All Forum Posts by: Robert Plumpe

Starting & completing a college degree is a great thing.  It shows you've got some intelligence, energy and get things accomplished.  There is also a good chance that you will meet friends for life and business contacts.  If you are lucky, you might even meet your spouse.

With that being said, I would NOT borrow any significant amount of money to do so.  This is especially the case if you are going to be on the hook for well over $100k.

That is a life altering amount of debt.

I know many people (mainly attorneys) whose lives are TOTALLY ruined due to the amount of student loan debt that they have.  I know several attorneys that have $250k+ in student loan debt who are LUCKY to make $50k a year.  They will never be able to pay off their debt.  Their lives are altered & wrecked.

Here is a good rule of thumb.  DO NOT BORROW MORE THAN 1X YOUR 1st YEARS STARTING SALARY.  You might be able to borrow $60k if your starting salary is $50k...but anything beyond that, and you are looking at serious trouble.

One thing I wish I understood better when I was young is that the value of a degree can vary TREMENDOUSLY from school to school.  A Harvard degree is almost certainly worth the money.  A degree from "Directionless State University" might be worth only slightly more than the paper it is printed on.  Not all schools are worth the same.  Sadly, most have a marginal value.

The amount of money is simply too much to be gambling with.  Coming out of school $100k+ in debt could very easily be a life altering mistake.

Daniel:

Let me suggest a few things...

A). If you are looking at a deal with a $300k+ property in a "C" class neighborhood that is likely to cash flow $100 to $200 a month, I would really reconsider the deal.  The problem is the return on the asset.  If you are borrowing $240k+ to make a couple of hundred in monthly free cash flow, I would probably pass on the deal.  The only way I would do it is if there is some other "hook" where you can increase cash flow OR reduce the amount of debt, or some other type of thing.  The risk ($240k loan) is out of proportion to the reward (cash flow).

B). If you are looking at dozens of deals, and can't get one done, perhaps now is the time to either save & build up capital OR move/look in different markets or assets.  

C). If at first glance, a project is only marginally profitable, I would be EXTREMELY cautious.  So many things crop up that you don't/can't foresee.  The cost of renovating may be a bit more than thought.  A contractor may take a few weeks longer.  It may take a month longer to rent the property...and on and on.   I try to be extremely conservative in my estimates, and even then I'm still frequently too low/slow.  The odds are probably greater that you will have small problems, than you will pleasant surprises.  So a marginally profitable deal at first glance will likely prove to be breakeven?

Finally, it is certainly important to get started and make your first deal, but you can't do a deal simply to get it done.  Maintain discipline and you will be off to a good start.

Good luck!

Corina:

Sorry, I didn't make the original posting 100% clear....too much work! not enough time!

I've got a promoter lined up with a track record and book of business.  She has done pretty well with this limited model.  A lot of retirement parties, baby showers, birthday parties & such.   People who rent the hall can bring food/drink in, there just isn't a full kitchen to prepare it in from scratch. 

I think this is a good model, I've seen it work.  The price to rent is lower than a "full service" hall.  There is plenty of business on the lower end.  I was shocked at the prices that are received for this type of event, but I've never rented a hall OR frequent them much.  A limited service hall can easily rent for $750 for a 6 hour period.

I plan on converting about 2/3 of the building to limited service catering (no full kitchen), which would be a bit over 4k sq. ft.  Two separate "rooms", The rest would be offices/storage and common area.

Hey all:

I am in the nearby suburbs of Detroit.

A few years ago I noticed a limited service catering hall in a nearby strip mall.  By limited service, they did not have a kitchen and the size of the hall was just one room and was maybe 1,200 sq. ft.  The business owner would set up, people who rented would help in the tear down and clean up.

I initially thought that this business was a TERRIBLE idea...no demand, no money to be made....to down market.

Well, I have to admit,  I could not have been more wrong!

What changed my mind was that my father attended a function in it one day.  He knew the person who rented the hall and how much they paid.  I thought the cost was about $150 or $200.  NOPE, not even close.  It was $700 for 6 hours!

So I started to pay attention.  This place was almost always rented on the weekends (SAT. SUN)  A couple of times a month, something wold be going on Friday.  They also rented the place out from time to time during the week (retirement party?  birthday party?).   The big thing seemed to be baby showers.

The hall eventually closed, the owner moved to a larger location, a bit further out...and a boutique rented the spot.

So I think that the limited service catering hall is a tremendous business.  I would like to convert an office building to enable this.

Of course, you've got to have several factors to make it work.  You've got to have enough space, bathrooms, AND PLENTY OF PARKING!  Obviously you've got to be zoned appropriately, and there are other smaller factors too.

So my plan is to convert the building, rent it to a caterer for a somewhat smaller monthly rent, but get a percentage of bookings.

Anybody have any experience or thoughts on this?

Matthew John: I've done 6 deals in my real estate career. All but one of them have been cash money up front. My profile has me listed as a wholesaler...not sure if that is accurate at this point. The one deal that I did that was NOT 100% cash up front was structured initially as a rental with an option attached. The option got executed just before it expired and I used "hard money" for that. I have never used a realtor for any of my deals...always negotiated them directly with the owner. I find that owners selling directly frequently have a MUCH higher motivation to sell than owners who list with realtors. I would guess that a surprising number of realtor listings start with the realtor saying something like..."Let me list is for 1.5x what it is worth, we'll see what happens and what do you have to lose?" That way they get the listing...but a lot of commercial listings never have a sale take place (or it takes YEARS). That indicates to me that the seller is not serious... If you want to get together or discuss things/strategy, I would be happy to tell/show you some of the things I've had success with.

