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Frank Klein
  • Investor
  • Baton Rouge, LA
4
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14
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if you are waiting for the right moment to start, its now

Frank Klein
  • Investor
  • Baton Rouge, LA
Posted Nov 20 2015, 09:16

“Success means doing the best we can with what we have. Success is the doing, not the getting; in the trying, not the triumph. Success is a personal standard, reaching for the highest that is in us, becoming all that we can be.” Zig Ziglar

I will try to keep our success story brief, but make no promises, because our success came in the doing and the lessons we learned. Real estate investing started for me in the middle of the South Pacific digging for precious minerals on the sea floor, we had several months offshore and I had picked up a copy of “Rich Dad, Poor Dad” at the airport in Australia, I had also picked up a Men’s Health. About half way through the book, I realized I knew nothing about money and needed to learn. I spent every off hour I had reading and rereading, searching the internet and basically taking a crash course on finances and investing. Thank god for Robert Kiyosaki, because without his book giving me the knock on the head and the kick in the *** I needed, I might have opened the Men’s Health and gotten on the treadmill and instead of being part of a successful investment team, I would be in shape. And who wants that. Now that I knew what I had to do, I had to build a team to accomplish my goal. It took all of two seconds to decide that my family (Dad, Brother and sister-in-law) would be the cornerstone of any team I had. Their strengths played to my weaknesses, my brother’s methodical approach tempered my unbridled enthusiasm, and this applied to all things. My sister in law is the middle ground and can see both sides and is able to help bridge the gap when needed. I was surprised at how fast they all agreed and how little convincing they needed, the truth is once you look past all the reasons we have been given that investing is for someone else, it just makes sense. Our plan was simple we would invest in Multi-Family properties as a cash flow business and focus on student housing as our niche. Next member of our inner circle would have to understand real estate and the multi-family market, we met with several realtors to get a feel for how they worked, this was trial and error and we quickly realized that investing wasn’t the norm and that 9 out of 10 of the agents didn’t know anymore than we did about MF’s or the market. Turning point was when we set down with David V. of Keller Williams and discussed our investment plan, short and long term goals. Looking back this should have been the first sign that we were talking with the next member of our team, he was the first to ask beyond what houses we wanted to look at. David wanted to know why we were looking at student housing and what our plans were for managing them after we bought, he wanted to make sure that after we found a place we were able to manage it and profit from it, so that we could get into the next one. David showed us some buildings close to LSU in Baton Rouge and explained the Pros and cons of the area and the tenants, then asked if we would be willing to consider other areas and other tenants? By now we trusted David and understood that as an investor himself, he understood how to make this work and if there were other areas that he felt we should look at then who were we to argue. First impression was that the areas we went through could be called transitional in the sense that they were going from one gang to the next, and the drug of choice was probably changing often, but David reminded us that in every neighborhood there are good people, good families and good tenants that need a safe and decent place to live. We were sold and looking for our first property and someone to manage it. We attacked both at the same time, David pulled up everything that met our criteria (at or below 75% of market value, high vacancy rate due to management or condition and in need of work) and we drove the neighborhood to see who was managing in the area already. If we saw the same number or sign on several properties we would call and talk with them. See if they could support our belief that if you provided above average units at a similar price point, you could attract and keep above average tenants.

Property #1 MLS and private lending. 4-plex owned by a Trust out of California that had been mismanaged for several years. Manager had been using one unit as storage and reporting 75% occupancy, maintenance had been deferred and building was starting to deteriorate. It was already under contract by the time we saw it, but we put in a back up offer and when financing fell through we jumped on it. Inspection report scared us, because of the list of things that had to be done. Scared, but not deterred we pushed on and closed. Two of the units had long term tenants paying less than market value rent, but unhappy due to the unanswered maintenance request. Had our new PM go in and get a list of what needed to be done and knocked it out as quickly as possible, we could have raised the rent and made a little bit more each month, but these were good tenants who cared for their units, even when the owners and PM didn't. These were type of tenants we wanted and it has been worth the money to keep them. After repairs and turnaround on the vacant units, we have maintained 95% occupancy for two years.

Lesson learned – Listen to your team, our broker led us to a Building we would not have looked at otherwise and or our PM let us know the value of the tenants. This has been our best performing building so far

I have to acknowledge and give whole hearted thanks to Jason Guerin and the Area Home Lending team for their ability to finance this for us when others could not. He came through at the end and made it work,

Properties # 2 & 3 Family based funding while Driving for dollars. After the success of our first unit, we were in the neighborhood all the time looking for the next one. I have to say the neighborhood is rough and vacant abandon buildings are easy to find. We were not experienced enough or brave enough to take on one that needed full renovation and recovery, we wanted something that needed cosmetic repairs. Found a 4-plex that looked good from the outside and appeared to have been boarded up and well preserved. Now at this point we had not found Bigger Pockets and didn't have the wealth of information available to us on how to find the owner. Couldn't ask the neighbors as this was just one of many buildings left and forgotten. The ladies at the Clerk of Court walked us through each step until we found the name of who had purchased the building several years earlier. And that is all we found a Name and State, California. Googled the name and state, several matches came up, but one stuck out. A real estate agent that facebook suggested owned properties in Louisiana, messaged via Facebook and his local rep got in touch with us and said he would love to sell the property and if were interested he had a duplex in the area for sale as well. We agreed on a price for both properties that was just below ARV of the Duplex, and for anyone paying attention, I didn't skip any steps. We didn't inspect the properties or really look deeper than the outside before signing the purchase agreement. We were committed; this was a great deal two buildings for the price of one, what could go wrong. Well apparently everything, both buildings had been gutted and all the copper taken and apparently it was too much trouble to walk out of one unit and go the next, so they tunneled through the walls between units. Of course this is judging their intentions and maybe they were less thief and more visionary. We may have missed an opportunity to convert two into one and get a larger SF home. Even after seeing the inside conditions, we kept going, running numbers on what it would take to rehab the place. Some of the numbers we vetted others we invented, again no Bigger Pockets, no Podcast and no experience. We missed on the numbers and time frame, it cost roughly 30% more then we estimated and took several months more than planned. Saving grace is that we got them cheap and in the end we had them at market value, which means we will have to hold on to them for several years, but that's okay they are cash flow positive and with the renovations will be for many years to come.

