All Forum Posts by: Serge S.

I'm struggling a bit on what was seemingly a home run deal. Was hoping for some advice from you seasoned pros. I stumbled upon and quickly locked up a home that is 3 hours from the territory I typically work. Just got a chance to see the home for the first time and although my purchase price to comps is great I need to make a number of decisions on my exit. Here are the details:

Purchase price $41k

Neighborhood sold, pending and active comps $125-$179k

So far so good. The problem is that the house was owned by a do it yourself type with two terrible condition add ons, funky tile throughout and and a number of cosmetic issues.

My question is whether my best exit would be to flip it as is where I estimate I could list and get around $70k as is.

Or "wholetail" to make the home functioning and liveable by keeping the tile and bathrooms while finishing the add ons, fixing the roof, painting the cabinets, exterior and interior paint, landscaping and HVAC. This would make the home liveable, maybe FHA financeable and would be consistent with many active comps that look liveable but not upgraded with list prices in the low $100s. I estimate a sale in the low $100s if lucky and the rehab would be int he $12-15k range. The concern here is that I don't do enough to sell it fast and a potential deal would fall apart under the lending microscope.

Final strategy is a gut keeping just the tile throughout the home although I don't really like the tile. This would include refacing the cabinets, granite countertops, new windows, finishing the add ons, baseboards, gutted bathrooms, etc. Cost would be in the $30-$37k range but the comp would be mid to high 100s most likly $150-170k. I've met with and received bids from local contractors for this and don't have a comfortable feeling with any of them to pull it off appropriately. Rehabs are hard enough when I'm local let alone 3 hours away and only able to show up once every other week. This is the part that scares me most. That and keeping the tile while spending so much on everything else.

The market in this city is hot and there is a shortage of dressed up housing. This is a cash deal and I have no holding costs or cash constraints, just constrained on time and headaches.

Finally I could always hold and rent if all else fails as my cost basis would still be low and the home fixed up would rent for around $1200. I'm not a remote landlord and don't see many (any) successful remote landlords or landlords using PM, at least successful by the standards I set.

So ... interested in your thoughts on best strategy, thoughts on the tile, etc. Pics are attached. Please help.

Wade Guy Sorry to hear about your experience. I too feel your pain as its been a rough year for me as well. I had to replace 8 air conditioners in a 32 unit building and another 4 in SFRs. I also have let the wrong tenant slip screening and have paid for that. Sometimes I feel just like you but a few things put me back to reality. I have been landlording as long as you and I would provide the following counter to your points:

- Much of your repair expense will be a function of your house which predicates the tenants you have. An old home in a marginal neighborhood will produce marginal tenants. I've learned you simply cannot make money in these situations. Where are your homes?
- Expenses congregate back to 50% over time. Except for mutlitfamily where its usually 60% or more.
- In parts of the US the equity has been fantastic. Homes bought 09-11 are up 100-150% in AZ for example. Statistics won't show this but but if you know how to buy properties at wholesale the equity growth combined with principle paydown where leveraged is significant.

You say you have had these homes 8 years so sounds like you purchased the boom years. I don't know many landlords enjoying the experience of owning a home purchased in 2005.

It all boils down to having the ability to buy right. The right home, the right price, etc. Make a mistake here and nothing will bail you out. I would ask yourself if you purchased right.

1. SFR and multifamily
2. Arizona
3. Conventional for properties 1-4, Portfolio for properties 5-10, cash via long term flips and savings for all the rest
4. 40+ deals
5. 3 years (2009-20012):
5. To own the minimum cash flow properties debt free that maximizes cash flow while minimizing landlording headaches with the ability to pay all monthly expenses.

My path was made quicker by many years due to the foreclosure crisis in AZ and a well paying day job that made access to leverage easy.

