Partner won't buy out of jealousy over what the seller will make

29 Replies

I'm in a bit of a pickle, because my husband and I disagree over investing philosophies and whether we should invest in a particular property. We're both pretty conservative with our money and have been keeping most of it in cash because we'd been looking for a "home run", we're worried about a possible correction, and as you all probably know, deals are getting harder and harder to find. But he's a complete pessimist and doesn't want to pay for a flipped property that he sees was $180k cheaper 1-2 years ago. I, on the other hand, think that if the flipper took all the risk and did all the work, he deserves the gain, and there's still gain left for us (in the form of cashflow). 

We already own a duplex that we bought in LA in 2014, it was a flip that the seller had bought at an auction and done a lipstick job with, we put in an extra $30k to get it rent ready, redo plumbing and electrical, and have been managing it ourselves since. Note, my husband had wanted to back out of the contract at the last minute but I convinced him to go through with it, and now it cashflows around $1000/mo and is the best investment we've ever made, yet all I hear is how we could have done way better and we should've bought something like that property but before it was flipped, in a different area that had later gotten gentrified. Hindsight is 20/20...

Fast forward to today, after I've spent months looking, developing a relationship with a broker, and passing on multiple opportunities, we have a multifamily property under contract in Cincinnati, OH. According to my calculations, it's a 7.5 cap, we could buy it for $420k and rents are slightly low at $5000 gross/mo, we would be cashflowing $800/mo with $105k down and no work. It pencils out, but my husband doesn't even want to hear it, because he's jealous of the seller: he had bought the property a year ago for $240k, rehabbed 9 out of the 11 units, and is looking to make a huge gain from what we can see.

What's your advice? Pass on it, or try to convince my husband to buy like I did 4 years ago? I don't want to pay for inspections, fly out there, etc., if my husband will veto the purchase anyway. On the other hand, if I go through with the due diligence, it all looks good, and yet we back out, my broker would probably never speak to me again.

Granted, we won't be able to do the BRRR strategy with this property since there's not much value-add left (that would have been ideal). But it's a low-risk investment that would give us some stable cashflow until we find the next one. It might be worth noting that my husband would love to reach financial independence and has pretty lofty goals but no specific plans/actions to achieve it, our goal would be to find value-add properties that could give us a balance of gain in equity and cashflow.

My husband says I can buy if I find my own money. What do you guys think? Should I start looking for other investment partners? 

get a new husband (HAH!).. but seriously.. get a new investment partner because your current one is holding you back.  That sounds like a great deal.. make it work.  See if another family member wants to lend money and be a partner, take a personal loan, whatever it is.. get that house

@Aliz Rao

I run into that mindset all the time

"They are asking $45K for it, it's a slam dunk when you are done with it. $35K in repairs and we could list it all done for $135K all day long."

"But I know he only paid $18K for it at auction, no way is he making $27K off of me"

"It is still a home run, I suggest we make a solid offer and lets close this out, I have it on pretty good authority he would take $35K cash, no inspection 2 week close"

"Tell him I'll give him $21K and not a penny more"

Next morning: "Did he take it? When can we close?"

..... "No, we heard nothing and it is in Pending"

"I thought you were suppose to find deals.... I need to find an agent with a more investor mindset who will get my low offers accepted".

@Aliz Rao

Retail is exactly like that.  The manufacturer makes the product and sells to a wholesaler at a certain price , the wholesaler sells it to retail outlets at a markup and the retail outlet marks it up even further.   While you seem to understand that your husband still participates in that system everyday unless he never buys anything. 

Since he is opening the door for you to buy with another investor might as well take that path and get the deals.  

That's the Cinci market.  I've been on the hunt for quads for 5 months...I've contracted on a couple but then due diligence showed they didn't do any maintenance in 7 years and want double what they paid...or they bought it 12 months ago, did the lipstick paint job and also want double.  Inspections revealed another $40k to $60k in maintenance I'd get hit with..couldn't make those number works so we walked away.  They sold next day to another out of town investor who didn't do DD.  I don't know what to tell you WRT to your financial dilemma though.  That's tricky.  Good luck! 

