Buying properties to sell/rent

mpat215's picture
Rank: Monkey | 30

Anyone have any models they can share about this topic? Looking to buy properties for quick turnover or cash flow and need some models to see if they are worth the investment. Thank you kindly.

Comments (103)

Feb 23, 2017
    • 6
Feb 23, 2017

Apartments, houses, retail buildings, 1mm sq foot office buildings?

Feb 23, 2017

Town Houses/Single Home/Apartment buildings roughly between 1000sq-7000sq. sorry for not specifying.

Feb 23, 2017

I figured as much. Don't expect to do any quick flips unless you're really creating some value in the properties. You're probably looking at about 8% of the sale value in sales/closing costs, and if you plan on putting in tenant(s) and having a third party manager, expect to cut out maybe another 10% of NOI.

I don't have a model to share, but you could probably find a pretty good one on Google for SFR.

Your big expenses for long term ownership will be vacancy (check what it is in your market), property taxes (county will have), maintenance (my estimations are about 2% of the value per year for repairs) (renters will break everything), cap ex improvements (basically anything you need to bring it "upmarket," you'd be surprised what 'granite' counter tops can do), debt service and finally management/ leasing costs if you choose not to manage the property yourself (this will be negotiable and dependent on the market, but I've seen about 10% of NOI for some smaller stuff).

    • 3
Feb 23, 2017

Wow this is an incredibly broad question. You may as well just have asked, "I'm thinking about buying a company, does anybody have some quick tips they could share?"

    • 4
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Feb 26, 2017

Get rich quick hu?
I have a few scheme for you mate - hit me up. I am working on a ponzi scheme and I just started so come on in early you might just about get your money out before it unravels.

    • 2
Feb 28, 2017

I recommend reading Foundations of Real Estate Financial Modeling by Roger Staiger

    • 1
Feb 28, 2017

With rates dropping it's becoming increasingly more appealing. Mortgages have come to an all time low. However, keep in mind that more and more institutional investors are starting to set up funds to buy up residential housing. The competition is coming and the window for opportunity is closing or might have closed already.

One of the major problems I see is that the market in NYC never got as bad as other markets. The best opportunities continue to be in Phoenix and Las Vegas, but I see a lot of risks in buying a home there if you don't live there. You have very little opportunity in doing due diligence and figuring out which neighborhoods are desirable etc.., but if you do it can become costly very quick.

Feb 28, 2017

Well it's not fake if that's what you were gettin' at.

Feb 28, 2017

I'm looking to get involved myself. The best option to enter is probably getting a threeplex or fourplex and living in one of the units. It still qualifies for an FHA loan with 4 units or less and owner occupied, gets you some management experience, isn't a heavy burden cost wise, etc. Just seems to make sense.

Outside of that, I've actually considered getting into hard money lending and was curious if anybody else dabbled there. Basically financing people's attempts to rehab/flip/whatever and charge decently high rates. Where I am, that's 12-15%, 2-4 points, reasonable LTV (60-70%), etc. If you have 100-200k to use, I see it as a decent trade. Some risk to it for sure, but pretty respectable returns and minimal legwork needed if it's a side project. Without leveraging yourself at all, you could end up getting >20% returns a year on that capital.

Feb 28, 2017
Jerome Marrow:

I'm looking to get involved myself. The best option to enter is probably getting a threeplex or fourplex and living in one of the units. It still qualifies for an FHA loan with 4 units or less and owner occupied, gets you some management experience, isn't a heavy burden cost wise, etc. Just seems to make sense.

Outside of that, I've actually considered getting into hard money lending and was curious if anybody else dabbled there. Basically financing people's attempts to rehab/flip/whatever and charge decently high rates. Where I am, that's 12-15%, 2-4 points, reasonable LTV (60-70%), etc. If you have 100-200k to use, I see it as a decent trade. Some risk to it for sure, but pretty respectable returns and minimal legwork needed if it's a side project. Without leveraging yourself at all, you could end up getting >20% returns a year on that capital.

In theory- Yes but good luck getting your money back from contractors who can't sell the property or go flat out broke from other projects.

Feb 28, 2017
Jerome Marrow:

I'm looking to get involved myself. The best option to enter is probably getting a threeplex or fourplex and living in one of the units. It still qualifies for an FHA loan with 4 units or less and owner occupied, gets you some management experience, isn't a heavy burden cost wise, etc. Just seems to make sense.

This.

Feb 28, 2017
Jerome Marrow:

I'm looking to get involved myself. The best option to enter is probably getting a threeplex or fourplex and living in one of the units. It still qualifies for an FHA loan with 4 units or less and owner occupied, gets you some management experience, isn't a heavy burden cost wise, etc. Just seems to make sense.

