How one 475K condo turned into $2.75M in Assets in 15 yrs
Real Estate Broker · Gibsonia, PA · Member since 2013 · 828 posts · 260 votes
Hi BP
I had a post which I initially intended to describe now I did a 1031 Exchange to trade my first home (condo) into a $1M 3 story commercial flexspace (currently 6 units)
as I began to write this, it should have been the platform for it and it's actual title!
I don't think this is True Success Story, because my journey for the commercial just started. I am not sure if it's a "succese" yet!
I just want to THANK BP and it's community for helping me through these past few short years I have been on it. Since my joining BP my real estate has exploded ;p
This is a copy paste of the last post Enjoy
BACKGROUND
My story involves a little luck and intuition ;)
it begins with my mother ;)
I grew up in a very entrepreneurial family. our dinner conversation is always very interesting. my grandfather built and owned factories from scratch. My mom's generation was expected to join the family business. This was back in Asia.
My generation in turn also is expected to join and continue. But there is an old saying that most family business can't last more than 3 generation. Its part due to the economic and global change.
At my grandfather's last moments in life, he said something to me that resonates even today.
"I realize at 80 yrs of age, the best investment is when MONEY MAKES MONEY!"
He said that he owned factories, it means he buys machines, manage worker, deals with supplier, and global politics! But also worry if there will be a fire, a strike, utility price increases, and how to feed the workers.
He said the best investment was when my mother started investing in FX (forex). no strike, or fire. its risky but if you do it right very profitable.
-----------
My mom is an amazing lady. She took over the business, and ran it well. When she started investing the revenues in FX or real estate, she and my dad decided to invest 10% of their capital into what she does for the family. From there she grow very profitable. She loves real estate, so naturally she bought as many grade A single family homes she can, while my grandfather bought land!
my mom wears too many hats and self manage so she believes in low maintenance landlording. Good School, Good tenants, Low turnover. Appreciation play. They bought in different countries, currency plays too.
------------------
this story doesn't have a happy ending....
I saw the FX market take a toll on my mom. she eventually took her own life.
I saw my moms generation fall apart after my mom past, she was the pillar and bread earner.
I also saw how Real estate saved our family. my mom's rentals practically paid for 3 children formal education and send us to the US for college. Having some money in fixed asset that is also your roof is a good thing when family feud flares.
My grandparents real estate as they sold it off has been saving the family. even this week today.
LESSON: BUY Right!!! Seek opportunities!!
MY FIRST HOME
In 2001, and this goes for any place my mom goes. I remember we vacationed in Melbourne and my mom bought 2 apartment units in a very newly developed area, called dockland today, She was one of the first investors, and my sister recently sold it for not only appreciation but currency gain!
Anyways, in 2001, I married my husband. My mom came to the US with us to see me off. Her mission is to buy us our first home in Boston MA. My husband got into Harvard Medical for residency.
Mind you, my mother NEVER set foot in the US (except for my graduation and occasional business trips in other parts). We have NEVER been to BOSTON.
We got off the airport, and drove towards LONGWOOD MEDICAL area. As we drove down Brookline Ave my mother stopped and pointed at an apt complex, and said "THERE, I want to buy THERE!"
I, being age 24 then, rolled my eyes and said, "MOM you can't just point at a building and say you want to buy there! You don't even know if it's on the market!!!"
This is BEFORE INTERNET SEARCH.
We met our broker, my friend today ;p She took us around, We only had 1 wk to find a house before my mom left.
We had an amazing broker that listened to our needs. As she took us around Brookline area on our first day, my mom just wouldn't let go of that apt complex. At the time there was nothing on the market.
LUCK would have it, my broker knew one that came up in the market THAT night. We were there the next day and made an offer, CASH, CLOSE tomorrow or ASAP! SERIOUSLY!
I don't know how my mom did it, but she bought the cheapest per sqft in that complex I think until today! When we went, there was dog poop, and it needed work! So right away we "fixed" it up!
My mom put 50% down and we borrowed the 50%. (my mom wanted my husband to have skin in the game). It was also a great move bc it built up this credit. My husband is from the working class, his motivation is to work work work and provide.
