Success leads to a crossroad

[Matt Weaver]

I am an investor from Richmond, Virginia, I graduated VCU in 2000 and I have been investing in real estate off and on since I got out of college. My first flip was around 2002. About 5 years ago I started getting more serious about it, I started a LLC and got some business cards, attended some meetings and owned a hand full of rentals, I had done a few flips but if I was being honest with myself it was still just a hobby. I had a 60 hour a week corporate job, and 3 small kids at home, and it was always easy to justify any amount of inaction by pointing to how busy I was. About this time I was starting to become increasingly less satisfied with my job, and it was hard to imagine staying at a company another 20 years when I no longer had any desire to advance. I set a goal to become a full time real estate entrepreneur before my 40th birthday and started really pushing myself.

During the last 3 years I have gotten my real estate license, flipped numerous properties including some very challenging ones, recently one of the flips had a $250k rehab budget which was, for me pretty risky.  I started trying to hold one house for every one I flipped, I focused on one neighborhood and really worked on being the top player in that small space, really just 4 blocks by 3 blocks.  The homes I was buying and flipping were appreciating rapidly but the cash flow was minimal and I wasn't getting any closer to my goal of leaving my day job.  So I started looking in other areas and eventually bought a 12 unit apartment complex in Ohio, followed by a duplex and a single family home there shortly afterward.  Around this time I was working on a flip in Richmond across the street from a large quad.  It was a distressed building that looked like it had a lot of potential.  I was able to track down the owner and it turned out he owned 2 other quads down the street and he was looking to get out of all 3 buildings.  I walked through the buildings and knew I had to either offer the 800k they wanted or lose them to someone else.  It was very difficult for me to get a good handle on what it was going to take to renovate 3 buildings, with 12 separate units that were in extremely poor condition.  I looked at the comps, I did some quick math and I made the decision to get the properties under contract.  Sure enough two days later the investors across the street called upset they missed out on the deal by a day and wanting to know I would consign it to them.  I took it as a sign I had gotten in at the right price and held on.

I knew this was a gamble, but I felt like it was one I needed to take.  Over the course of the renovations I made numerous mistakes, learned a lot and had a tremendous amount of anxiety and stress.  The city required commercial permits for all the jobs which I didn't know going in, I assumed because they were zoned residential and were less than 5 units the permit process would be the same, I should have done more research there.  That alone probably set me back $20,000 after it was all said and done.  I used my secondary team of contractors who I had only used twice before on 2 of the quads, and turned the biggest one that needed the most work over to my primary team.  The secondary group wasn't capable of handling that big a job, the contractor couldn't manage time or money on a job that size and ultimately we ended up in court.  I prevailed but there are no real winners in situations like that.  After 5 months I was able to start marketing the properties for rent.  Unfortunately it was January, about the worst possible time to try and fill vacancies and I had 8 units that needed renters in an area that has a lot of student renters who were already committed to leases until May or June.  I didn't get the 3rd building finished until June 1st.  Luckily by that time the market had improved with the calendar and I had all the units pre-rented.  

I probably could write a book on all the mistakes I made on this deal, I had never renovated anything beyond a duplex and nothing bigger than 4,000 square feet.  Suddenly I was committed to 3 buildings totaling almost 9,000 square feet, needing 12 all new kitchens, 12 new hvac units, etc.  Now I have (finally) arrived at the crossroads.  I made over 300k on the deal, the properties appraised for 1.6 million dollars and as hot as the market is right now I am confident I could get that for them.  I have been working to refi the properties, however with the debt service terms I am going to be stuck with a 60/40 refi split leaving a lot of equity in the properties, worse, despite having the properties at market rents the cash flow isn't enough to get me out of my day job. I could sell all 3, and 1031 exchange into a 1.6 million+ property that would potentially generate better cash flow, but the commercial market is so hot right now that finding a deal in that space is no sure thing.  I could sell the smaller two, keep the biggest one free and clear and then refi it to get a lot of my capital back out and still have a nice cash flowing property.  Or I could go through with the refi, sit tight for a few months, 4 months of principle payments would wipe out the mortgage costs, and wait for something to come along.  However there is risk in not striking when the market is hot, if things went south its possible that a significant chunk of my money would end up trapped in the properties.  

As you can see while I can't look at the deal as anything other than a success, and certainly the problems I have now are better than the ones I had a year ago, I still struggle with what to do.  I have a six figure job that allows my family to live a comfortable lifestyle, I can retire from there in another 15 years and be very comfortable.  For some reason, to me giving that up is risker than spending 800k on 3 vacant buildings.  The main reason I post this now is that I realize this is the time when it would be great to have a mentor, when it would be great to be in a mastermind or group with other investors that had similar experiences.  As I look around my current circle, I am the most experienced person, I don't have a robust network to lean on.  If I could do it again, I wouldn't be the quiet guy in the back of the room at the meetings, I would get out of my comfort zone more.  Real estate is a tough business and a lot of the stories I read on here show a linear progression that I have found hard to duplicate. I hope this story helps someone out there and hopefully I will be able to provide an update once I work my way through this decision point.