Outside of that, I've actually considered getting into hard money lending and was curious if anybody else dabbled there. Basically financing people's attempts to rehab/flip/whatever and charge decently high rates. Where I am, that's 12-15%, 2-4 points, reasonable LTV (60-70%), etc. If you have 100-200k to use, I see it as a decent trade. Some risk to it for sure, but pretty respectable returns and minimal legwork needed if it's a side project. Without leveraging yourself at all, you could end up getting >20% returns a year on that capital.

I've been involved in hard money lending as a borrower. I think its great in terms of lending. Although, you need to understand the market in and out, in your area. If the borrower defaults, you come in, finish the project, and still make a decent profit. With that said, if you have no contacts in construction or time to finish the project, it might not be in your best interest to be a direct lender.

Personally, I'm all about hard money lending. But, I would prefer to invest with a hard money lender vs. direct lending. Many lenders operate this way. They basically buy money at 7-8%, which goes to the investor. Then, they lend at 15% (7-8% going to them) and charge 4 points and many other small fees which add up quickly.

By the way, I'm only speaking for residential lending. Not sure where you are, but PM if you are interested.

Feb 28, 2017

I was never really that interested in investing in property, but if I had enough money right now, I would be snatching up every fucking slice I could.

If you had a timescale of about 5-10 years, I don't see how you could lose (open to correction).

Damn you Rodger!

My WSO Blog

Feb 28, 2017
Dufus:

I was never really that interested in investing in property, but if I had enough money right now, I would be snatching up every fucking slice I could.

If you had a timescale of about 5-10 years, I don't see how you could lose (open to correction).

Where are you looking though?

A lot of property is absolute junk. Outdated or poorly rehabbed or in just a shitty area.

Other areas have a massive glut of nice real estate and while prices may get an uptick, I have a hard time seeing there being much of a rally. I see parts of Chicago that developed massive amounts of luxury real estate right up to and through the financial crisis and have no idea when the demand is ever going to come back. You have buildings with >70% of the units unsold and even being list @ prices that would be a loss doesn't get filled. I just don't see it happening anytime soon, not to a significant degree at least.

It is a good play with you can lock in some low rates though and have an area you really like as a buy and hold.

Feb 28, 2017

How often does that happen though? If the counter party has enough equity of their own at stake and you have a lien on said property, you're never looking at a total loss.... breakeven might be highest if they default part way through the process. I would be interested in ideas about this, seems like an interesting trade. I can also see value in cross collateralizing with people's personal property in return for offering them marginally lower rates (even though it likely securitizes your loan much, much better).

Feb 28, 2017

hey at least your investment won't blow up for another 70 years...

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

Feb 28, 2017

What are the benefits of purchasing physical property versus investing in a REIT or REIT ETF? I presume that physical RE offers a higher return long term, but there's also more risk and more work involved. Insuring the property, repairs, working with tenants who refuse to pay rent, etc. Would like to hear opinions on this matter.

Feb 28, 2017

I have investment in real estate but before purchasing property , you must know about tax on property.

Feb 28, 2017

My brother and his Brother in law just invested money into land in Montana (they live out west) and they got it a very favorable price per acre.

They asked me to invest but didn't state why it is such a good investment (both are lawyers), I was skeptical and could not find anything online to support this.

Any one hear of Montana R.E. and why it is lucrative?

Eventus stultorum magister.

Feb 28, 2017
Johnny Ringo:

Any one hear of Montana R.E. and why it is lucrative?

Could be a speculative land play for future natural gas and oil fracking going on in this area (East side of state).

Feb 28, 2017
Johnny Ringo:

...Any one hear of Montana R.E. and why it is lucrative?

Rumor has it they aren't making any more of it!!!

For real though, probably just speculative. Realistically the value of land will always increase over the long haul since there is limited supply. The question is, does it go up enough to justify the carrying cost/expense of owning and maintaining it.

Regards

Feb 28, 2017
blackjack21:

So does anyone here actually invest in Real Estate? If so, has anyone taken a chance since the Housing market collapsed?

Residential? commercial? New York? Las Vegas? Dallas?

Feb 28, 2017

i do...going prtty well..im almost 10% up in 2 months...the lower th rates drop the better for REITs

"An investment in knowledge pays the best interest."

Feb 28, 2017

I invest in real estate with my family. We are buying residential properties in Las Vegas right now, and have been for the past 3 years. It's not as good as it was a few years ago (09, 10), but you can still buy some pretty cheap properties and make good returns if you have a long-term view (can wait for the capital appreciation 4-6 years down the road). It's been hard to extract good returns on rental income because rents have been driven down in the last year as more supply comes online and banks are releasing more and more of their inventory. This is NOT an easy business - dealing with repairs, contractors, general bullshit of irate tenants. To make it worthwhile in the rental business, you gotta scale up and buy a few units. One unit is not worth the trouble. We typically buy at auction (REDC) and then rent it out to extract income, but make most of our money on capital appreciation and interest. Raw land is where you'll get the most capital appreciation if you can withstand paying taxes on it without generating income. We also do seller financing on these properties that we end up selling. That's a pretty decent business. We make 10-12% interest only loans and balloon it with a 5 year horizon.

