Playing Fred & Ethel Mertz

8 Replies

My wife (@Shannon Smith  ) and I started house shopping while living in Bend Oregon during late 2009, and we looked into the possibility of renting out a bedroom to help offset living costs. During our first few months of shopping we caught wind that we'd be likely moving to Redding California, so we kept an eye on both housing markets. The thought of reducing our living costs transformed into trying to find out if it would be possible to actually get paid to live in our own home. Ultimately we ended up moving to Redding in the summer of 2010 and this added about a year to our shopping process since we now needed to learn a new town.

After running numbers every which way on my excel sheet I decided that if we could buy a multi family for $50k/door or less the building would meet my desired results of making double payments on it's mortgage w/out me having to pull out my wallet, or it would pay the mortgage and pay me an equal payment in terms of cash-flow (at least given the rents in my area this quick rule would give me a fairly accurate filter).

In 2011 we got an accepted offer of $194k on a 4-plex in Redding CA and were able to rent the units for $685/mo. while living in one of the units. Our PITI was about $1,100/mo. So basically 2 units covered the mortgage and a few utilities, and the 3rd unit was cash flow while the 4th unit my wife and I moved into. We bought the building with a cash offer using a private loan from a family member.

After living in the unit for 2.5 years things were going very well with 100% occupancy and 0 turn over, so we re-fi'ed to get our cash loan back. Using the cash we bought a SFR in Shasta Lake California (about 5 miles north of Redding) for $61k and are now just finishing up the rehab. We should have roughly $90k into the house when it's all finished and the ARV will be ~$125k. We plan to move out of our 4-plex apt which we are now beginning to rent out on a furnished basis to international students at our local schools for $850/mo., and we can move into our new house which will be costing us close to $500/mo. after repairs netting us a $200 monthly raise and living in a nicer place.

With the remaining balance on our loan we will likely pay back the family member who originated the loan. However, we have been very heavily considering investing the remaining balance out of state since we are learning how much better other markets can be. We are even considering selling the 4-plex to raise capital to invest out of state since we have captured roughly $100k in appreciation so far.

Nice job @Rodney Smith  ... good to hear of success stories in my back yard. Sounds like a really smart plan. I think doing what you did is possibly the single smartest financial move that younger people can do to begin early to accumulate wealth and assets relatively easily. Even if people did nothing else with investing but buying smart income properties as owner-occupants, then trading up and moving into nicer ones every couple of years while keeping the properties and the long term fixed rate financing, that alone would transform people's ability to be financially free later in life. Well done!

Nice job bro. Two questions:

1. Who the heck are Fred and Ethel?

2. I'm not sure I quite understand what you mean when you say: "With the remaining balance on our loan we will likely pay back the family member who originated the loan."

@Troy Smith   1 - In the tv show I Love Lucy, Fred and Ethel are the best friends of Ricky and Lucy and they happen to own the apt building that they all live in together. They are the best friends / landlords to Ricky & Lucy.

2 - Family member originated a loan on our 4-plex allowing us to pay 'cash' for the 4-plex. Later we re-fi'ed through a conventional bank to pull the cash back out. We re-fi'ed $150k and will only use about $90k on the rehabbed property leaving $60k to either pay back to the family member, or seek out more properties.

Ahh, i see now. So it would pay back that part of the loan, but not the full balance. I didn't get it before. 


Keep four plex or trade up when you desire

My suggestion : pay back family member asap

@Aaron Nelson Thank you for your kind words. This investment has served us very well. I only wish I would have pursued learning more about REI at a younger age, but thats okay. Cant do the 'shoulda woulda coulda's' right. I remember my dad used to say 'the most money you'll ever make will be on your 1st home' and I remember thinking how I might be able to maximize that when looking for our 4-plex.

Now to be honest i'm trying to look towards guys like yourself and learn from them, I know you are quite the investment minded person with a real gift in the RE business. So now i'm trying to watch what guys like you are doing and trying to learn what I can. I've read on a recent post that you picked up an apt building in the south - firstly congratulations and way to go! Secondly i'm excited to hear about how that pans out for you. I know my wife and I are seriously considering transferring all of our buy-n-holds to a more advantageous state but are still concerned about managing from a distance / finding good PM's. So i'm sure I will learn a lot from the good people on this site.

@Rodney Smith  the four plex sounds like a long term keeper unless it has some major deferred maint coming up (smart buyer will know this anyway), you need (for whatever reason) to pay back family member and can't refi, or you expect the property to go down in value to include reduced rents.  

If you were in a more pro-LL state I'd simply tell you to stick close to home since you can cash flow well, but with the crazy CA laws which certainly won't change under Gov Moonbeam, I think you are smart to look out of state.  Still, I'd do that while keeping the four plex, even if you don't expect any appreciation on it.  

@Rodney Smith   yes, the most intimidating part of the long distance investment to me has been the PM side of things. Since I've only owned the building a couple months and we are doing some rehab, I can't say for sure how well that is going yet. But I'm sure I'll have some updates in the coming months on that situation. My preference would be to buy and hold most or all properties I can in the Redding area, but unfortunately the numbers just didn't work for me in most cases... 

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