Mike:

OK, if you can get it for you want to pay, sounds like a reasonably good deal.

Let the board know if you are successful!

Hey Wayne:

Thanks for the reply.

I forgot to mention that while the AirB&B is on a commercial strip, it is maybe 50 yards (if even that far) from a very plush, upscale residential community.  That upscale area has ZERO hotel rooms...and I think the location would be a major selling point.   

Hey all:

One thing I've been working on lately has been researching Air B&B.  It looks like it could be lucrative IF you have a niche, you pay the right price, and work and stay on top of bookings.

One thing that I think would be a good strategy is purchase commercial properties that have an upstairs apartment.  These buildings tend to be older.  Some jurisdictions prohibit or restrict this in their zoning....BUT if you can get around all of that, I think the upstairs apartments might be perfect for AirB&B...

You would not have neighbors complaining about people coming going, different neighbors every week...and on and on.  It is kind of an isolated place, but not too isolated.  Just isolated enough that it does not bother/disturb the neighbors.

Another consideration would be what type of business is below the apartments.  Ideally, you would want something that is quiet, low key, and maybe upscale?  You most certainly would NOT want a liquor store, bar/restaurant with loud music, strip club, or anything like that.  Low key offices might be best?

Finally, I would think these apartments would trade on the market for a discount, as people with children/families would NOT want to live there, as there is no backyard.

Not good for families but good for AirB&B?

Anybody have any experience/thoughts about this? 

Hey Mike McGee:

I would only be slightly concerned about the appearance of the building.  Add maybe a 25 basis points to the cap rate?

 Here in MI, there are buildings that look very similar to yours.  They were built in the very late 60's and early 70's I believe.

The thing I would be more concerned about is that it looks like 2 of the units are garden or basement units?    Do you have to go up/down stairs to get to the offices?  If so, the building would not be ADA compliant.  Of course, it is probably grandfathered in, as it probably can't be retrofitted.

HOWEVER, some prospective tenants will shy away from this type of buildings.  For example, attorneys that meet with clients that are ill/injured and in wheelchairs.  Also, some national businesses may not rent in buildings that aren't ADA compliant.

Not that this makes a huge difference, but maybe add another 25 basis points to the cap rate?

Finally, I would probably want to get a bit more than 11% if the building is completely full.  Of course, there might be other considerations if you think you can make improvements to the building/raise rents.  Interest rates have been raised, and they are clearly up in the short & medium term.  This is going to make mortgages more expensive and lower the value of assets.

You can get very high single digits and sometimes even break through 10% on REIT's. If I own/manage physical commercial property, I would certainly want to beat returns offered in publicly traded REIT's.

James Wise:

Absolutely there are good solid suburbs around Detroit.  Some of them offer good living/investing opportunities EVEN with the appreciation in price.

Detroit (proper) is a bit different...I would argue that pretty much every part of Detroit is "rough" OR is a few streets from a "rough" area.  A good example of this is "Indian Village".  Indian Village consists of 3 streets (Burns, Iroquois, Seminole).  Houses in there are very large & nice, about 100 years old.  A good percentage of them are truly mansions.  Go one street past Burns (Fischer) and it is "Mad Max" time.  Lots of crime, lots of burned out houses, lots of problems.  A similar situation exists in the "Boston Edison" neighborhood.

In Detroit proper you've got the problem of taxation, both property and income tax.  Then you've got the problem of car insurance.  Then you've got the problem with water & sewer.  Then you've got the problem with education.  Then you've got the problem(s) with police, fire & ambulance.  Then you've got the problem(s) with decaying infrastructure (water, sewer, roads, street lights).

It is not an impossible situation, but it is VERY difficult.  

Then you've got the problems with price fluctuations in housing stock.  As time progresses, the value of real estate tends to go DOWN, not up.  I bought my condo (adjoining suburb) in 2015 for LESS than what it sold for in 1968.

I've bought commercial buildings for LESS than what the original owner paid for them in 1974.  These buildings were in reasonable shape and NOT in Detroit.

Perhaps the best example of declining property value is the Fisher Building.  It (along with Albert Kahn & outlots) sold for $12.2 million in 2015.  This is LESS than what it cost to construct these buildings  when they were originally built in the 1920's!!!!!!!  Please see:

http://historicdetroit.org/building/fisher-buildin...

Another example of declining prices is a Co-operative that my father lived in for many years.  This is a wonderful building along the Detroit River.  Very nice, a great place to live.  After the financial meltdown in 2008 (and many years thereafter) units were almost worthless.  Several were GIVEN back to the co-op for free.  The owner(s) simply wanted to no longer be responsible for the monthly costs.  That is certainly extreme, but many units sold for MUCH less than what owners paid for them 10, 20, 30 years ago.

Right now, prices are inflated in much of Detroit.  I can't help but think that in the next recession/depression, prices are going to absolutely collapse.  It has done it many times before.

Maybe things are different this time, and the cycle(s) won't repeat.