All Forum Posts by: Arlen Chou

David, I went through something similar last year.  In my case I bought 2 4 plexes right next to each other.  I only wanted one but the owner only wanted to sell to somebody who would buy both. Anyway ended spending everything to buy the properties and the renovation budget went nearly to zero. I have never done serious construction work but that was my position moving forward.  I also have a full time job that requires me to travel extensively.  

The thing that saved me was stepping back and looking at this project as s business and as a second time job. Cash flow was critical to fund the repairs.  I kept all the tenants at below rents to keep flowing. I ranked each unit from to best to worst and interviewed the tenants extensively. I decided which tenants were the keepers and which were less desirable. I decided to tackle the worst unit first and leave the best for last. As each was rehabbed I moved tenants that I liked into the fixed units. I increased their rent but they got better units.

My renovation plan put me on site every evening of the week and all day on weekend. I did everything from drywall repair, to tile, to kitchen cabinets to sanding staining floors. I never did any of this type of work before, but YouTube is a life saver. First unit took 7 weeks, but the last one only took 2. The unit needed less work, but I am also much better at I what do. 

If I had a contractor my first unit could have done faster. I don't believe anybody could beat me on 6,7 or the 8th. I saved a TON of money doing everything and I learned even more. I don't plan on being the guy swinging the hammer forever, but I am  much better equipped to negotiate contractors and to estimate renovation budgets and time lines.

The point of this long story is it can be done. But you have to set goals with hard completion dates, just like a project at work. You also have to set your hours to work each day, just like any other job. 

There is a light at he end of the tunnel and hopefully a pot of gold. 

Good luck!

Arlen

Hello Kristin, Commercial RE is a different beast. I am by no means an expert, but I have 20k sqft (lite industrial) in the Bay Area. My situation is similar to yours in that my day job company leases some of the space from my RE holding company. This part is fine and straightforward. However, I only use about 6k sqft, so the rest is leased out. If the space is going to be only used for your NP, then things are pretty easy. However, if you have space to lease out the story potentially gets more complicated. In my area there is still a ton of open lite industrial commercial space so competition is pretty tight to find new tenants. But once you find a good one they usually don't move unless they really grow or go under. Many of the companies that inquire about space are tech start ups. I come from that world so I have done some leases for equity exchange in the start up. They are usually happy to do this because they are cash strapped and the share amounts are small in the big picture for them. With that being said if you get lucky you can hut the ball farther out of the park with this method, on a ROI basis, then any straight RE play. I am not sure if this helps you, but hopefully it gives you another perspective on your potential deal. Good luck, Arlen

Just to clarify things, you will NOT get all of the money out right away.  Within the first year you will be able to finance it based upon the original purchase price. The bank will only give you some portion of the total amount you paid, not 100%. You can consider the balance like a down payment.  To get ALL of your money out, you need to rehab, bump rents up and push the appraisal value up so that what ever percentage the bank will lend you is above your original investment plus all of your costs.  Hope that helps. Good luck!

Back in the day when I was your age I went through the same dilemma. I ended up buying a 2 bedroom row house in Mountain View and renting out the second room. Like @amit m. said, this is a great option. I was young, just getting my feet wet in the working world, but knew I wanted to start a RE base. The HOA took care of all of the exterior stuff, and since I lived in the place the interior maintenance was easy, no need to drive out to fix stuff etc. Besides the place was new so there really was nothing to fix for the first few years. As I was young I also wanted the time to be able to socialize. For me this was a great balance of starting in RE, saving on commute times and having a social life. If you jump into a MU or a SFR it will most likely be older, meaning that you will most likely be dealing with maintenance issues. When I eventually sold the place I got the profits tax free and then put the money into a triplex. Just my 2 cents... Good luck on what ever you decide.

Doug is right, this is a good strategy if you have the cash.  It allows you to make a much more appealing bid and close very quickly.  I just did 2 of these last year.  I am in the SF Bay Area where good properties fly off the market very quickly.  A cash offer with fast close is what got me these buildings.  The down side was that I was cash poor after we closed, so I had to be very careful with my renovation budgets.  But once everything was upgraded, the properties appraised for much higher then what I paid for them and i was able to get my cash back out.  I suppose you could try to refi with the units as purchased, but I don't think you will be able to get all of your money out.  Just be prepared for the lean weeks/months when you are doing your repairs/upgrades.  Good luck!

Interesting deal, but the thing that would worry me is the efficiency rental for $200.  I am not sure what the laws are there, but I would look into the potential of that person being considered an employee...  The unit is renting for $100 less then the other efficiency rental and as stated he is doing working on the apartment as the "unofficial manager".  The state could see him as an employee stating that he is being compensated $100 per month for the work he is doing.  This could potentially open up legality issues, like workers comp if he gets hurt on the job, which I personally try to stay away from.  I know you have stated that you are thinking about doing the management of the building yourself, does that mean you are going to stop using this person as the "unofficial manager" and increase his rent.  You can probably see where I am going with this... Like I said, I don't know the employment laws in your area, but I would at least run this past somebody who does.