First deal in a while! Lessons learned and analysis

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So I will try to describe as briefly as I can my latest experience. Been in the market for an investment property the last 3 weeks or so. Started looking in the area I currently live in, as many people know in Hawaii and Southern Cali, it can be hard to find places that cash flow well.

After looking into leaseholds, short story= no. Then I moved over to a different part of the island hoping to find a better cash flowing property. The first potential deal fell here through, because a large number of the units in this building had enclosed their lanais, not officially to code, but this was approved by the association before any official rules were in place. Go figure. Now lawyers and 'gathering enough signatures' were involved= no.

I looked at a few 2bed/1bath places before noticing a new one (2bed/1bath/2parking) had just come on the market, and priced about $10-15k below market value. Oh boy. I knew a bidding war was going to brew, but I was interested. I offered the list price, ~$140,000, cash offer. I was told that the seller would NOT be reviewing any offers until after the first open house, set for a few days later. 

After the open house, I was told that there were 6 offers already, then 9. And that one of the offers was somewhere in between the recent comps for that area: high 140s to ~$165,000, but "closer to the higher one", but with financing, not cash. I also learned somewhere along the line, that the house was owned by a mom and son, and the mom recently passed. I was suggested by my agent to offer $153k.

THE INTERESTING PART: I was ready to offer the above, then just 2 mornings after the open house, my father who was communicating with a broker in my area, was told by the broker that there were 16 OFFERS, only 2 cash. One cash offer was at list, and the other was "slightly above list". At this point, my $151,000 all cash offer was already submitted. That begs the question, was my 151 'slightly above list'?! I felt like I was overpaying a bit because I knew the seller wanted all cash and a quick close. But I was told that if I asked for any sellers assist or any offer reduction, the would accept another cash offer that was "close to mine". I knew the value here so I accepted.

Your thoughts guys!! 

1. Do you think I handled the challenges well? I had to go through the above while working fulltime. 

2. More importantly, what could I have done better or smoother?

3. Side note, is it okay or ethical to correspond with another broker/agent in this case. Keep in mind, my father corresponded with him and forwarded me the email.

I truly appreciate everyone's feedback and tootelige (I know spelling is horrible). And wish me luck for a quick close :)

The DEAL ANALYSIS and numbers are to follow.

Congrats on jumping into the fray and getting started! A lot of people have analysis paralysis and don't get that far. Something I have learned the hard ware. Don't rehash it. You get better at EVERY deal you. I rehash our first deal. We did well but we could have done MUCH better.

I also work Full time, run 9 houses, a investment blog, a house hold, PLUS I have a life and a husband who doesn't help because he travels. I can tell you now, I do thing at 80%. My feeling is you can either attempt or not even try. If you don't try you FAIL. I think you did great for your first deal. You are a newbie, learn, evaluate the take aways but don't beat yourself up! 

The key is to start building you empire and to not give up! 

@Elizabeth Colegrove  Much appreciated :) What do you mean by, "I do thing at 80%", was that a typo?

Thanks for the encouragement! What did Michael Jordan say, you miss 100% of the shots you don't take..


Here is the quick deal analysis:

Purchase price: $151,000

Rental income: $19,200  (Conservative estimate of $1600/mo. rent, average in this neighborhood for the same sq. ft., this unit in a bit above average shape)

Total Operating Expenses: $7,302   (Total maintenance fees: $6,168, Property insurance: $320, Taxes: $564, Repairs + Misc: $250 {my total cost for repairs in my studio rental in the last 2.5 years were $0, but to be conservative}, Utilities: $0 {tenant pays})

NOI: $11,898

CFAT: $11,898

CAP rate: 7.9%

Can someone help me calculate CoC ROI and total ROI? Honestly, 3 different REI calculators all gave me different values for ROI!

Also, >1% rule achieved! Has anyone else exceeded this in the Hawaii, Southern CA, Boston, etc. markets?

@Andrey Y.  The 80% wasn't a Typo. What I meant is for me to be successful I do everything to an 80% completeness. So I won a house because I wrote the landlord a letter describing my family and telling them why they should pick us. On the other hand, the letter had typos because it was written in 10 min (all the time I had) and I was late to work (because I wasn't expecting this). On the other hand if I hadn't have tried I would not have gotten the house. 

The point is TRY! Even if it isn't a perfect situation. If you don't try you will not win!

Originally posted by @Andrey Yusupov:

Thanks for the encouragement! What did Michael Jordan say, you miss 100% of the shots you don't take..

Actually, it is Wayne Gretzky to whom that quote is attributed.

The deal looks plausible on the surface, though you should make an allocation for management (even if you will be self-managing initially). Also, it is doubtful your CFAT will be your NOI ... the Taxman will get a slice of any net-income, you should probably also set aside a capital reserve for forthcoming expenditures.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

I agree with Elizabeth. I have been doing this for a long time, and I find most people are just observers. There are few "Elizabeths". 