We also act as lenders in hard money lending through a few mortgage brokers we know. Often the transactions are in CA.

Feb 28, 2017

The situation looks a bit different in the UK. If looking for financing with a mortgage, the minimum deposit is currently around 20% mark. Despite a continued oversupply of residential property to the market, the average house prices are currently only 13% lower in real terms than at their peak in Q2 2007. With the prices stagnant, oversupply in some areas such as Edinburgh and Wales will over the next 3-5 years force further declines as sellers finally decide to realize their returns.

London is an interesting exception. Majority of the central areas suffer from housing shortage, with average property prices now at PS477,440, a new record high. By contrast, some of London's eastern peripheries suffer from a significant oversupply, which in my view, should further push down local prices by some 5-6% in real terms over the next 3 years.

A snapshot FT article here: http://www.ft.com/cms/s/0/ad02af98-b88f-11e1-a2d6-...

Competition never sleeps. Then again, chances are that neither do you.

Feb 28, 2017

My response was too long for a comment, so I posted it on the main board. I do invest in real estate, and I talked a little bit about how I did it...
http://www.wallstreetoasis.com/forums/response-to-...

Feb 28, 2017

slumlordddd.....

Feb 28, 2017
gstackle32:

slumlordddd.....

True, but I respect what this guy is doing. I've definitely thought about doing the same thing.

Feb 28, 2017

As the old saying goes, real estate gets sick but never dies. Great idea and I commend you for doing all of that in low-income areas.

I am personally planning on buying an apartment building in Saudi Arabia. They're always full and returns are ~10%. Costs are extremely minimal. No taxes. REIT, anyone? :P lol I wish, too bad foreigners can't buy real estate here or else it would've been hot,hot,hot!

Greed is Good.

Feb 28, 2017

I am planning to do something like this over in Miami. You can get fourplexes for as low as $50k asking in the bad areas, but I won't be caught dead "literally" there. Minor repairs needed ($5/sqft). Section 8 guaranteed rent, professional management and above average conditions are my goal. I have my sights on a few properties composed entirely of 1/1 units with around $700/month rent based on a 20% discount from fair market rent calculations. 20% down interest only 5/1 arm if i can get them. I intend to sell or pay them off by the end of that 5 year period. On top of that, I get a 3% commission back from the purchase (As my mother is a realtor in the city)... That's about $1500 return instantly after my down payment which I put into my repair fund.

Costs:
Property taxes: 1,100/year
Management: 5% gross
Monthlies: $400/month approx (utilities, insurance, water/sewer). The tenants pay the rest.
Reserve fund: $500/month (this is generous, but see why).
Interest payments: $200/month

NOI: Approx. $18k before taxes.
at 20% down (I can get 3.5% down if I was able to establish an apartment as a residence while not using it... but I wont go there). I made my money back and $8k additional in 1 year. Time to buy another place!

Now my reasoning behind the reserve fund.
I have an idea of giving my tenants an incentive to keep the property clean and safe. I will offer each tenant a rebate of a certain percentage of Gross income for every month the place stays nice (Paid as free utilities or random gifts?). Not sure on the legality of it, but it's an idea.

Maybe invest in a nice gate, some bars and some outdoor cameras to prevent crime. Sure, it's extra money into the pot, but it might be worth it.

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Feb 28, 2017

Did you account for HOA, taxes, and insurance? Remember that with condos, there's always the possibility of getting hit with a huge assessment for something like redoing the roof or something. HOA fees will eat up any net income you make, though you do get to depreciate it. Also don't forget manager's fees. If you work in NY and want to buy an investment property in Charlotte or Atlanta you will want a property manager. They usually take about 10% of your rent revenue.

If you're looking for a depressed market, there are 3 flats available for like $350k and each one's renting for $1k in Chicago (Hyde Park area). No HOA's, no assessments (well you have to care for everything) and with 20% down the mortgage payment's going to be about $1,600 a month at 5% fixed, 30 years. On an FHA 3% down loan, probably about $2,300 but I'm not sure if they'll let you buy investment properties on an FHA loan.

Now the math works out better if you live in Chicago and buy yourself a 3 flat, live in 1 and rent out the other. You lose about $1k of income but you also don't pay rent and you're paying about $2,300 with $2k of income, and you get to deduct mortgage interest, so you probably could come out ahead.

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

Feb 28, 2017

The Other Road for topics not covered. Also, feel free to post investment questions in the HF/AM/S&T forums, there are a lot of guys there that can help out.

