All Forum Posts by: Adam Johnson

Life Lesson - anything that sounds too good to be true - is

Excellent suggestions!

I will offer an extra warning to you - if you find you get "attached" to a property, be EXTRA careful before you proceed. I once became very attached to a historic property that desperately needed love. I gave it the love it needed, was very proud of what I did, and it nearly put me out of business. It was a horrible investment in hindsight, I lost a ton of money and I am a little embarrassed that I was involved with the whole thing.

It is tough to do, but try to always love the numbers not the property. If you fall in love with the property before the numbers, step back and look really close at what you are getting into!

I am not a patient person, so I am not one to preach, but be patient, the right deal will come along.

This is an interesting conversation, so I am going to comment and watch it to see what happens. There are already a number of good perspectives here.

First, if you have only a few units under management (or none), just the management is a huge leap. It can be done, but realize that managing 89 units is a full-time job for 1 or 2 people, not including maintenance. This is big enough that you will likely struggle and possibly fail if you are thinking this will be a part-time gig.

Second, I have tried to get into some very large deals before. In hindsight, any one of them would have sunk me if I had been able to pull them off. I simply didn't have the resources to manage them properly. I ALWAYS dream big. Thankfully, the little birdie on my shoulder (I married her!) is my voice of reason and helps keep me in check. This would be a sizable deal for somebody that already had 89 units under management, so if you are smaller than that, be very cautious.

With that said, I will offer another perspective - have you talked to the owner about a manage-to-own situation? There are all kinds of ways to structure it. To sketch out a rough outline, you would work alongside the current owner to ramp up your capability to manage the properties, help relieve some of the strain that he/she is experiencing keeping up with all of the properties, then over time you would begin taking over ownership of the properties. Maybe a few at a time, maybe after some milestone, etc.

With this many units, the owner is likely looking at a substantial capital gain, so there may be benefits for him to consider this idea, as you would slowly take over instead of all in 1 tax year.

Be extra diligent in knowing what you are buying. I had a chance to buy out a 50-unit portfolio at one time, mostly singles, with a few 2-4 families mixed in. At first glance, the portfolio was priced fair (not great). I spent 2 days going through all of the properties and pulling comps so that I knew what they were worth if I had to sell them off a year or 2 after I closed. When I switched from the income approach for the whole portfolio to the comparable sales approach (since these were all 1-4 family, that is how they would sell), the value dropped by almost 50% and I determined that had I moved forward, I would be taking on a TON of headaches that the owner was desperate to get away from. He had refinanced his portfolio on the income approach and was now trapped in a business he hated. I gave him a sympathetic handshake before walking away.

This could be really good or really bad. Keep your eyes and ears open!

A couple thoughts for you -

1) does your plumber think that the roots can be treated for chemically on a regular basis (once or twice a year) to control them? There are several products out there, but I don't have any personal experience to be able to recommend one.

2)If you DO end up excavating, have them install a 2-way cleanout, which is essentially a cleanout that angles toward the street and a separate cleanout right next to it facing back toward the house. That will allow them to run a snake either direction from outside the house. They should be installed so that they face each other (the wyes laying laterally) so that they don't leave a short length between that you can't snake. The excavation cost won't be any more money and the material/labor cost to install a 2nd cleanout facing the opposite direction should be minimal. I have installed this in commercial locations that have all of the plumbing below the concrete slab inside the building.

3) I'm not familiar with CIPP, but would definitely research that as well!

Some of my best deals are the ones that never happened! Matt Devincenzo made a great point, always work the math backwards from the ARV. To further the comment by James Vermillion, working with a wide range for ARV is dangerous, it is too tempting to look at the upper part of the range and talk yourself into a bad deal.

I can't tell you how many times I have disappointed myself when starting with what I initially thought was a good deal, only to find that after running the numbers it didn't work. One that I will never forget I literally broke into a sweat out of frustration because I couldn't make a deal that I really wanted work out on paper and meet my goals. I still wrote the lowball offer and I still got beat by another buyer that overpaid for the property, in my opinion.

Numbers don't lie! Good luck on the next one.

Nicole Pettis - here is a challenge for you that will be much easier said than done, but will help prepare you for great success in the future.