When my mom passed, only 2 yrs later, I had to make a decision. My dad helped me pay off the rest of the 50% and I started my RE investing "career"
LESSON: Buy Right, Go with "my" GUT FEEL
MY BEGINNING
As you know, the FX took a toll on my mom, she went into depression. After college, instead of coming home to work for the family, I took 2 yrs off to help nurse my mom. Meanwhile, help with the books, learn FX. But eventually she decided I should just get my real estate license. At 21, I didn't take it seriously back in Indonesia. But I did sell a house before moving back to the states for marry in my short 6 months with license.
This was realtor with NO MLS! 4 signs from different agency on the yard. Net sales. all things illegal in the US!
Anyways, I digress
Right before my mom past, she said " READ RICH DAD POOR DAD, BUT ignore the financing part! I don't want you to have anything to do with the leveraging part. It's reckless! But the book has some really good point!"
So I read the book and ignored the leverage, I was a finance major, so some of it, I was like WHAT that is crazy!!! (but that is b.c my family value isn't in line with the teachings on leverage)
What I realized, is my family was the RICH DAD, these are all the philosophy I grew up with. While my mom reads it as refreshing, I read it and everything my family taught me aligned, or just clicked!
As you all know 2003-4 is the crazy market flipping craze. So when my mom past, I tried my hand in my first flip. I borrowed all the money from my dad!
Called the same broker! I wrote about this on my first few post in BP.
the short version is I learnt all my mistakes, all 100K worth, became an accidental landlord, assigned a parking to the condo in boston. and sold it in 2 yrs for 100K more than I bought it. BUT I only came out $1000 a head, thanks to the rental year! and Paid my dad back in FULL
LESSON: I can do it, and it didn't scare me!!!!!
First Home to $1M commercial, and 7 other along the way
------------------------
you may wonder why I had to put in the backgrounds stories. Its because its fundamental to the motivation and thought process behind my investing.
I would have never dreamed of my position today. I had always had a road map of where I wanted to be, it never written or voiced. I just knew I want to have cash flow when I retired and hopefully provide a nest egg to my kids like my mom did for me.
------------------
when we bought our first home, it was a condo. it was home. it wasn't an asset. being young I thought it would be my forever home. before my mom past, I thought I'd be a housewife forever, and do my forex on the side forever.
I was good at forex, but it wasn't my "thing". I had to work on it. and I'm analytical. I trade on charts and graphs. my husband is news based. he reads up on current event. when I found myself at historical highs and lows... I was at a lost! my strategy no longer works. also I got tried of having ZERO CONTROL over my investment.
When I did my first flip, I liked that I was not stuck behind a computer, I got to meet ppl and problem solve! With my sweat equity, and value add I can turn a product that I believed in selling. it was very gratifying, not the emotionless world of trading.
-----------
so... residency ended for my husband, we were pay check to pay check for 5 yrs, trying to maintain our condo. we were a slave to this condo ($475k, 2 bed 2 bath, 2 car garage, awesome location)
my husband owed the NAVY. we got orders to go to Camp Lejuene NC.
this was 2005-6. market was still high. we out our house on the market for 700k. got offer for 650k, and my husband refused.
we go stuck with it and ended up renting $3000/month. maintenance was $1200 at the time! we owned it free and clear so its OK.
Navy doc salary was good. we rented in NC. we quickly saved enough for a downpayment from rental income and salary to buy our now construction live in flip....
(To be continued)
LESSON: SET A COURSE, RESEARCH So you can Strike when you need too
Continue..
-----------
The Boston Condo had a HUGE 30 yrs assessment in 2007-8, our condo prices plummeted. Along side the weak market. Fortunately, our rent covered ALL of the assessment but we made $0.00 in cash flow. We were LUCKY, it was PAYING FOR ITSELF.
Also luckily, while we are in NC, and when the market was still "strong" we had the FORESIGHT to take a HELOC ( home equity line of credit) on our Boston Condo.
I am super conservative, beyond reason, so we only took 200K out of the $600K equity. We only opened it for EMERGENCY, take advantage of the situation. We NEVER took any Equity out til later.
Our Boston condo has 0% vacancy bc my mom BOUGHT RIGHT!
Why did she want that particular apt complex?
