I write this as a career RE investor for 2 reasons: 1) Inexperienced investors might find a tidbit or two, and 2) that experienced investors might point me toward what is next for me.
I bought my first rental property when I was 18. Baltimore was undertaking a renewal and I purchased a bldg. near downtown on the west side. I think that I made pretty much every mistake that and investor could make – overpaid, bad location (Balt is a city of neighborhoods and you go one block and everything changes), believed the realtor and etc. I called it “hell house” and it took me 7 yrs to finally get rid of it after losing lots of money and time, but I did learn by my mistakes. After that property I never lost any money and did all real estate by the numbers with and exit plan and verifying all. That house was my BS degree in real estate investment. The master’s or PHD was yet to come if you keep reading.
Later I had accumulated a couple of res. rentals near the U of MD prof. schools and they were really good rentals – graduate and professional students. You just had to hit the market based on the school schedule and no one moved after school began in Aug. until maybe Jan. if you were lucky, otherwise you got the riff raft tenants that were awful. I was trying to figure out how to scale my rental business when a friend of mine who had several rentals told me of his program to pay down his highest interest rate loan, with cash flow and adding other money and then applying that free-and-clear cash flow to paying off the next loan and having 2 free and clear props. I thought that sounded like a great way to go and applied his strategy using Excel progs. to track my progress. My wife and I were raising 3 daughters at the time and wanted to provide well for my family’s future. However, sadly my friend did not work his program and today, many years later, he has about $20K in investments and lives in a rental apt. Live is about taking action and having passion for the things we do.
Once I had one of my properties paid off and just as a lark called a bank that I knew, about managing any REO that they might have. This was during the recession in 1992 and REO's were abundant. I never thought they would ever call me, but within 2 weeks I got a call to look at a multi-family property that was coming back to them. I did a complete walk through and review of the financials of the 18 units in 4 separate buildings. The property was originally set up to condo, but the area had declined and the property was a rental for 10 years or so.
I saw a lot of potential even though there was much deferred maintenance, poor mgt. and significant water damage in one unit requiring complete rehab. After my review the bank president asked me if I wanted to purchase the property from them and I told them I had no cash. They asked if I had a paid off property and I said that I did have one. My wife and I had a "corporate meeting" and we made them and offer and ended up purchasing the property for $1K over our offer price at auction. We never put a dime of our own money as the cash flow was strong even in its poor condition. I super managed the property – income, expenses & loan - and took care of all maint. and mgt. issues (the water damage was handled through the previous owner's property ins. ) and brought the occupancy to about 100% while raising rents about 20%. I kept the property for 5 years and sold it at more than double the $376k purchase price. I continued my program of over paying the principal amount of my monthly PITI to bring the loan principal amount down quicker as well.
I decided to us a 1031 Tax Deferred Exchange in selling the property and as I was moving my family from Balt. due to the crime, drugs and gangs. Through the exchange I purchased a multi-tenant office bldg.. in Knoxville, TN. The property was in pretty good shape, but suffered from poor management. I had accumulated about 35 SF rental apts/houses in Balt.. I used a fix-n-flip property and bought a 2nd office building in K-ville with a 1031 Exchange. The bldg suffered from neglect and poor mgt. (a real opportunity sweet spot in my RE career). This one was older and had some high vacancy and needed a cosmetic renovation to get it filled up and making money. With the help of and excellent realtor and a can do attitude, we made some attractive deals with new tenants and got the bldg full. From there we were able to raise rents on renewals and improve out tenant leases to pass on more expenses to the tenants. Based on the improvements and upgraded cash flow the NOI capped out much higher so I was building both equity and cash flow. I love both of them equally I my real estate deals.
The first office building was cash flowing great and full so it was time to sell the property and scale up my investments. A friend owned self-storage properties in K-ville and he said to me “no kitchens, no baths and no overnight tenants”. He had my interest. I was wintering in the FL Keys at the time (we found out that you could transfer your kids into schools in the Keys in Dec. and take them out again in Easter quite easily) and I had mentioned to 2 different realtors about my self-storage interest. The property came to me through both just at the time when my wife and I had decided to remain in K-ville due to our adopted Romanian son’s IEP needs. When they told me that the property included a 10,000 SF office bldg and about 500 self-storage units my interest was piqued. As a commercial real estate appraiser I did my due diligence on the property’s cash flow and leases and something looked very off. There was no way the cash flow for the self-storage portion made any sense. Based on the number of units and rental rate the reported cash flow was very light. I got the property under contract and several weeks later the current managers were caught kiting checks and stealing cash of about $5K per month, while the owners of the property were 20 feet away in the next office suite. The property was being managed – 500 storage units - on 3x5 cards!! Unbelievable to me! Needless to say the first investment I made into the property was for a quality mgt system that was very difficult to override and office/site security cameras.
