Posted about 10 years ago

Searching for Unicorns (i.e. The Perfect Property)

So you have watched plenty of reality TV shows, read countless articles and surfed across dozens of websites that tell you how easy it is to make money investing in real estate. If all of these people are making all this money, why shouldn't I? Now all I need is the perfect deal to get started.

Finding a Unicorn

Much like unicorns, I would argue that the "perfect" deal does not exist. And speaking from my own experience, a lot of time can be wasted looking for an investment whose criteria are impossible to meet. Perhaps those criteria look something like:

Cash flows at least $ ____ (fill in the blank with an unrealistic amount) per year.
Price is no more than $ ____ (fill in the blank with a price that is completely incompatible with #1).
Property is located in a really nice area.
Building is in great condition and fully occupied.

Not too hard to see how trying to find a property that meets all of these criteria might impede one's success. This is pretty much what I spent two years trying to find and not surprisingly, made zero investments.

So Unicorns Do Not Exist, Now What?

I think the first thing to do is establish realistic expectations for investments in your given market. I went through the MLS for our market and put a big chunk of properties into a speadsheet (see my prior post A Spreadsheet Jump Started My Investing for more details). This gave some basis for my price and cash flow expectations, instead of just pulling them out of thin air. Now I can just focus on these properties that look great based on Cash Flow and Price. That bubble was quickly burst when I ran my list of great looking (i.e. Unicorns) properties past the realtor we work with. These properties may have met criteria #1 and #2, on paper but definitely not #3 and likely not #4. In reality, most of them only met #2, low price. Our realtor suggested we look at a half dozen multifamily properties, some listed some unlisted, that he thought would be good investments.

You Call This a Good Investment?

We invest out of state, so the next time we were in town we went to see the properties. They were all pretty bland buildings in working class neighborhoods. All were very similar in terms of construction, layout, tenants and condition. These were not the buildings in my real estate dreams. Sure they had positive cash flow but way below my lofty expectations. My projections put these properties around middle of the pack on my spreadsheet. Even after looking at these properties and talking with our very knowledgeable realtor (who is also an investor and property manager) I was still convinced we could do better.

We Need to Get in the Game!

So we (my wife and I) went back home to contemplate the properties we toured. I put all of the numbers in my spreadsheet and showed my wife how they were all just in the middle of the pack and had come up reasons for not investing in all of the properties. There were two adjacent properties that seemed like they might work but I was still hesitant. These properties were side by side four families which our agent was managing for the current owner. Our agent also owned buildings on the same block. I projected a cash on cash return of about 15% using actual rents and expenses and a 10% vacancy rate. The buildings were fully occupied and did not require any work. We spent a good amount of time discussing these buildings until finally my wife said, "We need to get in the game". She was right.

We'll Take It

We ended up purchasing the two buildings and kept our agent on as the property manager, so the investment was pretty much turn key. We closed on the buildings in March 2013, so just passed the one year mark since our purchase. In 2013, we had 100% occupancy in one building and 95% in the other with no major maintenance expenses (knock on wood). We are just wrapping up our 2013 accounting but between the two buildings earned an 18.6% cash on cash return for 10 months. So our passive investment, that we almost did not make, earned just shy of 19% in less than one year, while we were 300 miles away. No one is going to make a reality show about this kind of investment but I will happily take this type of return on our investment any day of the week. By deciding to end our search for unicorns, we were able to not only make a good investment, we were able to get the invaluable experience and knowledge that only comes from making a real investment.