If WSO had a forum for every one of these things, there would be forums for:

Real Estate
Real Estate Investing
Corporate Finance
Financial Leadership/Development Programs
Entrepreneurship
Tech Entrepreneurship

...to name a few.

Feb 28, 2017

interested as well. are there any good reads on this topic?

Feb 28, 2017

Ill give you one of my simple models if you hook me up with a job :).

Lol, but seriously, it really depends on how much you will have as your LTV on average for your properties. With rates so low, its crazy not to go into RE, but this has caused RE prices in better areas to rise significantly. I don't exactly know how much you are willing to commit as equity, so can't really go over leverage. If single family is how you want to start, I highly suggest you understand the market first. I have seen many RE investors get trapped due to low prices in distressed areas, not like the ghetto or anything, but some cities have not recovered as well as others. I can't speak much for single family, obviously, due to the fact our clients are multi-billion dollar REITs. In regards to investors, it will be insanely difficult to convince anyone to invest with you, nothing personal, but investors require a fair amount of experience just like with any transaction they do.

Shoot me a PM. If you have some markets you are interested in looking into, let me know. We have some pretty good software which we use for market research/analysis, we are paying several hundred thousand a year for it, and I don't think I use it enough. I don't mind helping you out.

Feb 28, 2017
TeddyTheBear:

If you have some markets you are interested in looking into, let me know. We have some pretty good software which we use for market research/analysis, we are paying several hundred thousand a year for it, and I don't think I use it enough. I don't mind helping you out.

If you don't mind me asking, what program is that? Costar is the only I can think of, and I would have never guessed that it was several hundred thousand dollars a year, lol. Isn't ARGUS even like 5k/yr?

Feb 28, 2017
TeddyTheBear:

If you have some markets you are interested in looking into, let me know. We have some pretty good software which we use for market research/analysis, we are paying several hundred thousand a year for it, and I don't think I use it enough. I don't mind helping you out.

I'm super interested on any elaboration you can give on this as I am someone on the software side in CRE.

FrankD -- ARGUS is like 5k/year for basically a 1 user license. When you start building enterprise platforms that 10s to 100s of people can use, it's very common for software companies to charge 6 or 7++ figures for those kinds of packages and services.

Feb 28, 2017

As I've mentioned in another thread, I've done 3 real estate deals now since 2009 and am up about $417,000. They say real estate is location, location, location; however, in RE investing, it's finance, finance, finance. So much of what you can do starts with what you can get financed. So your credit score, liquidity/LTV, current income from job, loan size, property condition, etc. impact what you can do--build, renovate, or just buy existing--and IF you can do it at all. All of those factors impact your debt-to-income ratio, LTV, and pricing and qualification for loan product. Ideally, you'll avoid banks and work in cash only as an investor.

Without information on income, liquidity, and targeted price range, it would be difficult to even start to advise you on where to begin.

Feb 28, 2017

Its enterprise software, that we got and have an entire team that we pay to maintain and upkeep. It feeds from multiple subscriptions that we have, costar, reis, axiometrics, cbre cap markets, and various other ones.

The price of packages is based on users and markets. For example, if you only want to research NJ properties, then you only need the NJ packages. We have all 50 states and several users. I don't know the exact cost, but I believe its somewhere around $35-$40k a month.

Feb 28, 2017

A couple of things you need to do:

1. Do not buy property like this without a professional inspection. They will be able to identify any major structural issues with the property (they have an educated eye for it, you don't), whether it's the foundation, electrical, etc. Don't be penny wise, pound foolish and skimp on this - it's a couple hundred bucks that can save you tens of thousands.

2. Hire a property manager, unless you want tenants bugging you all the time about buying a new fridge, fixing a leaky toilet, etc. The shittier the property, the more often these problems come up (and they're students on top of that - stuff will get damaged and they will try and claim that it wasn't their fault, but either way it has to get fixed). Property managers typically take a percentage of the rent as their fees (or a fixed monthly, depending on what they want). And like any service, you get what you pay for (go with referrals from others if you can and it's worth paying a little more for someone you trust). The more hands off you want to be, the more it's going to cost you.

And you're an investor, so you should know: if it looks too good to be true, it probably is. Doesn't mean you shouldn't invest, but that your operating costs are going to be higher than you'd expect. I'm sure you've factored in a healthy maintenance expense budget annually (if the property is shitty - you still have to keep the place up to code, and a shitty house is like a shitty car - it can be a money pit if you buy the wrong one) and property taxes, special assessments on top of hiring a property manager.

Do a title search on the property as well. You need to know if there's any encumbrances, easements, liens etc. or any clouds on title before you buy. And if you do buy, obviously you'll need title insurance policy.

Feb 28, 2017

http://www.wallstreetoasis.com/forums/4-more-thing...

Great advice on that thread.