We own 10 MF buildings in Metro PHX area and my advice would be to BEWARE. There has been a run up in MF about as much as SF. There is very little distressed inventory and anything at even reasonable prices has many offers. I see junk that couldn't sell for under $50k 2 years ago getting 20+ offers and selling in cash deals for $175k+. I'm talking about property that had no chance to cash flow at $50k - 1950s built gang infested, falling apart where owner pays all utilities. I monitor all multifamily that goes to the MLS and I don't remember the last time I spotted a deal that made sense. Management of multifamily in PHX is quite intense due to the class of tenant and low rents for SFR, you end up with low income, no credit train wreck people. There are always off market deals to be had but good luck finding those from out of state.

Bill Exeter Yes absolutely agree - 12 months is the safest way to prove intent.

Oldest trick in the book -- you 1031 into your eventual primary. You rent it out month to month for one rental cycle and then move in as owner occupied. You will lose your future $250k-$500k exclusion though at the future sale of the owner occupied property.

Agreed triple net is a great solution for some people. Problem is that without leverage $1M doesn't buy you much and with the triple A tenant in place you are looking at 5-6% returns at best. That doesn't get me very excited and if that is your only $1M its hardly enough cash flow to live on. NNN is nice when your sitting on $5-$10M and want truly passive diversified income with NNN being one piece of that puzzle. With only a one shot $1M nut NNN would not be the place I would look but that's just me.

Interesting thread and responses ... I'm actually approaching this situation in reality. I'm preparing to sell a 32 unit complex that should net approx $1M after tax give or take. The complex is debt free and my cost basis is low. I really should be 1031 exchanging into something appropriate but the larger issue is I don't want multifamily or commercial and it will be very difficult to land the right SFRs within the 1031 timeframe.

I'm not a believer in diversification IF sustainable income is the goal. You diversify not to lose, no risk no reward. Look at the truly wealthy RE investors and the formula is usually the same; expertise in one market (usually local) and expertise in ONE maybe two asset classes be it SFR, MF, commercial, etc. These investors are usually not bragging about the mutual fund or 401k that got them rich over a 10 year period. It is the local guy with connections to private money and deals that most of us never see. This investor can tell you if a property will cash flow before stepping foot a property and is probably not agonizing over every detail.

So the strategy I will most likely take is buying marketable SFRs one at a time and then owner finance them with the sales price at a 10%-30% premium over my sales price. The math would look like this for one house:

Purchase and rehab $100k
Owner finance at 70-80% LTV (varying term) at a $125k sales price rates at 7.5-9.5%. The $25k in profit adds major juice to your overall return. On a 5 year note thats an extra 5% per year realized upfront. Add that to the interest income of say 9% and you have a nearly risk free 14% with no management headache or large transaction costs. There is always demand for owner financed homes and at reasonable LTV this should be a very sustainable and truly passive model which is the goal. I can supplement this with the rental income from the best SFRs and multifamily already in the portfolio and call it a day.

If I didn't mind adding additional rentals and the incremental management involved I would go SFR buy and hold all the way but unfortunately after the recent price run up I would not be very interested in the 5% returns that the market is offering.

The answer to this question will be different for everyone.

Agreed - this model that they are using is beyond terrible. The auction format is such a time waist. I have been the high bidder on one house 5 times and the auction ends in reserve not met. No counter nothing. You have to follow a house literally a month or two playing this game until it finally goes to best offer. Even worst is the employees that run the place. India outsourced and absolutely clueless borderline illegal. Search prior posts on gohoming.com which is what this outfit used to be called. What I cannot understand is why sellers would ever give them inventory. This would be the last place I would ever consider.

This is a very interesting post. I think the vacancy numbers are a bit off as they do not factor holding periods. Someone posted the powerpoint quarterly presentation of a public hedge fund a while back. I love how they continue to preach the "inefficiency" of the mom and pop investor as if this is a retail industry and the cogs landlords make can be found cheaper in China. Fortunately for the hedge funds it should be easy to unload the properties over the next five years. Once credit eases and the evicted generation cleans its credit we will get right back on the cycle. I'm not too worried about the effects of hedge funds selling rather the people that will be buying from the hedge funds. In Arizona the party has been over since these guys arrived.