BECAUSE she know within the 5 mins she in town for the first time, that IT WAS WALKING DISTANCE to the HOSPITALS, Public Transport, it had PARKING, and it will RENT to MEDICAL PROFESSIONAL!
my tenants were long term 3 yrs and 7 yrs. There was an in-house maintenance dept, so long distance landlording was easy from NC. By this time we were renting $3,300/mo. Maintenance was $1,500 after the assessment period was over. that's about $18K annually bc we owned it free and clear! But I was again LUCKY that my tenant is a medical professional and he paid in full at the beginning of each lease period. ($39K)
This gave us the liquidity to invest in other things!
This condo has given me:
1. CASH FLOW and Investment Capital
2. HELOC
---------------
My husband job slowly progressed, and as a physician our disposable income increased.
This Boston condo bought us
1. 20% down-payment on our Live in Flip (2006)
2. 20% down-payment on our very 1st commercial unit, (NNN lease) (2007)
3. 20% down-payment on my current primary home in pittsburgh (2010)
4. Proceed from sale of our live in flip helped paid off a portion of current home (2010)
5. Proceed from sale of 1st commercial got us FREE and CLEAR a 2nd commercial in Pittsburgh (2012)
(DISCLAIMER: I found BP and my investing exploded, bc I got my license too)
6. The HELOC financed the RENOVATION of my inlaw's first flip in Pittsburgh (2013)
7. Proceed from sale of inlaw's first flip bought them a 5 mix used bldg, I get to manage (2013)
(We increased the HELOC somewhere down the line to $300K)
8. Bought with HELOC a duplex to fix and flip ORIGNALLY.
(each of these deals, I think have it's own forum post in BP)
LESSON: BUY RIGHT, KEEP LOOKING FOR THE NEXT "DEAL", SET YOURSELF UP FOR SUCCESS
1031 exchange and $1M bldg
I think some of my mom's intuition has rubbed of on me.
when we moved to NC, I immediately spotted the area I will definitely buy in. At that time we were poor, we were pay check to pay check for 5 yrs in Boston. I would day dream which properties I would buy and run the numbers in my head.
The first commercial happens to be on that street I had my eye on. We happened to have capital and bought it when it hit the market.
when we moved to Pittsburgh area, my second commercial was the same way. I said if anything pops up at my price range I'm in.
so this bldg was the same. I have my eye on it for the past 5 yrs. its in my 50 yrs plan ;) HA!
I told my husband if any of these building goes up for sale, I want it ;) we just laugh it off.
----------
this year, I found out that all the bldg belong to one 80 yr old seller. all the bldg went up for sale all at once!
I was very disappointed bc there is no way we can afford it. I pray it will sit on the market. months rolled by.
---------
my Boston condo lease is up. my tenant had expressed that they didn't want to renew their lease.
My broker from Boston called and said, you know how in 2009 we couldn't even sell for 450k????
it's Worth at least $900 maybe $1M if we fixed it!!!
I had intended to keep this forever even if it was only 3% CAP. it had sentimental value to me.
I told my tenant I may sell, is it OK to show during their tenancy. That's when we realized they were in the market to buy!!!
By LUCK, we struck a deal at $850k. I didn't want to fly to Boston to renovate. they lived in the unit for 7yrs. buying as is Cash!!
from BP we toyed with the 1031 exchange bc we no longer can qualify for the tax exemption of $500k as married couple.
at $850k our HELOC would be paid in full, my duplex will be free and clear.
We quickly abandoned the flip idea and within wks put in tenants in the duplex (12% cap free clear)
bought 230k, renov 70k, rent $3350/mo
that is more than the Boston rental!
--------
as for the 1031, it was easy to identify the next bldg, because I been eyeing it for 5 yrs.
the rest is due diligence and negotiating.
but the long and short is:
we thought we only had to spend the $530k proceed. No, we were wrong! we had to spend the total sales price $850k to qualify for the 1031exchange.
we debated over buying multiple homes or multi units or buying this one.
we initially offered 700k for the bldg. but we ended up at $1M bc of the seller. and he sold a unit during our negotiations at $1.2M
its currently 50% occupied. it has been neglected, rents are below market.
it needs some TLC.