Now, coming from someone with a decent amount of single family experience, I advice against most people who do not have some flexibility in their job to buy a rental house. There is a lot more that goes into it than at first glance. If the property is also far away it makes it that much more difficult to handle.

If your cap rates are that high, than hiring a property manager can make sense. But i guarantee unless you use someone who you know personally, you will most likely get killed on the fees & repairs. Fees for a single family will be roughly 10% + 1st month rent every year. Plus they also uncharge you any repairs. This can roughly take 5-6% of your ROI away.

Risky areas that are "bad neighborhoods" have great upside potential if the area gets gentrified. But if the area gets worse you will not only get stuck with a house you can't sell, you might not be able to rent it. Obviously this is all area dependent. All areas work differently.

When it comes to student housing there are a couple things to look out for. Try to find out if any permits were applied for student housing buildings. If a new housing building is built that can lower your rents.

Also get personal guarantees on the rent from the parents on the kids. Your tenants will make or break your profit. Trusting kids is hard. Even with personal guarantees from the parents it is difficult to collect.

My last tenant in one of my rentals cost me $16,000 in renovations/repairs!

For quotes, take a contractor with you when you look at the house. They can give you a rough estimate. Most contractors will do this for free b.c they want your business.

Feb 28, 2017

Everything @mbaapply stated but I'd also look at the overall risks of the property itself, and this goes beyond the time suck of how many units/income it will produce to you (even if you have a prop manager), what sort of debt terms you're looking at (recourse?) and just general things like that, but what's the risk on the property? If the college decides to build more on campus housing and the student demand diminishes or evaporates, are you stuck with X units in a crappy part of town renting to low income people? Students can be a pain but being a landlord in the hood can be horrible. And they won't pay as much as students so if you have recourse debt on it and default you're fucked personally. Even if it's non-recourse you're out all of your equity. I know it sounds like an outside chance but I'd do your diligence with the college to make sure they're not planning in building more housing anytime soon.

Feb 28, 2017

Um, 50% IRR over 50 years sounds pretty good to me.

Feb 28, 2017

When you say "a property" are you reffering to a single family home, duplex, 4-8 units, or larger complex? If its a small property expect to pay a property manager close to 10% of EGI, if its a complex expect to pay 3-4%.

Get an inspector and if there is issues, have a couple GC give quotes. We own a few and would recommend hiring it out and not dealing with the daily problems of a drunken college student. Make sure you don't get burned on a property tax reassessment if you acquire more than assessed value.

Feb 28, 2017

i didnt expect this many responses so first and foremost, thank you all.

the property is a single fam connected town house - 3 bed, 1 bath, 1180 sq ft. the prop manager would most likely be 8-10% gross and first months rent. i'd try and negotiate with them to some degree on the 1st months rent since from what i was told, finding students isnt hard. the thing that gets me is the 20% mark up on contractors. seems bizarre to me to do that.

as far as the school expanding; i need to investigate this. they added housing a few years ago but outside of buying up the area i'd be buying in or close to it, there isnt much room to expand horizontally.

those returns i mentioned are even after an assumed 10% prop manager off gross and 20% off gross for a maintenance fund every month.

i'm going to take all of your advice and bring a contractor with me for sure and run title.

thanks again.

Feb 28, 2017
Beanyeyes5:

the thing that gets me is the 20% mark up on contractors. seems bizarre to me to do that.

same thing that pisses me off too. The first month's rent + monthly fee i understand. They have to pay out (usually) leasing fees; etc. But the 20-30% markup is just plain stupid IMO. What are you paying that markup for? Just for them to make a phone call to a contractor?

Feb 28, 2017

I own rental property and have never used a property manager. Take the time to find quality/responsible tenants (ie not a frat or members of the hockey team). Use Angie's list, Google, or local trade journals to identify reliable contractors. Draft a comprehensive lease that explicitly outlines responsibility of tenants, noise/party restrictions, etc. I'm on my phone so can't go into much detail but you can definitely manage the property yourself working Buyside hours.

Feb 28, 2017

yea it seems like having an arrangement with a prop manager where they manage the day to day and payments and I hire someone for any contracting work or issues would be ideal. i dont know how realistic it is though.

Feb 28, 2017

If you only own the single home, finding a worthwhile guy to manage it could be difficult. Even if you do find a worthwhile guy, he's probably going to cost you the majority of your return.

Another thing to consider is that a SFH in a rough neighborhood isn't going to be nearly as liquid an asset as the same home in a decent neighborhood. You may find yourself stuck with something you don't want to manage.

The economics look good on paper because managing one-off houses can be a pain in the balls.

Caveat to the above - I don't do it, but I know quite a few people that do. Their experiences vary greatly.

Feb 28, 2017

Just wondering your IRR is levered or unlevered? Are you putting 20% down or buying cash?