We purchased the property in 2004 and had a mortgage with a TN lender who we had now had 3 mortgages of over 4 million for the 3. Our 5 year call on this loan was to come in December 2009. As we renovated the property, added perimeter parking for cars/boats/RV and commercial vehicles and filled up the office bldg the cash flow was over $50K/month. We had been offered just under $4mm in 2006. We could see the storm clouds looming in the housing market, but we thought we would be able to ride it out ok in commercial. Wrong!! Our continued discussions and financial data to our lender brought us repeatedly "everything looks good for the renewal". As I could not find a better property to 1031 to my wife and I decided that based on our strong cash flow that we would keep running the property. Our LTV on our mortgage was under 50% by now. Wow, what a mistake that decision was.
2007 hit FL like a ton of sh.. and investors and property owners were running for the doors. I knew of realtors/investors that committed suicide due to the depth of the financial hole that they found themselves with Miami condos. The great Recession was incredible brutal. My acct in Balt. said to me “I have never seen such pain in so many clients!”. We went into to the banks main office on Xmas eve 2009 thinking that we were there to renegotiate the terms of our renewal. That was not the case as the lender informed us – not our guy, but the “hatchet man” for the bank – that the bank was no longer in Florida and that we needed to get them out of our property and they were calling our loan. I was stupefied and basically in shock at this. I had built up an almost $4mm net worth, most of which was in this property (a big mistake) and we were going to have to sell at the absolute worst time ever.
We did sell the property to a REIT that had a requirement of $100mm in SS properties and a $1 billion of other retail prop. We made a few hundred thousand on the sale over our purchase price, but we had the deferred profits of 3 -1031 exchanges to pay up. That cost about $400K from our proceeds. We came out with our hides mostly intact and a lot wiser about lenders and what they will do in down times. All in all we lost about $2.5mm of our $3.8 net worth in the great recession (the PHD cost I mentioned earlier) and most of our retirement funds. I didn't hardly sleep for a year of so while "waiting for the other shoe to drop". At that time I was property rich and cash poor, but upside down there as well. After a few years of licking my wounds while running my grass fed farm, I decided that the only way to recover was to liquidate my remaining property and basically start over investing in real estate.
I sold the farm at a loss and took my meager funds – about $400K – and moved to northern CA where our daughter and son-in-law were living. I met a realtor/banker who was making DOT/Note loans for pot farms at 50% LTV, 12% interest and a balloon in 2 or 3 years. Although the property purchasers did not speak English they had a tremendous work ethic and I did about 6 of these loans with great success. I still have one left with a balloon in April, 24. Great deals and I would continue with them but the market dried up in 2022 with legalization of recreational marijuana in CA
Since returning to investing I have been exclusively in cash. After I sold the SS property I paid off all debt and have yet to return to any. Call it snake bite, or just God's hand in my life, but I do sleep better and really enjoy owing no one. That has also led me to see the value in seller-financing and I have been on both sides of those deals. Of course I prefer receiving mail-box money of interest checks, but have used seller funds when mine are invested elsewhere. I did Eddie Speed' Note School training online, but at a cost of $72K for 2 years of supported access to his mutual fund of Notes, I can't get beyond the sticker shock of Eddie's mentoring program, but would love to do more DOT/Note deals if I can find them.
I also purchased a Taco Shop property in CA with a realtor friend at a song and it has been cash flowing for a consistent 5 years now. NNN lease and a strong restaurantor, has made this a wonderful property to own. At a 24% return on my cash investment I will take all that I can get every day and all day.
During the whole Covid 19 debacles I have done some fix-n-flip properties in TN, GA and VA and just settled the last of them with seller financing. The market was really softening here in Aug. here so 10% down, $270K takeback at 7.5%, 30 year amort. and a balloon in 18 months worked for me. This strengthens my cash flow position and I will reinvest the balloon funds. The seller's mkt that came along with Covid seems to be about now over, at least in areas that I follow. So what is the next wave to hit our economy and real estate mkts?
Since restarting my investment portfolio, I have rebuilt my net worth to about 1.2 mm and having turned 70 last November I am again at the point of what is next? I love real estate investment and really don’t want to give it up and put my money in an index fund or some other passive investment vehicle. I want to continue in the real estate investment game as it gets my juices flowing and I love it. The money is just the “fun tickets” and a measure of success in solid investing, but what I really love about real estate investing is the freedom it provides – money, time to spend with family and to travel. TIME – OUR ONLY REAL RESOURCE AS HUMAN BEINGS is why I love real estate investing. I also love the challenge of pitting my skills against the market and of negotiating the puzzle of a successful investment.
I will never forget fishing on my boat in the FL Keys out on the reef and being on my cell phone negotiating an office tenant lease. Wow what a gas and the power of cell phones!! I tell people that real estate investing with me is more like a disease than an occupation. Where ever I am I look at real estate. My family just shakes their heads, but they have all enjoyed the benefits of my efforts – travel, college, funds to purchase homes and etc. It has been a super fun ride (sans the Great Recession) and I do hope to continue it to rebuild the net worth lost then and continue in the field that I love being in.
I know that this is pretty long winded, but it is hard to fit 52 years of investing into one page. I do hope that some of my experiences – fruitful and not so – are somewhat helpful particularly for newbie investors and experienced investor’s comments and ideas are very welcomed and I need to find what is next for me in real estate investing. Thanks for taking the time to read this. Wade