I hope to turn this around to about 10% with leverage.
our awesome mortgage broker found us a 15 yr fixed rate for the difference.
we just closed, this needs 100k in renovation.
this is definitely a long term buy hold strategy. I'm negotiating NNN leases. and the current tenants are wonderful. Hence why I chose this particular bldg among the rest.
from a $475k Boston apt, slave to the condo to maintain!
my current rental GOI:
2nd commercial $1650/mo
duplex $3350/mo
5 mix used $4000/mo
all free and clear. minus taxes and repairs
this bldg, we borrowed 50% at 4.175% fixed 15 yr loan
is 15000 sqft flex space. with 9 electrical meters. it currently set up at 6 units. conservatively I can rent at $12/sqft/yr
current GOI: $9000/mo (triple net)
CAM & tax: 1200/mo from tenants (aka they pay)
mortgage: 4000/mo
2% after leverage (bc we have to subsize the vacant side have
potential rent GOI is $13000-15000/mo
but to do that I need to bring it up to standards. hopefully make 10% with leverage. but we plan to pay of the loan asap
thank you for your time!!
LESSON: PATIENCE, You make MONEY WHEN YOU BUY
1031 Exchange Process
Hi BP,
Thanks for reading, I don't have the actual numbers yet on this bldg, I will post when I have the actual expenses:
---------------------
I also wanted to quickly share my 1031 exchange experience.
Like with anything, if you find competent people to work with you the process is very simple.
---------------------
EDUCATION
In the beginning, the education period 1031 seemed very daunting.
BP was the best source to get the answers bc there are actually people here that have DONE IT.
In the real world, my accountant told me to talk to my lawyer! My lawyer told me to talk to the accountant.
Both Accountants and Lawyers really only know their "portion" of the transaction.
We needed up finding a good QI, Qualified Intermediary. Basically a THIRD PARTY that does 1031 exchange exclusively.
We were approached by some very knowledgeable QI on BP.
HOWEVER, We decided to go locally and one our lawyer uses because we were exchanging between two states MA to PA. I quickly found the QI in MA don't know about the quirks of PA real estate local laws. I have been through that rodeo, never again.
----------------
DECISIONS
1031 exchange is the exchanges of like asset for another like asset to defer the capital tax.
DISCLAIMER: I only know my issues and dilemmas
That basically means any INVESTMENT properties not primary home for us!
1. Military Deferment, $500K Capital gain Tax exemption for married couple
First, we had to figure out if we QUALIFIED For the TAX exemption! You have to live 2 within the last 5 year.
We bought our Boston Condo in 2001. Lived in it for 5 years 2006.
We tried to sell it a few time as noted in the background because we wanted to take advantage of the tax exemption.
We have Tenant 2006-8, AT THIS POINT we still Qualified 2 of 5 yrs, but the market was really SOFT and we couldn't even sell at 475K
2007, my HUSBAND was DEPLOYED to Iraq for 9 months. And we were told by various sources now that our time line is 2 of 10 years. military exemptions (which was in ERROR)
This is what we read, but miss understood.
"If you rented the home to others because you were on "qualified extended duty" with the military you can "suspend" that period of time in the capital gains calculation for "the last five years" timeframe. But, a suspension period can't be more than 10 years." www.military.com
So we ended up Renting again until 2015. Every year we fuss about the military exemption, because we can't get a straight answer. Mostly because we no longer live in a military town and we started to think of holding this FOREVER.
I don't remember the exact detail, but the wording on the exact rule, wasn't the 10 yrs we thought, it was no more than 10 yrs, and the amount of time was ACTIVE DEPLOYED TIME. Which for us was only 9 months in Iraq.
SO we quickly moved on from this TAX EXEMPTION IDEA
2. Replacement Property must be OWNED in the same STRUCTURE as Relinquished Property for Tax Purposes
We owned our Boston Condo under a TRUST. My mother had set that up during the purchase, all four of us, my parents and us, were the beneficiaries. When my mom past we eventually amended the trust beneficiary to just us at 50-50!
So this turned out to be a BIG problem, I didn't want to own an investment property with our personal names for liabilities issues. My husband is a physician.
Since the TRUST is a pass through tax to both of us individually, our QI, accountant and Lawyer came up with buying under 2 SINGLE MEMBER LLCs. For tax purposes it pass through the exact same way.
I think we could have changed the structure, but it required more time and more money (options that weren't our solution, I didn't pursue in detail. please consult your own legal advise)
3. What was our Replacement Value?
The next issue was WHAT was the amount we had to exchange?