Feb 28, 2017

the IRR is levered since i'm only putting 20% down. I can send the model out for purposes of the conversation. Just PM me. basic assumptions are; > $100K home value, 2x to 3x rent to mortgage ratio, 20% maintenance fund off gross monthly, 30 year mortgage, 4.5% rate, 30 year cash flow run with mortgage, 20 year terminal value with mortgage paid off. no assumption of any reinvestment of excess cash back into principal.

I agree with the need to not have a prop manager. The more I speak with people the more I realize it's not really warranted for just 1 property.

The property I saw last night was in OK shape, but may be an issue renting to students. It's a little too far extended from campus for my liking. Looking at other opps now in the area that are closer but the purchase price will surely be higher - albeit small.

@slothrop - could you elaborate more on the people you know who have those experiences you mentioned?

Feb 28, 2017

sorry,

Feb 28, 2017

If you can get 650k for it, I would sell it tomorrow.

Feb 28, 2017

Totally agree. That has been my position on it. Point of note, however, is that the owner of the building next door (corner building) is interested in selling, and I have around 5k sqft of air (and 6 hosing units of right) on this property. I'd like to buy the neighbor, transfer the air to that one, then sell my current one and use the sale proceeds to redevelop that one as well.

Ideally.

Best Response
Feb 28, 2017

I'm Northern Virginia-based, so that's where I do my investing.

1) Bought a vacant piece of land close to George Mason University for $100,000 cash in January 2010. Lot was about 6,000 square feet with horrible dimensions. Got setback exceptions to be able to build a legitimate house. Received traditional financing for the construction, which cost about $330,000. Sold for about $525,000 18 months after acquiring the property. After holding costs, financing costs, and selling costs my net profit was $30,000. Very disappointed in the total profit, but I learned a lot.

2) Bought a vacant piece of land in North Arlington in March 2011 for $145,000 cash. Lot was about 3,500 square feet with setbacks that didn't allow for a house to be built. Got setback exceptions and some other variances and built a legitimate house. Put in about $375,000 into the build with traditional bank financing and sold for $790,000 23 months after acquiring the lot originally. After selling, holding, and financing costs I walked away with something like a $200,000 net profit. However, I was very frustrated with how long the process took.

3) In February 2013 I purchased 3 lots in a mediocre section of the Town of Leesburg. Lots were listed for $110,000 each and we acquired them for $55,000 each. Lots were bizarrely shaped, but my builder pulled off a beautiful design. Joint ventured with the homebuilder, so cost of construction--$215,000 per--was charged at cost with no builder profit. I've sold all 3 houses to end homebuyers for $390,000, $395,000, and $399,000 each. 1 house is completed and settled, the second is halfway complete, and the third is breaking ground in a month with February 2015 settlement. After holding, selling, and financing costs, and splitting profits 50/50, net profit to me will be about $90,000 over 23 months. Not a stellar performance for 24 months, but I learned a lot about the area and how to deal with the government.

4) Under contract to purchase a lot in an historical district of the same town as #3 for $525,000. Will build 3 new houses and renovate the existing house built in the 19th century. Net profit is expected to be about $450,000 over 24-30 months with my profit expected to be about $200,000. Challenges will be maneuvering the town's expensive and difficult design requirements, the seller's deed covenant restrictions, and properly estimating the cost to move telephone poles and Verizon wires.

After I'm finished with #4 I'll have about 9 years of CRE/multifamily work experience, 4 projects under my belt, and a master's in real estate. From there I'm going to start raising outside money for larger projects. I know my area really, really well and my homebuilder also has a commercial real estate design/development group, so I'm going to try to capitalize on the synergies.

    • 7
Feb 28, 2017

OP, sweet thread, thanks for getting it started.

DCDep, thanks for sharing, sounds like you've gone through a great learning experience with these projects.

I aspire to take my real estate career into the entrepreneurial realm around the same point where you did, how did you guys decide you were ready to balance both your job and your projects?

Do you ever envision yourselves doing it full time and taking on bigger projects?

Feb 28, 2017

SB for this - great post

Feb 28, 2017

I think doing a single project at a time is easy to do on nights and weekends. In fact, it's really easy. I delegated the design, engineering, and daily building and anything associated with construction to the builder. My job was simply to find the right property, hire the real estate agent to acquire the property and sell the finished units, and to acquire financing. Not time consuming at all.

I think I could take on about 3 of the sized projects I've done at once while still working. There is a point, however, if raising outside money, that one would need to incorporate, open an office, hire personnel, and manage the projects at a high level, which would require going full time. I'm no where close to that yet, but that's the goal.

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Feb 28, 2017
DCDepository:

I think doing a single project at a time is easy to do on nights and weekends. In fact, it's really easy. I delegated the design, engineering, and daily building and anything associated with construction to the builder. My job was simply to find the right property, hire the real estate agent to acquire the property and sell the finished units, and to acquire financing. Not time consuming at all.