Thanks everyone for your comments! Hopefully as we do our due diligence, we will uncover anything that might have been covered up, and if so, I would adjust our offer accordingly. @Andrew Hargreave , agreed, we don't want to be the out of state sucker who overpaid! I will happily walk away if that is the case. I've since then talked to my husband and communicated this better, he's also doing his own research about the area and comps and he agrees with my assessment about the location being good. Also on my end, I ran some more detailed calculations and agree that their asking price is high and it wouldn't cashflow as much as I had thought initially. So in short, we're on the same page now. We have yet to get the detailed financials, and we'll see how it goes..!
Originally posted by @Aliz Rao:

I'm in a bit of a pickle, because my husband and I disagree over investing philosophies and whether we should invest in a particular property. We're both pretty conservative with our money and have been keeping most of it in cash because we'd been looking for a "home run", we're worried about a possible correction, and as you all probably know, deals are getting harder and harder to find. But he's a complete pessimist and doesn't want to pay for a flipped property that he sees was $180k cheaper 1-2 years ago. I, on the other hand, think that if the flipper took all the risk and did all the work, he deserves the gain, and there's still gain left for us (in the form of cashflow). 

We already own a duplex that we bought in LA in 2014, it was a flip that the seller had bought at an auction and done a lipstick job with, we put in an extra $30k to get it rent ready, redo plumbing and electrical, and have been managing it ourselves since. Note, my husband had wanted to back out of the contract at the last minute but I convinced him to go through with it, and now it cashflows around $1000/mo and is the best investment we've ever made, yet all I hear is how we could have done way better and we should've bought something like that property but before it was flipped, in a different area that had later gotten gentrified. Hindsight is 20/20...

Fast forward to today, after I've spent months looking, developing a relationship with a broker, and passing on multiple opportunities, we have a multifamily property under contract in Cincinnati, OH. According to my calculations, it's a 7.5 cap, we could buy it for $420k and rents are slightly low at $5000 gross/mo, we would be cashflowing $800/mo with $105k down and no work. It pencils out, but my husband doesn't even want to hear it, because he's jealous of the seller: he had bought the property a year ago for $240k, rehabbed 9 out of the 11 units, and is looking to make a huge gain from what we can see.

What's your advice? Pass on it, or try to convince my husband to buy like I did 4 years ago? I don't want to pay for inspections, fly out there, etc., if my husband will veto the purchase anyway. On the other hand, if I go through with the due diligence, it all looks good, and yet we back out, my broker would probably never speak to me again.

Granted, we won't be able to do the BRRR strategy with this property since there's not much value-add left (that would have been ideal). But it's a low-risk investment that would give us some stable cashflow until we find the next one. It might be worth noting that my husband would love to reach financial independence and has pretty lofty goals but no specific plans/actions to achieve it, our goal would be to find value-add properties that could give us a balance of gain in equity and cashflow.

My husband says I can buy if I find my own money. What do you guys think? Should I start looking for other investment partners? 

Your comment: "It might be worth noting that my husband would love to reach financial independence and has pretty lofty goals but no specific plans/actions to achieve it"

 There is something else going on here. Take him to dinner at a place where you can sit down with a yellow pad and write out your investment goals together. Ask where you want to be investment wise 10 years from now, 5 years from now and next year. Then break things into workable units based on your time frame, strategy, income, and personalities. Put it on paper. Take your time. Hear him out when he speaks. He is having a tough time articulating (and maybe figuring out) what he actually means by "real estate investment goals" and how to get there.

@Aliz Rao.  Glad to meet another married couple partnership with the wife as the investing catalyst.  We may are the smallest minority group on here.   

My husband is like you husband except he doesn't look at the numbers.  I'm accountant. He's an English teacher.  He assumes I know the numbers better than him and doesn't ask.  He is, however, a sucker for a good paint job and has a hard time seeing past ugly carpet or heaven forbid cabinets that are missing in a house with a kitchen we plan to gut anyway.  

I try to focus what he does bring to the table.  First off, he is a teacher and looks great on a loan application.  He's also a check for me as he keeps me from biting off more than I can chew in a rehab.  Finally, he is a native of the area we invest in having lived there nearly 30 years.  I can give him an address and he can usually tell me where is it and give me a yes/no on the location without Google maps.  

Our biggest rule is don't buy anything unless both of us are on board.  I can run all the numbers, drive by, and even call our realtor or the owner, but if he vetos it, we stop.  I have learned in resent years to just show him the ones that fit my quick requirements and if he vetos, I stop rather than wasting my time.  If he says move forward, I go more in depth.  

Finding another partner and own money wouldn't work for us as we consider all resources ours.  

If knowing the numbers is a sore spot for your husband, do y'all need to know what the seller paid?  I personally look it up, but if knowing is going to cause your business to suffer, maybe that metric isn't needed for the two of you at this point.  

