Cash Flow Seeker

[James Sutton]

I wouldn't call myself a serious investor as of yet; however, that is eventually exactly what I want to be. My full-time employment is working as a deep-sea diver and subsea inspection project manager in which I freelance as a contractor. I generally work 3 to 6 months a year, and for the rest of the time I follow my hobbies such as rock climbing, skiing, and spending time with my wonderful wife. 

I have 4 properties: two rental condo's in Thailand (where I lived for 4 years previously), 1 rental condo in Denver, and 1 house in Denver which I own.

Last summer my wife and I bought the condo in Denver and put about 14K into the rehab. We did most of the work ourselves and our now receiving a 10% ROI.

After recently finishing my Bachelors in Business Project Management, I'm looking forward to learning more about real-estate and will be pushing to making it my full-time job. Hopefully has a professional investor I can give up having to go away offshore every few months and simply be close to my family.

[James Sutton]

Great responses everyone and I especially like the comments about legislation. I have heard about some of the issues involving condo's and should that law pass big changes will occur. For myself, given that my job takes me away from home for months at a time, having a condo allows the HOA committee to handle issues such as lawn maintenance, snow removal, garbage, etc. Things that I wouldn't be able to offshore (and I'm not paying 10% to a management company!). Also, this is the first, and largest investment my wife has ever been involved in.

A good story. My wife had 10K from her grandfather passing away five years ago. She has that money in a CD for the past five years making about 88$ a year in interest. She always kept telling me, "debt is bad and risky, I like my CD's". Patiently, and slowly, over time I tried to explain leverage, low-risk investing, and "good debt"; she finally agreed to go in. So she in I split the closing costs, down payment, and fix-up costs. She then sold her CD and paid 54$ in interest fines for closing early that year. 

When she deposited the first rent check and we were positive $574.64 cash flow, I told her with her, " with your half in one month you made just over 3 years of profits of which the CD would have made!". She is now reading Rich Dad Poor Dad and on the sight of creating cash flow, though she is still very very risk adverse (which I love dearly!).

But to get back to why I went with a condo other than the fact of little maintenance. It was mostly the numbers. Its such a difficult market in Denver and I figured we would get 10% to 14% ROI. I had been telling everyone for a year and a half we were looking for an investment property. I searched on zillow, agents, friends, and hit the ground, but it was difficult to find anything that came close. It was my mother-in-law who was in a meeting with her accountant and over heard him saying his Aunt passed away and he needed to offload the condo from Denver and didn't want to deal with the headaches of agents, cleaning it out, and doing any maintenance to show it.

After taking a look we proposed an offer which was to not use realtors and take it as is. I wanted to try something that needed a bit of remodeling (I have construction background), and more so just wanted to get one under my belt to receive some lessons leanred. So the numbers were:

Condo: 

Location: 6384 E. Mississippi Ave 

Sqft: 1,557 sqft

Baths: 1 bath upstairs shared between 2 Bed - 1/2 bath downstairs "in kitchen"

Large Basement with fireplace, 2 parking spots.

I saw the pro's:
Corner lot, great rental location on bus stop, bike trail, near Cherry Creek. Condo has baseball and tennis courts and park right next door. Indoor pool and rec room (Old 70's style). Also, options to renovate the basement with egress window, and easy to add a bathroom and make the basement a 3rd bedroom. I understand adding an egress window would need to be passed through the HOA and most likely difficult.

Con's:
Shared bathroom upstairs. 1/2 bath in kitchen. Old condo complex. Weird 70's powder sink in middle of upstairs hallway (could possibly rip that out and put closet, book case, or washer/dryer later on if wanting to sell). 

Financials:
Negotiated purchase price for $152,500 by showing comps in surrounding area from $142,000 to $177,000 ranging from finished to unfinished. Appraisal came in at $172,500 which she did middle of remodel construction with no flooring. She asked, "Can you put the toilet back in the bathroom so I can count it?". Ha, I simply lifted it up and placed it backed down.

We Put:

20% down - $30,500

Closing / Points - $5,200 for 7 year adjustable 30 year amortized at 3.88%

Fix Up Cost - Estimated $5,500 and ended at $8,500 (about a grand in tools and valuable lessons leanred). 

- I cleaned out the condo (I negotiated a washer/dryer, big cold freezer, computer, and several old books and ornaments which I think all together adds up to about $4,000), installed laminate floors in living room, paid someone to tile the kitchen, I replaced all the fans and lights, installed dishwasher and new microwave, ripped out vanity and installed pedestal sink in downstairs 1/2 bath to give space, and replaced all gold sink and toilet fixtures with brushed nickel. My wife and I painted the whole condo, redid and painted kitchen cabinets, and had the carpets cleaned. 

I researched and knew we could rent from $1,400 to $1,700 monthly. I finished the remodel two days before Thanksgiving, and was flying out to work in Nigeria on December 1st for three months! So we rented it out immediately at $1,500 a month.

Breakdown:
So all in: $44,200

Rent: $1,500 / month

HOA: $250 / month

Cash on Cash is 15.6% return.

Including 5% cash reserve and 5% repairs, I calculated a 11.5% yearly ROI (Am I correct? I'm knew to running the numbers and something I'll be spending the next few months reading and learning about).

Conclusion:

I think in the Denver market 11.5% and 15% cash on cash would be silly to pass up. Like you guys said, this can be a short-term investment seeing how the legislation goes. Though in that location I think it will always have renter demand. Our plan was to keep it for four to five years and assess the interest rate and decide to either sell or pay down the mortgage. Mainly, it was to get our feet wet in remodeling for me, and my wife's feet wet investing and dealing with tenants. 

I completed the remodel in 4 weeks after coming off a 3 week trip offshore, and before heading to Nigeria for 3 months! Wouldn't want to do that again. Though I learned so much from the remodel, and was able to write off all the tools I purchased which I'll be using to remodel our house in the future. We plan to fix-up our own house, move, and either sell or rent out our current house located in Park Hill either this year or next. 

In the future, I would rather purchase a single and multi-family house to renovate and rent out. Now that my wife is getting used to dealing with the tenant, collecting rent, leases, etc., I think she will be ready to take on the monthly demands of managing a renter in a home compared to a condo. 

I plan on selling my condo's in Thailand (which I had to buy 100% cash). They were my first investment purchases while living overseas. They generate between 5% and 7% depending on the currency exchange. Though that's about 225K to 250K of my money tied up. I hopefully plan on selling them later in the year, getting that money, and leveraging it within the local market.

Hope I hit everyones questions and if anyone has the time I wouldn't mind hearing about the risk involved with the condo legislation. I believe it affects supply and demand mostly? I haven't looked too much into, but I'm curious to hear what peoples opinions are.

Also, if anyone has any comments on my numbers, strategy, etc. I'm always looking for constructive criticism.

James "JD"