I think I could take on about 3 of the sized projects I've done at once while still working. There is a point, however, if raising outside money, that one would need to incorporate, open an office, hire personnel, and manage the projects at a high level, which would require going full time. I'm no where close to that yet, but that's the goal.

Great post. Would you say finding a good real estate agent and a good general contractor are very very very important parts of the process, since they handle all the construction and buying & selling?

Also, how did you manage to buy the land for cheap, below market?

Feb 28, 2017

Very inspirational DCDep. I recognize you from a great post you did on affordable housing.

Could you elaborate on how you found a good builder? Also, have you considered expanding beyond single family homes? Thanks for the insight.

Feb 28, 2017

Well, I kind of cheated. My builder is my brother-in-law who has about 25 years of homebuilding experience in Northern Virginia. The guy is brilliant at what he does but he's an incredibly difficult personality to work with. He just recently went out on his own after spending years with the big boys like Toll Brothers. He does both commercial and residential builds.

The goal is to definitely diversify into commercial development once/if I am able to raise outside funds, but the great thing about residential is how liquid the properties are.

Feb 28, 2017

Hey DCDepository... I am actually in MD and working in N. Va in CRE, and eventually want to do my own deals. Mind if I shoot you a PM?

Feb 28, 2017

I like to buy land in my area for as cheap as possible then sell it for as much as I can. Generally through sheriff sale or from out of state owner that doesn't know what they have. I did my first deal when I was in school, bought a piece of land on a sorta gentrifying commercial strip for 10k and sold it a few months later for 32k. Have done a few similar deals since then, I'd like to get a small time home building business going so have been holding onto my land lately. Currently building 2 townhouses on land I got for cheap, was able to convince a bank to lend me something like 87% of project cost due to the equity I created by stealing the land and obtaining entitlements. Still not sure if homebuilding is a better business than just flipping land quickly but figured it'd be a good learning experience either way.

Feb 28, 2017

Awesome thread, I'm considering vacation properties out on the east coast in the next year. Need a longer season than we get here in the Midwest.

Also, "contractor" has the same negative connotation with me that "banker" has with the general public.

Feb 28, 2017

@"DCDepository" can you shoot me a PM?

We spoke on the thread I started about post-MBA employment, and I have a few questions about RE investment like you mention above.

Feb 28, 2017

DCDepository...realistically, how much are you looking to raise?

My hope is to either buy some small businesses in the coming years (maybe unrealistic given time requirements) or, I'm looking to do something very similar to what you are doing. Ideally, I have a few friends...or friends of friends...in the finance community that could probably throw some money into a pot for some small projects. Thankfully one guy has some experience with real estate investing, though primarily Section 8 housing (he was taking his bonuses a few years back and buying houses for $50k a piece...think he has, or had, about a dozen or so), so he'll be of some help.

Just wanted to get an idea of how much you are looking to raise and what sort of project you would likely take on with that particular amount of money.

I think what you are doing is great, but I have to say that I was a bit shocked at the length of time it took to get in and out of a property. Granted, my knowledge/expectations probably revolve more around the remodeling/flipping scenarios rather than actual development.

Clearly time is an issue with development, so the key is to have multiple projects going on at any given time...hence the 'fund', right? Or, to have projects that are significant enough in size that you are netting high hundreds of thousands, or millions, of dollars, as opposed to $60k or $80k per project.

Anyways, I love hearing about this type of stuff and seeing how people put their money to work. Beside not having much capital at the moment, my biggest drawback is that I'm very risk adverse (probably partly a result of little net worth and minimal capital)...so maybe that diminishes with time.

I don't know what I'm going to do for a living long term, but I know I would like to be able to do it because I want to, not because I have to.

To the OP...would it be possible to use the current property as collateral against the neighbors place?

Regards

Feb 28, 2017

cph,

The ultimate goal is to raise a large real estate private equity fund (i.e. $100+ million) in a decade or so, but in the first raise I'd be looking at something like $2 million. There are SO many great opportunities out there that I can't tap because of my finite funds. And, like you said, development deals take years to complete, so scaling up makes sense (might was well make $1 million in 2 years than $100,000). Of course over time I'd like to do 2/20 compensation. The good thing about having finite funds is that it forces the investor to be very discerning and highly critical of investment opportunities. On these smaller deals I can return 100-200+% on my money. As a fund scales up, those returns will probably drop into the 20-40% range over time.

With regard to risk aversion, I've found that in my experience and in my clients' experiences that it takes brass balls to develop real estate. I think the goal is to take an industry that is gambling at its core and turn it into calculated risks. I take gambles and turn them into calculated risks by selecting areas I know really well and that historically hold their values. It's how I've avoided getting crushed thus far (knock on wood). But what do I know? I've done THREE deals in my life--I've got a lot to learn.