This is a simplified analogy, but I don't need to know what the grocery store paid for the ground beef to know $1.99/lb is a great price.  I just need to know what other stores are selling similar beef for and if the cost of beef can fit in my budget to know if I should buy it.  

A year ago, someone took advantage of an opportunity. Today, your husband can be that someone. If he decides against it, another investor will become that someone. And another year from now, that investor will be up almost $10k, and your husband will now have 2 people he can be jealous of.

Almost every dollar he spends goes toward making someone else richer. This deal, for once, puts his own dollars back in his own pocket and multiplies them.  

If you do end up finding someone else to partner with, I hope he realizes he's given up any say in how you spend that $10k. 

Originally posted by @Aliz Rao:

Fast forward to today, after I've spent months looking, developing a relationship with a broker, and passing on multiple opportunities, we have a multifamily property under contract in Cincinnati, OH. According to my calculations, it's a 7.5 cap, we could buy it for $420k and rents are slightly low at $5000 gross/mo, we would be cashflowing $800/mo with $105k down and no work. It pencils out, but my husband doesn't even want to hear it, because he's jealous of the seller: he had bought the property a year ago for $240k, rehabbed 9 out of the 11 units, and is looking to make a huge gain from what we can see.

Hi Aliz.

9 rehabs is a lot of work. In Cincinnati I would budget $11k to $14k per unit for rehab (1br/bth 450 sq ft). This is a complete bathroom (to the studs) and kitchen (leave only the drywall) tear out and replacing the fridge and range with clean used units. (Fridges that are marked at $249 at the used appliance store,  I pay $150 because I buy 3 at a time. Glass top electric ranges I buy off of craigslist for around $150. I wont by from a used appliance store because they are inevitably filthy and require 2 hours of labor to clean.)

I'm guessing that the seller only rehab'd 9 of the 11 because the other two units are long time tenants, likely elderly. 

If you have to rehab one of those last two units, your $800 monthly cash flow is gone for a year and a half. If you have to rehab both of them, no cash flow for 3 years.

I am going to take a wild guess and assume that this 11 unit is in the Westwood, Price Hill or Avondale neighborhood.  

DL

As an investor your husband should realize how the game is played. He shouldn’t fault someone for playing better than him. The market is different now than it was when the seller purchased. He caught the wave and you guys didn’t. Not your fault, you just weren’t in the market at that time. Don’t hold out for a “home run.” Hit line drives until the market conditions change that will give you the opportunity for a home run. If you sit on the sidelines it may be years before the opportunity comes back around.

Originally posted by @Jonathan Hulen :

As an investor your husband should realize how the game is played. He shouldn’t fault someone for playing better than him. The market is different now than it was when the seller purchased. He caught the wave and you guys didn’t. Not your fault, you just weren’t in the market at that time. Don’t hold out for a “home run.” Hit line drives until the market conditions change that will give you the opportunity for a home run. If you sit on the sidelines it may be years before the opportunity comes back around.

A $420k 11 unit in Cincinnati purchased at a 7.5 cap is a line drive straight back to the pitcher who then throws back to 2nd for an easy double play. 

Dude (seller) paid $21k per unit one year ago. This, in and of itself, indicates to me that it is located in a very very "management intensive" neighborhood. Owning that thing from 2,000 miles away is a recipe for disaster. 

DL

@Aliz Rao - something doesn't smell right here. From the beginning- the current owner bought it for $240k then rehabbed 9 units(so if the cost on that was $100k, his profit would be much less than your husband thinks.) But more worrying is the current gross rent- at $5k/month, that means each tenant is paying about $450/month? 

You mention in your post that "we would be cashflowing $800/mo with $105k down and no work." If by "no work" you mean there's no immediate rehab required, fine, I get that. But when tenants are paying $450/month, other kinds of work will be required. Like banging on their doors to get rent. Or sending exterminators when someone leaves the garbage sitting around for too long and the roaches notice it. How's the guy getting only $450/unit after he just rehabbed them- is that the going rate for a rehabbed apartment in this neighborhood? 

Based on everything in your post, a theoretical cap rate of 7.5% for a building across the country should cause you to run, not walk away from that deal. If you had good local management in place- that you've already battle-tested, and know that they're honest, competent, and won't walk away from you at the first sign of trouble- I might answer differently. But I don't think this thing at a 7.5 cap would make sense for anyone.   

Agreed with @aliz rao that this is looking like trouble. In terms of the ongoing conversation though, there is one point which might help:

Someone who made a lot of money likely bought a different asset with higher risk, higher reward...

