $11,000 will become my equity once I have the project completed.

This UFUO will be successful for me because of the following:
1) The future potential rent is in line with the local market and easily carries the operating expenses and loan servicing,
2) I knew I was able to complete the work myself, and
3) The increase in the equity of the duplex should more than cover my investment.