“The True cost of yield”
Was the l captured off the g-chat window with my brother, after whining to him about some $hitstorm I created for myself, and had no one else to blame but the muppet in the mirror. Long story short, I’ve been having my arse handed to me on the renovation of my first commercial building, and it seemed like the best distillation of the problem to date. He’s good with brevity, that one.
Why write all this down? Because I made a lot of boo-boo’s on this deal, and hopefully you can read this, take a couple notes, and save yourself a few bucks, a trip to two to the chiropractor, and lower your bartab. If so, happy to have helped, and pay it forward.Its what life is about. If not, sorry I wasted your time….drop me some hate mail written on the back of a hundred dollar bill. My girlfriend will thank you.
I’ll keep the backstory short, as most of us know what a search function is, but this is my first commercial deal as a landlord, and is a master-metered, gross lease 8-unit office complex in my home zip code. If you don’t know what that means, let me translate: the proverbial pimple on the proverbial backside of the pretty girl from high school. It also happened to be lender owned, and full of hairdressers. Do yourself a favor, and google “The Crazy Hot Matrix Video”, it’ll save us all some time.
My grandiose scheme, aka “business plan” has so far been to leverage my not-insignificant construction resume to get stellar yields out of properties that traditionally have not done well, and therefore force appreciation. Not exactly rocket science, but also not something to be taken lightly. Unfortunately, I am nothing but a jack-of-all-trades, and master of none, save perhaps selling things and a Stockholm Syndrome-like tolerance for pain and stress, both mental and physical. Turns out that my model is a really $hitty one. Go figure.
So how did the title come about? Without boring you with a ton of details, I began a renovation on a mostly occupied building, with a fairly educated budget, an arsenal of tools that would make Bob Vila jealous, a 360lb back squat max, and a belly full of piss and vinegar. 4 months later I am crabby, exhausted, carrying some credit card debt, consuming espresso like water, and just want to lay in a hammock for 3 days and drink myself to sleep until its time to lift weights again, and think about a better way to live.
The upside of this is that I now have a building with an $1840/month payment to a bank, and a $6120 rent roll, with fully updated, and insanely energy-efficient mechanicals, and hopefully about 3-5 years before anything breaks or anyone’s lease is up. Sacrifices must be made for the greater good. Based on that actually, I think I can afford to lay in a hammock for 3 days and maybe toss back a beer or two.
As my favorite derelict who used to hang around my old warehouse from the neighborhood used to say, “What had happened was was”……contractor turned out to be an incompetent, window-licking muppet, largest tenant moved out, rent declined for 2 months, my part time help all got hired away, and because I had the stupid idea that it would be easier to get all the work done myself and then go chill, I promptly burned myself out.This was accomplished by not much other than sheer willpower, and the lack of ability to delegate, implement systems, and the small fact that with 3 tenant suites added on top of my semi-ambitious-yet-I-Think-I-Can-make-it-work construction budget, my wallet became a small furry doe-eyed creature dropped into a pit of vipers.
So in the interest of sharpening the 20/20 hindsight that we are all blessed with, I figured I’d write all this down, and how I’d do it differently. Unlike flipping, this type of project results in nothing more significant than increased cash-flow and a pile of paper equity. No large checks from selling property for 2x what you paid (although on paper with the equity I created, my net worth probably doubled). However, if you ask anyone in the commercial real estate world here in Scottsdale, I accomplished the impossible. Before you think I’m bragging, let me tell you how dumb you had to be in order to think that was a good idea.
Really. Effing. Dumb.
As in Don Quixote charging a windmill.
It came with a cost of my health (kind of), sanity, personal finances (which I religiously sever from the RE business) and general overall well-being, not to mention my social life.All of which are worth more than that, and should have been respected.
What I should have done differently. Oh man, this might get longer than Ron Jeremy’s….resume.
Construction is a tough game. Its less tough when you stick to the plan, but as we all know, real estate is, at its core, a reactive business. Periods of boredom peppered with moments of “oh $hit what do I do now??”.
In retrospect, the biggest mistake I think I made was not vetting out my construction help. That was the proverbial flapping butterfly wing in China that led to the storm in my backyard. Since I was in between jobs (aka W-2 employment), I elected to give myself 3 months of runway out of my savings (dumb, almost gone now) and just get it done. Construction labor is tight, and I didn’t know that, but it sure kicked me in the wallet once I figured it out. This was probably based on my overconfidence in what I would be able to accomplish with my own two hands, double-dumb considering that I evaluate and underwrite properties for my day job. Whoops.
Rather than shopping hard for just cool materials, and going over the top on mechanical systems, I should have split my time to make sure I had equally good labor, and a back-up plan for when it went wrong. Sure, a kick-a** tankless hot water heater is a solid call on a master-metered building, but the $85 I paid the electrician to do something I could have done was money far better spent. I should have been napping or eating more spinach, and thinking 4 moves ahead.
If you have been here, you’ll know what I mean - the tail end of any construction project is what separates the joe-blows from the big guys, and I handled this one like a damn amateur, that is for sure. Rather than touching up paint, hanging fans, or tossing bricks into a dumpster, I should have been supervising people and taking the time each morning to get organized, stick to my systems, make sure materials, tools and labor were on-site and on-time, and let the laborers handle the labor.
However, fear, and the fact that my budget had not enough cushion in it, led me to have to sacrifice my time, labor, and mental energy to handle things that should have been delegated and paid for. I focused too much on the goal, and not enough on the process, therefore dragging it out, and making it that much harder. Now, at the end of this, I have a small ($6k) hole to dig myself out of with debt, which sounds like a lot until I tell you that a sale of this place now would net me nearly enough cash to buy a nice single family home in my neighborhood, or when the time comes, put that magical 25% down on the 30-door apartment complex.
So anyway, use your brains more than your back, and life tends to work out better. That's my $0.02 on this.
Don’t be like me. Your back will hurt.
Happy Investing!
- Darwin
