Mistake I made starting out (15+ Years ago)

[Michael Zuber]

Having left the Rat Race this year after 15 Years of Buy and Hold Investing I find it is time to reflect, document and give back.  One of the first areas I reviewed was my initial purchases and I believe I made a mistake on a lot of my first purchases and thus wanted to share. Let me explain.

My focus when I started out was "Cheap" Cash Flow Positive properties.  This seems like a solid start but when I looked back I think I stunted my initial growth rate substantially.  Let me do the math and explain what I could have done different.

Let's say I bought a property for $150,000 that had a After Repair Value of $200,000 (keeping Numbers Simple).  Let's say the repair cost or make ready cost is $30,000.  Seems like a great fit as I get to create $20,000 in forced equity by funding the repairs myself.

My first 7-8 purchase all those years ago were like this but here is the problem with what I did.  

My Purchase from a Cash Stand Point.

$150,000 * 20% Down Payment = $30,000

Make Ready Cost = $30,000

Total Cash out of Pocket = $60,000

If I had bought the Property at $200,000

$200,000 *20% = $40,000

Make Ready = $0

Total Cash = $40,000 (Or $20,000 less)

The other area that is subtle is time to Cash Flow as my Cheap Property approach meant I could lose up to 6 months+ of rent if I bought the cheap property for 150K that was tenant occupied and paying under market.  When this happens I have to give a 60 Day Notice to vacate, hope they leave and if not start evictions which could take 90 days+, then repair, release, etc.  

In the end my cheap property approach 15 years ago meant I had to use more cash and I lost time to rent collection/cash flow.  

In the beginning my mistake was not appreciating the value of my cash position for down payments and the time to start collecting market rent.  What do you think? Does that make since?

Self reflection is always fun

Z

[Anthony Gayden]

Originally posted by @Michael Zuber:

Having left the Rat Race this year after 15 Years of Buy and Hold Investing I find it is time to reflect, document and give back.  One of the first areas I reviewed was my initial purchases and I believe I made a mistake on a lot of my first purchases and thus wanted to share. Let me explain.

My focus when I started out was "Cheap" Cash Flow Positive properties.  This seems like a solid start but when I looked back I think I stunted my initial growth rate substantially.  Let me do the math and explain what I could have done different.

Let's say I bought a property for $150,000 that had a After Repair Value of $200,000 (keeping Numbers Simple).  Let's say the repair cost or make ready cost is $30,000.  Seems like a great fit as I get to create $20,000 in forced equity by funding the repairs myself.

My first 7-8 purchase all those years ago were like this but here is the problem with what I did.  

My Purchase from a Cash Stand Point.

$150,000 * 20% Down Payment = $30,000

Make Ready Cost = $30,000

Total Cash out of Pocket = $60,000

If I had bought the Property at $200,000

$200,000 *20% = $40,000

Make Ready = $0

Total Cash = $40,000 (Or $20,000 less)

The other area that is subtle is time to Cash Flow as my Cheap Property approach meant I could lose up to 6 months+ of rent if I bought the cheap property for 150K that was tenant occupied and paying under market.  When this happens I have to give a 60 Day Notice to vacate, hope they leave and if not start evictions which could take 90 days+, then repair, release, etc.  

In the end my cheap property approach 15 years ago meant I had to use more cash and I lost time to rent collection/cash flow.  

In the beginning my mistake was not appreciating the value of my cash position for down payments and the time to start collecting market rent.  What do you think? Does that make since?

Self reflection is always fun

Z

 That's a good point, but what about the $20,000 in equity that you made by investing that $60,000? That is a much higher return on investment than the cash flow from buying a $200,000 property that requires no work. In fact it would take years to make that much from cash flow.

Using your numbers:

$150,000 property

$30,000 down + $30,000 repairs = $60,000 total investment

After repair value $200,000 = $20,000 in equity gained or 33% ROI + cash flow

$200,000 property

$40,000 down + $0 repairs = $40,000 total investment

After repair value $200,000 = Only return is from the cash flow as compared to the $40,000 you put down

It seems to me that fixing up the homes made you far wealthier. What I learned since I started investing is that appreciation will make you much wealthier than cash flow.