Boston Condo:
Purchase Price: $475K
HELOC balance: $300K
Sales Price: $850K
as mentioned, my accountant thought it was the Proceeds so we started looking at $530K homes
850K-300K= $530K
We quickly realized we had to spend ALL of the $850K or more.
Pittsburgh market is about $200K on my avg purchases.
I didn't feel like buying 4 single family, or 4 multi unit at ONE time.
We toyed with the idea of purchasing in NJ, for a retirement home, and rental for now.
but had trouble accepting with the ROI rate. Especially since we only have $530K CASH, we need to TAKE OUT A LOAN for the DIFFERENCE
ONLY IN AMERICA, you have to SPEND money to SAVE money! I always say....
So after much thought, I decided on this commercial unit, that is 5 min from my house.
I had properties in 3 STATES, and I am DONE with the LONG DISTANCE LAND-LORDING!
---------------------------------------------
BOOT
We learnt about boot, basically, you can not receive any money, or cash equivalent back from a 1031 exchange. Any cash back or saving is considered a BOOT, and you have to pay capital gain tax on it.
They are:
Mortgage Boot: you new mortgage is less than old mortgage
Cash Boot: any cash equivalent you receive at closing
Personal Property Boot: if you receive appliances during sales (???)
WE could have bought a house for $530K but we would have to pay $300K as CASH Boot
WE could have bought multiple home, ask your legal advice on that detail, for timing and process.
--------------------------------------------
PROCESS
Our process was quite simple. I know BEFORE we closed on my boston condo what my replacement property was.
BUT I don't know if our offer will be accepted. So we had a list of OTHER possibilities.
We complied with the rules, so I don't know the exact times of things
1. We Chose our QI in PA
2. We CLOSED on the Boston Condo. All Proceed went STRAIGHT to QI, and sits in an escrow account. We had to sign 1031 exchange documents at closing.
3. We IDENTIFIED which PROPERTIES we were looking to replace it with. It was a FORMAL FORM, we had 45 days to FIND properties if you don't have one! They don't hold you to it. If the deal falls through, you just go to need one and update the list is my understanding
4. Meanwhile, NEGOTATE and get under AGREEMENT with the Replacement Property, QI needs to be informed with everything going on with the 1031
5. Find LENDER, they need to be informed of the 1031 exchange!
6. Create a 2nd LLC for my husband, he didn't have a single member LLC.
7. CLOSE on the Replacement (commercial). Prior to Closing we had to release the fund from QI to the closing company. The process is like any other closing except Seller has to sign off on the 1031 exchange.
--------------------------------------------------------
All in all the most difficult part was the data collection to carve us the right PATH.
once we had direction and good people, it was just pulling the trigger and going full speed ahead.
Due diligence, knowledgeable contacts makes life easier.
The most difficult part of this journey was I had UNREASONABLE BUYER and SELLER ;p
Everything else was smooth ;p
LESSON: SURROUND yourself with EXPERTS and GOOD RELIABLE KNOWLEDGEABLE ppl
MY NUMBERS
----------------------------
I INVEST in what makes sense, I find most of my investments in Pittsburgh are commercial/multi units, it's slower to fill if it's not residential.
I wait til I find something that makes sense, i don't try to make it fit.
Also I am cash buyer and self manage, so my cost can be lower. Sometimes my RE license gives me an advantage via cost savings that my client can't take advantage off.
Not including the units we already sold prior to moving to Pittsburgh
This is how we turned 475K condo with a HELOC into about $2.75M in assets
-------------------------------------
Here is my current approximated numbers:
1. Commercial Buy Hold: ,this is an appreciation play, long term hold, inherited tenants. Rents could be higher, but I wanted to be on Route/highway. other building sold 500K to $800K now. I am probably closer to the 500K comp. We sold the NC Commercial to purchase this unit cash.
PURCHASED: 168K,
TERM: CASH
RENOV: under 20K, french drain, new parking lot
Rent : 1,650/mo or 19,800/yr GOI
Tax: 4000
Ins: 1000
NOI: 14,800 or 8% ROI (14,800/180K)
Market value at least 250K
2. Residential FLIP: 4bed/1 bath turned 4/2, THIS WAS MY BUY IN into the MARKET, I got my license when I SOLD. I bought with my agent. This was when I started BP and decided to make REI my full time. I found my contractor here too. This was my inlaw 168K and my 40K. This was an ESTATE, and before pittsburgh was on the MAP.
