My First Project and Success (sort of)
Hello fellow BP'ers. My name is Tim Ehlers and this is my first post. It's long but hopefully informative I would like to share my experience with my first project, where I screwed up, what I learned and how I got out of a potentially bad situation. I call it a success for a few reasons, even though I lost a little bit of money in the end. My success came from the experience itself, how to find a team, how to protect myself, learning construction costs and many, many more!
The home was a SFR in Lakewood, CO. 4 bed 2 bath build in the early '60's. It was pretty much in original condition. Original wood floors, small kitchen, one GIANT bathroom on the main floor with 2 beds and a small bath on the full basement with 2 beds. The neighborhood would be classified as a "C" neighborhood I think, however, directly across the street was a very large halfway house. The house was purchase through a well known and respected wholesaler in the area and the contractor I started with had done a lot of work for other investors in the area. I did call his references and also walk one of his jobs which looked great. I paid $198K after the wholesaler fee
Long story short I did not manage the contractor well, paid way too much ahead of time and then he disappeared with $22k of my dollars (along with about 200K from other investors including my wholesaler). Some of his subs also never got paid by him so they decided to break into the house and rip out all the plumbing and electrical work they had performed. He is still MIA to this day. I found another contractor and he and his team were amazing and completed all the work (plus another flip for me and a few for my buddy).
The house looked BEAUTIFUL when it was done, so beautiful in fact that it should have been in a MUCH nicer neighborhood. We gutted the upstairs bath and turned it into two which created a master suite. So, my second major mistake was completely over-rehabbing the property. With the lost 22K I had put almost 85K into the house. should have been 30K-35K.
When the home went on the market there were almost 70 showings total in the first 5 weeks without one single offer, not even a low ball. Of the 70 showing any about 35 actually got out of their car to see the inside. The halfway house across the street was killing me. I had the house listed at $320K, my comps were $330-$340K with less then a week on the market on average. I dropped the price to $290K, still nothing. Ugh.
One night I was looking at google earth around the neighborhood and noticed a large building on the other side of the halfway house. It was labeled as a university. I searched for it and found out that it is an art and design college with a few thousand students that attend for four year and graduate degrees. I had thought about getting a month to month renter into the house to help offset my hard money payment (10% or about $1700 per month) but market rent in the area was about $1600. I emailed the college to ask if they need student housing. The next day I get a phone call from the student coordinator with and astounding YES! There is a huge shortage of affordable student housing in the area and if I wanted she would market, interview and find a group of students to move in for a six month lease. I said I would consider but the price would have to be about $700 per room and she said not a problem. $2800 per month!.
I contacted a local attorney and had him help me draft a lease agreement which would allow me to rent each room in the house individually. I chose this route versus a single lease for simplicity. The students were on different schedules and I didn't want to have to constantly fight with the group when one left. They are art students after all. No parties, no fraternities...just lots of ganja and Starbucks. It is Colorado don't forget!
So within 30 days it was fully leased and even with my hard money loan still in place I am cash flowing about $400 per month. I then put together a pro-forma about the property and sent it out to every local investor I could find and put it on the MLS as an income producing property and it is now under contract for close to my original asking price. I would have LOVED to keep it because if I could have refinanced it at 4% the cashflow would be close to $1000k per month. My problem is that I don't have any income right now. I sold my business the year before and quit my job as a paramedic. I have money but nothing to qualify for a standard loan. The two local portfolio lenders I met with would not give me any higher then 70% LTV which overall is decent, I just don't want to have that much money tied up into one property right now. I'll add another post to this later about what I learned throughout the process, this is probably enough right now.
My biggest lesson was this...When you have a potential project ask yourself "Who will my customer be"? Customers are buyers AND/OR tenants and I had the wrong customer in mind. I imagined a young family with kids and professional parents who wanted to be close to Downtown Denver. Wrong!