All Forum Posts by: Nick L.

You said your plan is to sell the place. So you don't necessarily need to come up with the money to own it. Here are a couple of options for when you are ready to move on.

1. Assign your lease or purchase option to the buyer.

2. Use short-term/bridge money to perform a back-to-back purchase from the current owner and sale to the new owner. 

Whatever you do, make 100% sure that it is allowed by your current contract. No doubt the current owner knows you can purchase for 50% of fair market value and would love to catch you breaking a clause so he can turf you out and sell it himself.

I'm curious to know how you would value this property. It's a well known and popular brewpub/restaurant/rec area with waterfront access to one of Milwaukee's rivers. It appeared to be very successful until it closed with almost no warning last month for unknown reasons. 

It's not a going concern and no financials are likely available, so you can't value it in relation to owner earnings or gross revenue. You could value it as real estate + assets but (a) it's really hard to find comps, and (b) even if you had them there is no way to directly extrapolate financials from the asset values.

Any thoughts?

For an even harder challenge, how would you value it in combination with this property, which is owned by the same seller and directly opposite the first one, but has a completely unrelated use?

@Matt Kauffman

I would say you are thinking in the wrong terms. The question is not what other properties have sold for on the open market. It's what this specific property is worth to you and to the developer. There are no exact rules in this game - you have to make your best guess as to how much you think they want this parcel. 

But hey, don't get too greedy and end up with a "nail house" like these people...

@Alan Rekowski I have an excellent contractor/handyman that I use. He is not a drywall specialist but he does a great job with it. I'll drop you a PM.

@Nate S.

It's definitely hard to find good deals right now, for the reasons you describe. I'm in a similar situation but am lucky enough to have found a couple of decent options for 1031 onward investment.

Here are a couple of other ideas that may or may not work for you:

1. Invest in low appreciation, high cash flow properties (D class). They are guaranteed to have a strong tenant base, and a rise in cap rates won't affect you as you're not in it for the capital appreciation.

2. There are some REITs structured in such a way that you can 1031 into them. I believe the difficulty comes when trying to exit the REIT, but I'm no expert.

Other than that, you may have to just expand your search net in terms of asset class and geographic location. That was my approach.

I've done this in Milwaukee too. So far always with great success. I make sure to vet the tenants especially carefully with references and proof of employment. Then I have them sign the lease remotely and send it back to me with proof of ID. (You could make them get this notarized if you have any concerns.) I also spend a lot of time making sure they are comfortable with everything - after all they are as nervous about a bad landlord as I am about a bad tenant.

I've done this 3 or 4 times and all the tenants have been excellent.

@Todd R.

At that level, the property is viewed purely on a business level. Each opportunity is reviewed individually. Generally speaking, if your purchase price + total rehab + soft costs + margin is lower than the after-rehab valuation, the opportunity is worth pursuing. If not, skip it.

A lender will typically require a debt service coverage ratio of 120%+ (meaning, your NOI has to be at least 120% of your annual debt service). But in a turnaround situation, if you can present a persuasive case that you will add value in the long run, you may be able to borrow at a lower DSCR or less than 100. It sounds like this is the situation you are reviewing.

@Lisa Ryan I agree. But as a primarily cash business, I think rooming houses perhaps attract people who take a different position.

@Marrio Barnes

I recently toured a bar and rooming house for sale in the Walker's Point area of Milwaukee. If I were going to own one, that would be a good neighborhood for it.

I didn't feel it was dangerous but I decided it wouldn't be much fun to wring cash from the tenants every week or turn up to sort out drunken disputes at 2am.

But, no doubt there's a lot of money to be made, especially if you don't plan to declare cash income on your taxes.

@Jason Bott I agree, Waukesha is another good area for rooming houses. I also agree about the insurance. Probably something to get lined up early.

That area's pretty shady. But you might not care if your PM will be managing it. I would suggest maybe boosting your capital reserves to allow you to fix up trashed units from time to time.