PURCHASED: 168K
TERM: CASH
RENOV: 40K, Added bath, totally updated,
SOLD: 242K (too cheap in 1 day)
PROFIT: 15K after closing cost 7% ROI (15K/208K)
3. Commerical 5 mixed used: my inlaws turned around and bought this building. 2 vacant commercial and 3 apt with 2 tenant. Needed 100K worth of Rehab. I am at 70K now. new roof to mechanics. I have 2 of 3 apt completely rehabbed (1 is still inherited tenant). I totally rehabbed the commercials, 1 restaurant within a year, and 1 martial arts school coming in next week (2nd yr)
studio, 1 bed, 2 bed and 2 commercial. this was a DESPERATE seller, they had it on market for 500K and dropped to 325KI offered under 200K and we ended up at $200K. I didn't approach them until I made offer.
PURCHASED: 200K
TERM: CASH
RENOV: 70K of 100K (New roof, windows, new 2 apt, new 2 commercial, new gas forced air furnace X 3)
RENT: 500+550+700= 1750/mo (700 can be 900-100 if I renovate and kick tenant out in future, old rents 400, rents in 1 day)
1500+1200= 2700 (commercial)
GOI: 4,450/mo or 53,400 annually ( I get late rents, because inherited tenant lost job, but we good now)
Tax : 7,000
Ins: 4,000
Utilities: paid by tenant
NOI: 42,400 or ROI 14%, 42,400/300K this is my inlaw's 200K from #2, and our 70K. I don't own this but manage for them.
but After this week, I shouldn't have anymore big expenses unless my 2 bed room apt leaves and I renov
Market Value: 450-500,000
4. Residental Duplex: 2 separate deeded townhouse, 4/2 and 3/1. Seller was own one, rent to family, was not investor. They wanted out.
PURCHASED: 230K
TERM: CASH/Line of Credit....paid OFF in full
RENOV: 60KI was going to flip it at total 450K, but I sold my boston condo, HELOC was paid in full so decided to rent:
RENT: 1650+1700= 3,350 or 40,200/yr GOI
Tax: 5000
Ins: 1000
NOI: 35,200 or ROI 12%, (35,200/300K)
Market Value: 450,000
5. 6+ Unit Commercial: This is a 3 stories, 15,000 sqft Flex Space, I just bought this last week. I will initially put about 80K. I don't plan to put in new tenants yet. currently functioning with 3 tenant
PURCHASED: $1.055M
TERM: 50% financing, 1031 exchange with 550K financing,
RENOV: needs 100K in Cap-X renov.
MORTAGE: $4,500/mo
Current rent: 5000+1000+2200= 8,200/mo GOI 98,200/yr
Triple net tenant will pay for CAM and TAX
Lost rent: 1500+1000+2000 = 4,500/mo or 54,000/yr
------
Current GOI: 8,200/mo or 98,200/yr Tenant pay their CAM and TAX
Vacant CAM+ TAX: 1,800/mo or 21,900/yr
Mortgage: 4,500/mo or 54,000/yr
Insurance: 4,000
Current NOI: 28,300 or ROI 3% (22,300/630K invested)
Potential GOI: 152,200/yr
CAM + TAX: Triple net by tenant
Mortage: 54,000/yr
Insurance: 4,000
Potential NOI: 94,200 or ROI 15% (94,200/630K)
Market Value: $1,055,000
So I look for VALUE ADD stuff
-----------
THANK YOU FOR YOUR TIME
I'm currently in Pittsburgh too. I have yet to get into real estate investing myself but I really appreciate the time you took to share this.
I know this is an old thread, but the story is timeless. I am also in Pittsburgh area and while I have yet to get my first deal, my goal is to get it this year, and reading your story, Jennifer, is inspiring. And so a belated thanks for posting.
@Jennifer Lee How about an update on your Realestate empire. It's been three years since your post.
Hi Jennifer. I'm impressed with the way you have make this happen: it's brilliant. Congratulations. Amàlia
@Bob B.
Thank you. I totally forgot I posted this ;)
I went on to buy a 12 unit commercial as a result of the 6 unit purchase 2 yrs ago ;). Its currently 60% occupied ;)