All Forum Posts by: Jim Walker

Investment Info:

Retail commercial investment investment in Vicco.

Sale price: $2,320,000

25,000 sq foot retail building.

What made you interested in investing in this type of deal?

I had previously sold it five years earlier.

How did you find this deal and how did you negotiate it?

1st time through relatives, second time because I had sold it the first time and had deep knowledge about the building.

How did you finance this deal?

1st time was cash second time the buyer obtained conventional bank financing.

How did you add value to the deal?

I knew every square foot of the building, and it's entire 100+ year history.

What was the outcome?

One building, two commissions five years apart.

Lessons learned? Challenges?

Know everything you can find out and document about a building. Save your old files.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Alvin Lau of Oakland cooperating broker both times.

I read most of the 95 posts. There were two interpretations of the definition of ugly. The 1st was morally or ethically ugly, {taking unfair advantage}  the second was esthetically ugly, but morally positive {cleaning trashed houses} I found it unfair that OP was called out for supposedly being racist for admitting that a racist thought can make an appearance even in the mind of someone who is opposed to the evils of racism.   The point Jim K was making was that this is a symptom of systemic racism. Even a woke social justice warrior can recognize that systemic racism is so pervasive that nearly everyone is affected by it.  Because it is embedded in our institutions, our systems, our culture, and especially our economy. In other words, everything. 

Those who attacked Jim and called him a racist remind me of the ridiculous character played by Stephen Colbert a few years back who claimed that he could not see color - to the point where Colbert's character claimed he did not know if he himself was white or black.  If you are claiming that recognizing the existence of racial thoughts is a form of racism, well that is denialism. And denying the existence of racism can be part of a racist belief system.  

So most of the discussion was about that.  As to the meat of the original post itself, most posters agreed that it is not necessary to be an evil landlord to make good money at this business. Most posters agreed that turning ugly houses into habitable housing often involved dealing with disgusting or ugly "before" conditions.  I summarize the answers as: do morally ugly things: NO. Deal with ugly houses? Yes.

My answer is no to both types of ugly.  You can make money with new homes, clean homes, industrial, commercial, etc.  There are many ways to add value, rehabbing is just one tool in the box. 

I concur with Joe. His numbers are good. Rental homes are in high demand. 

I don't do airB&B. Just from Joes numbers though, the thought scares me. How much of that extra $900 a month (or $30 per day) is chewed up by the necessary furniture, appliances, utensils, linens, appointments, maid service, B&B and visa card commission, and hotelier paperwork, increased maintenance and cleaning due to frequent turnover, vacancy factors during turnovers. I have run motels, apartments, rooming houses. The revenue per square foot can be higher, but also the operating expense.

Do you plan to own this for ever and ever? The dirt has underground fuel storage tanks that were left in place, not removed, but filled in.  Should you, or your heirs, ever decide to sell with this flapping crimson red flag, any and every investor will either walk away completely or beat you to death on price when you go to sell.  Even if there is zero contamination.  Even if you have a phase 2, with soil testing finding no evidence of contamination. Your future buyer and their broker will say "Fine and dandy, but absence of evidence is not evidence of absence. We'll pay you 10 cents on the dollar because of the risk that we are taking on." Your seller is an idiot, or dishonest, or he doesn't really want to sell. Maybe all those descriptions apply.  The foregoing is NOT advice. It was bombastic non-expert opinion from a source that has no knowledge of the PIQ except what you have posted on this thread. 

Those saying don't take it are looking at the $400 cash flow as stand alone. Akin to agreeing to be property manager for $33 per unit.  If that was all you were ever going to make, they'd be right.  But didn't you say this is $50K under market value?  And your debt service includes principal doesn't it? 

Your return on cash invested in the first year then is something like $4800 cash flow +$50,000 equity boost + $3,000 (reduction of principal).   $57,800. If you pay nothing down, just pay recording fees and transfer taxes and notary fees, Lets say closing costs puts you back $2,890. That gives a first year internal rate of return on cash invested of 2,000%. Some risks are worth taking.

Come to think of it, I have seen many at 50% or above. I just don't usually analyze them because they usually are not priced correctly on their NOI, but on their GRM, or maybe just: "let's ask for"
 

50% That is some high maintenance low rent stuff there? All the (stabilized) deals I analyze in Sacramento run between 33% to 45% expenses. maintenance and reserves.  If you are at 50% rule of thumb is it because that is a value add property? Either vacancies, underpriced rents, repairs? Or is it all the money spent on snow removal?

Orkeem, I like your deal.  Many BP gurus are aghast at even tiny, temporary negative cash flows.  If property in question is an investors only income, that makes sense. but if you have other cash flowing investments that cover, along with steady employment income, increasing your net wealth, including locked in equity, counts for a lot, too. 

If a property is not clean and move in ready when you close escrow, you will have down time where can not earn any rent or even show the property until it is ready. Factor that in to your cost in addition to repair, labor, materials, permits, and don't forget project management. Either you pay someone for project management or you should value the hours you put in yourself.  The scenarios of buying at $80,000, putting $20K in, then having a house worth $130,000 as a result are hilarious. You know why it is worth $130K later?Because a couple of years have gone by, that's why.  Some flippers need to get out from under their hard money loan and will sell reasonable. Here in Sacramento, buying fixers in 2016 has minuscule returns.   If you were a Sacramento buyer, I would recommend buying something that already had a good tenant, or one that is move in ready.  The tenant occupied are usually better than either vacant fixers or turnkey flips because owner occupants and even many investors are reluctant to go after tenant occupied single family homes.

Hi Nicholas.   

It is different strokes for different folks. Usually at polar opposites.  There are some investors who want maximum leverage, even to the point where they are risking their investment in case of adverse conditions.  Lehman Brothers was leveraged 50 to 1 and that company lost everything while sparking the 2008 global economic meltdown. (not saying it was all Lehman's fault, it was just the spark - the room was already full of flammable gas!)

On a micro level, the scenario you laid out is fine. Provided that you have plenty of funds left for "rainy days both in your personal life and for the investments you take on. Once you have a healthy rainy day fund and a good credit score and credit line to draw on above that, then it is smart, if you have no higher paying investment opportunities to retire some debt early.  Here is how I do it. The average return on my highest earning assets available to me is about 8%  {That is $100K houses rented for 1k per month with $4000 in annual expense.) Debt Service is purposely left out of this equation because it is The return on asset - not return on investment. 

If I have money to invest, it theoretically makes more sense to pay down any debt that is over 8% APR and make the just the required payments on any debt that is below 7.9%APR and invest more money at 8%. In reality, I strive to pay off any debt over 5%APR because acquiring property, renovating, then getting and retaining tenants is harder work than writing a check to JPMorgan Chase.

I simplified my answer of necessity. There are so many other factors.  To scratch the surface. What are the investment opportunities readily available for the investors available funds? How does the investor feel about the locations, and quality of those investments? Most of my investors won't touch $100K houses because of the neighborhoods. What is the return then on $300,000 houses?  I can tell ya. It ain't 8%! But the $300,000 house will have higher resale value at disposition time than 3 $100K houses. So much to consider.