I think one of the challenges is transitioning into commercial real estate--obviously one starts small. However, small commercial properties have a very limited buyer base. One could build the sickest Class A retail property in the nicest area, but if it's worth $10 million at a 6% cap rate, who the heck is going to buy it? Too big for a wealthy doctor to buy and not big enough for institutional buyers. So therein lies the challenge.

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Feb 28, 2017

Interesting. Raising a fund is my goal as well. I feel like it would be an easier process to just raise $10m+ than it would be $500k. I'm sure there is a good reason for it.

I just put an LOI out on an apartment building for $2m. No idea if I can raise the capital for it, but I rather try and fail than watch it go by. Its also one of the cheaper things I've seen lately. I am selling the properties as much as I am selling myself to investors.

Feb 28, 2017
DCDepository:

cph,

However, small commercial properties have a very limited buyer base. One could build the sickest Class A retail property in the nicest area, but if it's worth $10 million at a 6% cap rate, who the heck is going to buy it? Too big for a wealthy doctor to buy and not big enough for institutional buyers. So therein lies the challenge.

There are arguably more buyers for smaller commercial properties ($1m-$10M) and much higher volume of transactions for deals of this size than the institutional quality product. There are more owners and players that focus on this segment of the market hands down. You're buyer for that $10M 6 cap deal could be anyone. You'd be surprised.

Feb 28, 2017

own MF units in a very very tertiary market. If you are comfortable what some would consider being a "slumlord", there are great deals to be had everywhere at 15 - 20%+ caps. Offer low enough to where you would feel comfortable holding it forever all cash and just considered it a savings account. Use all excess cash to pay down any debt / keep in reserves for any unexpected repairs (i.e. don't take out as personal income). Repeat this process over a few years and you should have a pretty good portfolio.

Feb 28, 2017

Out of curiosity, what would you consider a "very very tertiary market" and, given the nature of the markets, are these typically brokered by traditional real estate agents/how would someone sitting in Manhattan access these?

Feb 28, 2017

A town of

My suggestion would be either look in areas where your family or someone you know lives and seek out a local broker. Offer very low. Liquidity is so low in these markets a lot of the 2 - 4 unit properties have been on the market for years and people are willing to take a significant discount if you can buy all cash and close quickly.

Another bit of color on this...the last one we bought we got ~ 90% loan to purchase price because we offered about 50% below to asking price, the owner took the offer, then the property appraised for about 40% more than the purchase price and the local bank lent on the appraised value. Worked out well.

Feb 28, 2017

Thanks for the color on that.

Crazy how similar a position I'm in as you, DC. Just got $75k as a grad gift and trying to find some investment ops on the side of my acquisitions job.

Feb 28, 2017

Great thread.

Interested to know what age (20-25, 25-30, etc) anyone was when they decided to pull the trigger, and how much money they had saved, or had access to. Did you take all your savings out, borrow from family, know a lender? Trying to gauge how much risk there was before actually taking the plunge.

Feb 28, 2017

I was 24 years, 10 months old. I used my full $100,000 that my parents gave me as a college graduation gift.

Feb 28, 2017

Just turned 26.

Feb 28, 2017

What do you guys think about student housing apartments? And what's a good amount of money to have to start on that first deal?

Feb 28, 2017

Mid 20's. Not much saved as couldn't pass on the deal. Enough saved to cover any major capex costs on an as needed basis.

Feb 28, 2017

Working with a family member and close friend, we bought up rental homes ($60K - $80K) and small (2-10 unit) multifamily properties in my home state during the downturn. Parameters for buying were, in priority: (1) strong demographics and location in suburban areas of a major city. As posts above mention, yields are higher in tertiary markets but we wanted to avoid that level of risk for our first venture; that and vacancy kills your numbers for rental homes - it's nice renting to quality people (2) areas we believed would continue to improve based on proposed highways, public transit, etc. (3) properties requiring no more than 20% capital of purchase price, surprising how many people are turned off by a hole in the wall, that's an easy fix. There's still plenty of meat on that bone... throw in some water, a potato, baby you got a stew goin'

We're now looking to get our feet wet on a 50+ unit apartment building (needs to be big enough for an onsite manager) using financing on 4-5 of the homes. The math works out well as they have been appraised at 150%-200% of total cost. Debt service for each home is covered and nets ~$250/month after taxes and insurance. Exit opp is a HNW individual but as DCD mentioned you hopefully don't end up between private and institutional price targets.

@youngunner I'm in my late 20's, but we used family money to get started. I work full-time in REPE (in a different city, which sucks) and spend a few hours a week helping out the other 2 guys. What you can do now, at no cost, is start pitching ideas to contacts and then revisit months later to point out the profit they missed on. Show enthusiasm but avoid the Boiler Room vibe.

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