You want to buy it as a post rehabbed building with a solid tenant pool that can be tweaked further. Less (theoretical) risk and less reward to this model, if still profitable. Its two different assets even though its the same building...two types of investing and two different jobs to make it work.

Sounds like a pretty good property from the sounds of it, if I knew you better I'd definitely go in on it.

Congrats Aliz on the LA property that is cashflowing and doing well! Doing real estate investments isn't for everybody and unless your husband can change his mindset, I don't think he's going to enjoy the process. There are plenty of other ways to make money out there.

Since you're kind of stuck with the guy lol I'd suggest to try to explain to him that the past doesn't matter. What does is the now and what will happen next. If he knew that he would make a million dollars on the property in the next 5 years would he do it? Of course! If it's a good deal now, it'll make sense to move on it. It almost sounds like he is making up excuses because he is scared of making an investment. You can never be perfect, but you can be extremely successful by taking risks.

@Aliz Rao so if the person had inherited a $10 million building but only wanted $500K for it, would you husband say "Nah the seller is making too much, he got it for free"

A very important concept in investing. It doesn't matter what the other guy makes. You buy based on what you project you will make.  If you don't understand or accept that concept get out of the business.

@Account Closed you are making an awfully harsh judgment when you know almost nothing about the specifics. You could have phrased that comment in a positive way. You haven't added any value here.

@Aliz Rao - tough situation, I think your husband should try to understand that earnings go to the investor willing to do things that others wont.  In the situation with the current seller, I’m sure it didn’t look like a slam dunk at first, he had to put a lot of rehab for it to be the cash flowing property you folks see today.  If your husband wants the really cheap prices, you should be looking in foreclosures and massively distressed properties that have high risk, high reward instead of already fixed up properties.  Maybe you need to have that discussion with him first and see if you should change your search parameter to pursue these types of properties instead.  

If you think this is too risky, I agree with the others that you should first have a discussion with your husband that you’re going to look for other business partners that are on the same page as you.  Once you find a new partner, you’ll be able to make things happen quicker.  But of course, you always want the support of your life partner in any investment or things will fall apart at home.

On another note - there’s nothing wrong with hitting several base hits instead of a homerun.  The base hits help you learn the business and how to identify a homerun when you see it.  Good luck!

Originally posted by @DL Martin :

I am going to take a wild guess and assume that this 11 unit is in the Westwood, Price Hill or Avondale neighborhood.  

DL

The property is in Silverton, so a better area than those. Hmm good point about the cashflow being gone for x years if I were to rehab the last 1 or 2 units. But then you'd get a gain in equity, so it balances out, right? And just think, if you put in $10k and can get $100/mo more after that, that's a 12% return on your investment, and your cashflow will be greater going forward. @Michael Gansberg , your calculations are correct that rents are on average $450/unit, but these are studios. So the rents are on the low end due to the size, not the tenant quality. On the other hand, these being studios would probably mean a higher turnover, so that's one concern and I am making sure to account for turnover costs in my calculations. I don't know how I might battle-test the PM (other than references and online research); if you have any advice, I would love to know! And yes, those last 2 are long-term tenants who opted out of having their home rehabbed, since they would rather stay.

Thanks again all for the helpful discussion!

@Anna Buffkin , it's great that you guys play to your strengths and make it work! We also have different personalities and strengths, and it took us a while to realize how to work well together. For example, I love running numbers and analyzing spreadsheets and databases, and I get the nitty-gritty stuff done. My husband loves face-to-face contact and has really good memory, and can tell me which neighborhoods are good from conversations he's had with PMs a year ago, but likes planning rather than executing.

@Jonathan Hulen , @Chivas Miho , those are great ways to explain how it doesn't matter what the previous guy paid. Thanks!

Hi Aliz,

The current property you own is in your own state. The property you are considering is clear across the country and a smaller number of units at that. That does not make is hardly passive or scale able. 450 a unit is usually very low income type renters where YOU the owner have to work for yield.

So it's not just about you thinking you have a 10 to 12% return it is HOW HARD you will be working to create that yield out of the asset for an investment. I personally would rather take a 10% or even 9% cash on cash return that is easier and almost headache free than a hard 12% I have to think about everyday something going wrong and stressing me out.