Lesson Learned – Don’t judge a book by its cover. Inspect, inspect and inspect again. Look at everything and get others to look as well. If you don’t have a plumber, an electrician, HVAC guru and contractor, get one as a matter fact get several. Have them look at it and tell you what it’s going to cost. And for all the work you think you are going to do, get a bid and accept the reality that you probably are not going to do the work. I still have a to-do list from my first marriage and working on my second. I would also say don’t fall in love with the house or the deal, don’t be so impressed with yourself that you can’t admit to making a mistake. We could have walked away from these several times and saved our capital for something better and better things did pass us by while we were renovating.

Property #4 Traditional financing with the Power of networking – As soon as we freed up some cash, we put the word out that we were looking and David came through with a block of four buildings about to go on the market. The price was slightly higher than we wanted for each unit, but the owner would offer a discount for the package. We jumped on the opportunity and figured out how to finance three additional buildings (We had only planned on adding one). This brought us to the next part of our team, people with money, Banks and traditional lenders. The owner was being sued for an injury on one of his properties and his misfortune benefitted us, but I would truly not wish the injury and the loss of property that resulted from it, on anyone. The need to satisfy the courts and the settlement added a level of difficulty to this purchase and in the end we were only able to gain clear title on one 4-plex of the original four buildings. It was a good building and only needed minor cosmetic work to get it up to our standard, so the time and by time I mean months it took to close paid off in the end.

Lesson learned - Insurance get it, because by the time you realize your mistake it will be too late and when that’s happens, please remember “We Buy Houses” and contact us . Networking, reach out to your inner and outer circle often, not just when you need them. Patience, good deals are hard to come by and they will probably come with some sort of issue that makes them a good deal. Once you have inspected and then inspected again, got your quotes for repair, figured in your maintenance and repair cost if the numbers work, commit to the deal and stick it out. Note for those paying attention, we had already learned from our mistakes. Your ability and willingness to stick it out and close on tough deals helps build your brand as is said so often on BP, people will come to trust in your word.

Property # 5. Pay as you go funding is a matter of happenstance, not of strategy. While working on Property # 3 a notice went up on the building next to us about the property going to Sheriffs sale, building was rough and needed a lot of work, but it was right next to ours and as "American Pickers" always say," bundling pays off". We could control our neighbors and begin to effect change by the condition we keep our buildings in. So again we reached out to David and asked that he chase this down, he quickly found the owner and negotiated a short sale. In addition he found that the owner had a second building in the area that was in a similar situation. We offered 35% ARV on both and negotiated up to 65% ARV on the building not near us, but in the same neighborhood. Funny thing about this is that when the Sheriff's sale notice went up, it had the wrong address and was posted on the wrong building. So throughout the process we thought we were negotiating on one building and its condition didn't justify going higher than 50% ARV, so we let it go. If we had found this out prior to closing, we may have gone up to 65% on both buildings, but what are you going to do. The building we did get had been left unmanaged for 9 months, the owners had just stopped collecting rent and the tenants kept paying for water and electricity, so they had it pretty easy. They were not very happy to hear that we as new owners would expect rent to be paid, but in turn would bring the units back up to standard. We were also surprised to find out that although zoned residential; the building had been used for somewhat commercial purposes as a distribution center for South American plant based medicinal products. Not exactly our target tenant, so occupancy dropped to zero and Glaucoma complaints in the area went up. The empty building at a good price allowed us to take our time and use our cash flow from the other buildings to fully renovate the building, put it back in the rental pool and get rid of one more strain on the neighborhood.

Lessons learned – Keep your eyes open and know your market. Knowing from our other units what the ARV was and cost to rehabilitate would be, allowed us to move quickly on this. I would also say we learned that you can't trust the government, that is a general statement and not political. Had the notice been placed at the right address we would have known to go higher on the offer, of course if it had been placed at the right address we would not have been interested and would have lost out on the building completely. So no real strategy can be learned to count on the incompetence of others.

After sitting down and writing our story, I see the biggest lesson of all was that in the beginning we didn't know what we didn't know.  No matter how much homework or reading we did, we would not have learned and grown as a company and family until we tried, stumbled and got back up. So if you are sitting on the sidelines, waiting for the right moment to jump in,  jump now.

   Because without our success, our tenants wouldn't have the homes they do now and I think we are making a difference, our little patches of well maintained buildings is effecting change.  

Next Stop New Orleans, we will keep you posted.  

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