Each deal will hone your skills. 

I started with one house I bought by accident. It grew from there.

Set yourself a goal. 

I think a good goal would be to Be Elizabeth every day!

@Joseph Ball  I love that goal! How did you buy your first house by accident, would love to hear how that went down.

@Roy N. Sir, you mentioned Capital Expenditures. This is a condo, I can't think of any possible CapEx. Could someone elaborate on this.

Originally posted by @Andrey Yusupov:

@Roy N. Sir, you mentioned Capital Expenditures. This is a condo, I can't think of any possible CapEx. Could someone elaborate on this.

Appliances, flooring, fixtures, etc.  Obviously they won't be as significant as if you had your own roof and HVAC system ... your condo fees should cover those items.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

Originally posted by @Roy N. :
Originally posted by @Andrey Yusupov:

@Roy N. Sir, you mentioned Capital Expenditures. This is a condo, I can't think of any possible CapEx. Could someone elaborate on this.

Appliances, flooring, fixtures, etc.  Obviously they won't be as significant as if you had your own roof and HVAC system ... your condo fees should cover those items.

Assuming those won't need to be replaced/installed for rental purposes for at least 5-10 years, would you still include an anticipated budget as part of your calculations?

I guess the appliances can go at any time, but that wouldn't classify as a CapEx, if they are repaired/replaced to original condition, then we wouldn't be making actual "improvements" to the property.

My "Accidental House".

I was living in Southwest Gainesville, Florida. My family wanted to move to Northwest Gainesville. Both were nice areas. I told all of my friends I was looking for a nice house in NW Gainesville. I had a sale contract on my SW Gainesville house.

I found a nice house in NW Gainesville. Made deposit, and was waiting for closings (both houses).

My friend, Mark, called me. "Joe, I have found the perfect house for you. It is located in Southwest Gainesville and it is a very good buy". I told him I was already under contract in NW Gainesville and waiting for closings.

He told me he had sort of promised this guy I would come look, and would I please?

So, I went to look. By then, I knew values, although I had never bought an investment house in my life. I knew absolutely nothing about real estate investing.

So, I looked at this house. When he told me what he wanted, I "Accidentally" bought it. Rented it for two years, with $200/month positive cash flow. Refinanced it; bought two more. In 7 years, I built 1 million in equities. Never read a book; never attended a seminar.

After a few years, I ran into my friend, Mark. I told him what I was doing. He said, "Joe, you can probably do that, and probably do OK, but you really missed out. A few years ago, you could have made a lot of money. Today, you will probably just get by." 

I started all by accident. Please forgive me for doing it by myself. No one told me I couldn't.

Post script. When I moved from Gainesville to Orlando, 7 years later, my friend, Mark, told me I had certainly done well, but I just got in at the right time. You couldn't do that anymore. I'm sure he was right. After all, I knew nothing about real estate. It was all an accident.

Inspiring story  @Joseph Ball  . And you bring up an interesting point.

We moved to America in the early 90s, my parents bought their first house in NJ for $215,000. I think its worth close to $1MM today. Since then, still not learning a significant command of the English language, not reading a single RE book or attending a seminar, not understanding the math of it, they have purchases several more B&H properties in the tri-state and the Caribbean area, all through word of mouth from family/friends about what a good deal is. And they are doing quite well. Lucky? I don't know.

And to speak of including a budget for PM.. I don't know. I can tell you that my parents own a condo in Aruba, and have rented it for at least 7 years I believe, without a PM. Great cash flow and little problems. I bet @Elizabeth Colegrove  can speak to out of state/country investing without a PM. :)

@Andrey Y.  

Thanks for the shout out! We invest all over the country and self manage. I even travel overseas alot and have managed it than too. I actually signed two renewals during my last trip. So definitely possible to self manage and have a life. 

Let me know if I can help.

Originally posted by @Andrey Y. :

Assuming those won't need to be replaced/installed for rental purposes for at least 5-10 years, would you still include an anticipated budget as part of your calculations?

I guess the appliances can go at any time, but that wouldn't classify as a CapEx, if they are repaired/replaced to original condition, then we wouldn't be making actual "improvements" to the property.

Andrey:

You will be running a business.  Like a truck, lathe, computer system, your property is an asset used to produce revenue.  As with any tool/asset, components (fixtures, flooring, appliances) will wear and require renewal/replacement over time.   

The normal way to address these periodic capital expenditures is to create a reserve fund - incrementally built year over year - to be in a position to the cost of renewal/replacement, without having to scramble, divert, or borrow the funds needed. 

If your fridge failed and needed to be replaced or the dishwasher leaked and ruined the kitchen floor these are capital expenditures (not operating expenses).

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126