For your first deal (the one where you will live), set a budget before you start it. Stick to it. Because you will be living there, this will be even harder to do. That is where the challenge comes in. You will be tempted to spend a little more on finishes because it will be your house, but go for "adequate" instead of "perfect". It sounds like you are either starting out or starting out again, so my assumption is that your first property is not one you plan on living in forever. Keep that in mind to avoid overspending.

This challenge will need to be tackled on every deal after that. If you can do it on the first one, you will be way ahead of me! I blew the budget on the first one, hit it on the second one, REALLY blew it on the third one. Don't get cocky, this is a challenge on every single deal you do but a key success factor.

I will second the comments made by Ned Carey, if you are questioning whether things will work out on a deal, don't do it. From experience, I ALWAYS, ALWAYS, ALWAYS have multiple exit plans. If I buy to flip, it had better make sense as a rental too in case it doesn't sell. If I buy it to hold, then it better work if I had to all of a sudden sell tomorrow too. Did I say that I ALWAYS do that? This advice comes from a guy that ended up trapped upside down in a horrible investment (see my comment above about the 3rd property that I REALLY blew the budget on).

Good luck! Final tidbit - don't force deals through just to meet a goal of how many deals to do. Goals are good to have indeed, but don't be blinded by them. I have been frustrated at times when I can't find a deal that fits for quite a while, patience is not one of my strengths. But by waiting I have found and been ready to act on some very attractive deals.

My answer won't address everything to consider, but should give you a few things to consider. First let me say that I think this is a terrific way to start out in real estate investing (in concept, maybe/maybe not this particular property). I wish that I had started buying real estate this way. You already will be in need of a place to live, so why not buy it and rent remaining space out to others to reduce or eliminate your living cost. At the same time, you are accumulating wealth by paying down the mortgage using OPM (other people's money) by using the rent collected to pay the lender.

As an investor with a few deals under my belt, I would be looking at a property with a $ 17,000 asking price and a supposed $ 160,000 value with eyes VERY wide open! I am even more cautious when you say it is on the market over 100 days. That should mean, in theory, that some people "in the know" have already passed this property up for a reason.

If you are just starting out, I would run through the motions of analyzing the deal, but honestly I wouldn't plan on buying this particular property. If you are going to be in class soon, you are not going to have the time this type of property may require to revive. It is most likely uninhabitable in it's current condition, so you will also be paying for another place until this one is put back together again.

Here are a few things to figure out. I will put them in a punchlist (and it won't include everything) below. Post some of the answers and maybe some of the other members will back me up and help you analyze whether the deal makes sense.

1. Purchase price we know, add in some more for closing costs
2. Accurate after repair value (ARV)
3. Source of ARV and/or how you calculated it
4. How many units
5. What you can expect to rent the units for based on market in that NEIGHBORHOOD, not by city
6. Are there taxes owed still and will they be caught up at closing or your problem after closing
7. What will it cost to fix it (this one will take a while to do accurately based on the numbers you have already given)
8. How long will it take to fix
9. For items 7 and 8, it will take twice as long and cost twice as much, especially on your first project

Coming up with these answers may create more questions, but it is a good starting point and you should do this for every deal you consider. Don't let this discourage you! Real estate investing is worth it, but an investor bases decisions on numbers first and foremost.

In my opinion, pro formas are best used as toilet paper. I only use my own market rate rent estimates, the seller's tax return, or other verifiable numbers. If you need to estimate anything, use your own numbers. More often than not, several expenses are conveniently left off the pro forma (management, office and administrative, maintenance reserves, etc.), so it is effectively useless.

I made an offer on a self-storage property once. Asking price based on the pro-forma was 650,000. I used the expenses they did include, added in the ones they didn't, then used the rent roll to determine actual rents vs. what the pro-forma stated. Real rents were about 25% below the pro-forma. My offer was 325,000 using the same cap rate that they used.

My offer didn't get accepted, but I also didn't overpay for the property.

I always buy used, with a twist. There is a local appliance wholesaler that sells new and used. He guarantees them for 30 days and often offers trade in value for old appliances working or not. I feel less guilty about scrapping a disgusting oven that will take 4 hours to clean when I didn't pay $ 500 for it. He has varying price levels - older pea green and harvest gold go for about 100, nicer looking white or more modern looking ones maybe 250. Some of them were 750 to 1000 units when new. Nicer long term tenant gets a nicer/newer one, pig pen gets the ugly green one.

I haven't tried Craigslist yet, I am spoiled already and have only once needed the warranty. The rest have worked very well for quite a while.