If this property just had low rents but market was much higher that could be different says rents were 450 but market was 650 to 700 and owner owned for 25 years and never hardly raised rents OR this property was sitting in PRIME land for redevelopment. In these ways you could likely create equity upside versus the existing current return. The fact this is a rehab from 2 years ago you would need to quantify rehab. Are these units stud up or did the seller just put in carpet and paint with maybe some new lighting? I care very little about those small items. I look at the roof, a/c and heating, water heaters, windows, existing appliances,plumbing, electrical,etc. Basically it can be the difference between someone selling a car and saying like new when all they did was a cheap paint job and put gloss on the tires versus replacing all the hoses, flushing the system, new transmission and engine. What can take down your cash flow for years to decades is a constant money pit for big ticket replacement items  and repairs.

With multifamily units you need to look at what I call the (loyalty factor) which is ( How long have they been there and what is there payment history?) Even in a newly rehabbed place of owning 2 years and say it was stabilized for 18 months then how many of those tenants have been staying and paying on time? If the units are constantly turning over for most of the units then that can be very high ongoing expense costs for make ready with the units with little to no cash flow. There is also the REAL rent number. Seller might says 450 a unit but you find out first months rent was half off or free to get them in there. So in that case 450 X 11 = 4,950 annually / 12 = 412.50 real rent if they are paying in full and on time. I am typically not a fan of all studio mix 1 units apartments UNLESS it is close right to a college for student rentals or elderly people stay there. With college kids you tend to want to rent to those in 3rd year and up as most have already gotten out their partying ways and are focused on getting their degrees. 1st and 2nd year tend to be forced by parents to go to try and figure out their life and want they want to major in ( not all but many ). With older retired folks most tend to stay in a unit until they pass away or can no longer take care of themselves and have to move to memory care type places or assisted living.

If it is a standard renter those tend to move out as when they have a significant other show up in their lives or start families there is not room in a studio to make it work long term versus a 2 bed you can set up bunk beds in one room for up to 2 kids etc. and they can stay longer. I like unit mix to be 70% or higher 2 bed mix and very few 1 beds in a regular situation.

Next look at what I call your (regeneration of capital). Do you and your husband make 200k total income annually from jobs or businesses,500k, 1 million? CA tax bracket is very high compared to other states for what you net. This 100k down is it say 10% of your total net worth and you make 500k a year so worst case you stub your toe on this investment and take a minimal to moderate loss on this to resale after purchase?

Big difference between that and someone took 10 years to save the 100k and regeneration of excess capital is 2k a month so would take over 4 years to get back to the same place again.I have some clients that occasionally take on higher risk stuff. That is typically only maybe 5% of their overall holdings and they make tons of money so if it doesn't work out they  can be made whole from their income and cash flow with other properties in a matter of months. You need to figure out how bad it would hurt your overall position if the out of state venture failed relative to your net worth and liquidity as a couple and how fast it would take to bounce back from it in time.

I see people sucked in all the time by the looks of a higher cap rate but just do not have the experience yet to see through what the real numbers will be and how the asset will perform. A 9 unit is night and day different than a duplex.

Why not just stay closer to home and buy less units? You can go up to a 4 unit and get long term debt versus the 9 unit you will be into a small balance commercial loan with a short time window for interest rate.

If your husband wants small balance value add stuff that you both own 100% with no partners then it seems like staying in state where you can watch over things to create the value makes sense. If you have to constantly fly across the country to deal with property management and tenants issues the costs can be in the thousands or more annually. My clients buy commercial real estate nationally. The CA ones typically are selling off apartment buildings for 4 caps where they live. The buyer is usually overseas where they are trying to park money in the U.S. and where they live are seeing 0% to negative returns. Even if return is the same for them  getting the money into the U.S. they see it as a better opportunity and it might also help them fast track if they ever want to become a citizen and move here. Getting 1% rent to sale ratio on low end rentals is very poor if there is no other upside. Typically investors seek 2% which is very hard to find in today's markets. I see lots of over priced inferior assets these days. If it is just a straight return with not much upside except for normal annual rent increases to hopefully keep up with inflation then could be a bad deal. You have across the county, low rents per door, not enough units for passive with scale (need 80 units typically or more), barely covers 1% rent to purchase price if sellers numbers are completely accurate, and has no additional big upside to blend the cap rate up. Additionally you would be taking on large amount of debt that could hinder your future ability to purchase other properties when a better deal comes along. We call this (portfolio averaging). I have seen investors do really well on one property and then buy a dog or marginal property thereafter. The good property is constantly feeding the marginal or dog of a property the owner cannot get rid of so instead of doing very well they are treading water.

I would rather buy 3 really great properties a year then buy 6 to do volume and then those take away from the other 3 and create a lot of stress and headache. Now the marginal ones if you just resale those or assign and make a small fee and keep the better ones long term then you are letting others take the risk on properties with more limited upside. 

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