Success and lessons learned

5 Replies

I have not posted in quite a while. But I have been busy and ran into the old "too busy doing that I don't have time to keep up with the network." I really need to learn to balance that. But, working full time, two small kids and REI on the side makes for a busy schedule. But no excuses!

Overview:

- Sold one house

- 1031 exchange

- Bought 3 houses

- Renovated 3 houses

- Got ripped off

- Got flooded

- Renovated another house

- Buying another deal

- Ran into bank not wanting to fund me

- Found a way around and now in the process of getting funding

In late 2016 people here on BP convinced me that I should sell a high equity property for a few cash flow properties. I pulled the trigger and put it on the market. But not before needing to remodel the 8’x4’ bathroom at $10K. But that $10K brought me $30K more in the selling price.

The property was only $100/mo positive cash flow after 10 years of ownership, but that was pretty good for the SF Bay Area. The problem was not having my money work efficiently for me. I had $400K in equity sitting there and refinancing would make it negative cash flow.

I used the great people at IPX 1031 to facilitate the exchange. Was a lot easier than I had imagined. Sold one property in CA and bought three in Houston.

One of the new properties was of the MLS and two were through a wholesaler (Northwestern). But all needed work.

Property one:

This was off the MLS and was listed for $160K. I ended up paying $145K as it needed a lot of loving care. New siding, a new cement patio and walkway, new flooring, remodeled the 2 bathrooms and painted in and out. Roughly $20K in work but a lot of my own labor. This was not a good deal as ARV was $165K. Have it rented for $1650/mo.

Lesson learned: there is a lot more work needed than you may see, especially one prepped for selling to the normal home buyer.

After:

Before:

Property two:

This was from a wholesaler. There was a pipe that burst and the house had flooded. No drywall or sub floor in the second floor. You could see right through the house. But had good bones in a decent neighborhood. Paid $130K put $62K into the rehab and ARV is $220K. Rented for $1775/mo.

The problem here was hiring the wrong contractor. He talked a great talk and had massive amounts of verifiable experience, but for some reason his life had made a turn and he ended up only doing a few days of work in 2 months. I finally had to confront him. I had set up triggers by all the doors to show if he entered. He was not even showing up to the property but was billing me for his time. Well $20K into my learning experience, I had to fire him and look for a new contractor. After sulking for a week, I hired another team and they did a great job. So the rehab would have been much less had I not waited to fire the first guy. Just felt so bad for the guy, but after running the numbers on holding costs and lost rents, I was mad enough to fire him.

Lesson learned: Fire contractors quickly if they are not preforming. Kept thinking, I have now paid for my education, I might as well use it.

After:

Before:

Property three:

This was through a wholesaler also. Bought for $200K, $30K in rehab, ARV is $255K and rented for $1875/mo. I knew going in this was not going to be a good deal but this was going to be an "alternative primary residence" I love the neighborhood and like the house. So I was going to rent for a year and sell my house to move in to reduce my tax burden. Ended up just renting it. I'm still holding a lot of equity in this house and the value continues to climb as the businesses keep moving into the area. (more on the benefits of holding equity later)

After:

Before:

The Flood:

I had just finished these properties, and was getting back to normal life when Hurricane Harvey hit Houston. All the rentals made it with no issues, but my own house got 18” of water. Had to tear out the entire bottom floor and start over. I had no flood insurance as it was nowhere near the 500yr flood area. There was just a crap load of rain. 52” over 3 days.

Lesson learned: buy flood insurance.

This rehab was particularly hard as most of the contractors were booked up or working on their own houses. I called the same drywall crew as I used on property two, and their quote was 4x the cost for less work. Supply and demand in action. Materials were hard to come by, and the prices increased rapidly. I ended up doing all the work myself, and was faster than most full crews because I focused on only my house. Working this fast was beneficial as I usually got to the next build stage before others needed the same materials. This let me keep going where they had to wait for materials.

But the downside during this time was fixing things at the rentals when my own house was in pieces. I could not get a contractor to fix small jobs when they were making big money on big jobs.

Lesson learned: Don’t let your contractors jump around. It will take longer and cost a lot more. They should focus on one job only until done.

After flood and demo:

Starting to come together

The new deal:

I talk about real estate investing to everyone. So many in the neighborhood knew I would buy flooded houses. I also helped others plan the flow of their rehabs so they had the materials they needed and set up some group buys very early. I helped several wholesalers make deals. Now that my house is nearing completion, I am picking up another house myself and this one looks to be a better deal than the others.

Lesson learned: Talk about what you do, and help where you can. It will come back to you later.

Financing:

So I ran into an issue with financing. I wanted to use home equity line to pay for the new deal. But I was denied as this particular bank does not make 5 loans to one person. Oh well, their loss. After tapping into my network, I found another bank that will do the deal and they can move much faster. The good thing here is that once you build up enough equity you can use it like a credit card to do cash deal and the interest rate is only 1pt above prime. This bank will also roll it into a long term loan at a lower interest rate when the rehab is done and it is rented.

Lesson learned: Shop around and don’t let the bank tell you no.

Lesson learned #2: having equity in a house can be a good thing if you know how to tap it. (used property 3 for this)


Conclusion:

I moved from an equity play making only $100/mo to a cash flow play making over $3K/mo using the same amount of capital and a lot of sweat equity.

Bought for $270K waited 10 years and sold for $600K. Don’t wait to buy real estate. Buy real estate and wait.

I did a 1031 exchange into 3 properties. I paid $475K and put $112K in rehab for total of $587K all in, but ARV of $640K. (That is only $53K of equity + $36K in cash flow for the year)

With all this done, I have learned  the real lesson of cash flow and the ability to force equity. This has led me to now to make moves to get into multi-family where this all can be magnified. So if anyone has lessons learned relating to multifamily, Im all ears.

You are impressive.  Sending a connection request now.

Thank you @Michael Delpier for the wonderful presentation, details & numbers. Congrats on the multi-tasking and still crunching your numbers right on your deals. I'm learning a great amount of lessons from your post. Thanks

thanks for sharing your experience, and lessons learned... 

Thanks for sharing Mike, really impressive. Respect and admiration- and best of luck going forward!

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