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Multi-Family Residential investment case study


Rabbitisrich
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Ragnarisapirate is too modest to post this, but he has a very interesting series called "Walking Away From A Few Million Dollars". I have been tempted by a glut of condos that trade for under $250,000 despite comparable floor plans renting at ~$1,500 monthly. These articles helped me to remove the dollar signs from my eyes and to look at the mysteriously low HOAs, low owner-occupancies, and special assessments histories.

 

http://ragnarisapirate.blogspot.com/2012/05/sometimes-its-best-to-take-pass-40.html

http://ragnarisapirate.blogspot.com/2012/06/walking-away-from-few-million-dollars.html

http://ragnarisapirate.blogspot.com/2012/07/walking-away-from-few-million-dollars_18.html

 

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Ha! I saw a decent spike in views then the link that you put up Rabbit. Calling it a case study is WAY too flattering. Regardless, I thank you for the kind words. :)

 

There is more to come on it- and the story gets even crazier... If I wasn't working on a project house right now the series would have been done!

 

As a side note, $250K for $1,500 in rent is a number that doesn't come close to doing much for me, even with cheap money or paying cash for the whole thing. Good thoughts on the HOA related matters. Having been on a board of one several times, in my experience, they are an absolute nightmare to deal with.

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I manage my grandmother's real estate and I have some of my own.  I can attest it is VERY DIFFICULT to make money in them and there are much easier ways to make $$$$$$.  The $1,500 rent isn't close to what you'll be pocketing, I would take off 60% for expenses with whatever you believe you can get for rent per month--most people probably will tell you to take off 40% but I add in my time and labor as part of the expense for those that manage their own.  Those type of returns do not justify an investment, even if you could net $1500 per month after expenses thats only a 7% return per year on a $250,000 investment from the income.  I require a much higher returns than that before I will consider making an investment.  Also, from the pictures I saw you would probably need to add $50 K atleast for renovation for each apartment.    There isn't any margin of safety so I'm glad that the investment was skipped.  :)

 

 

 

 

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Two months ago I found out a really nice housing development was having an extremely hard time financially and near bankruptcy.  The comps in this neighborhood and similar neighborhoods in the area have the lots selling for $39,000 for 1/4 of an acre of land.  Seeing a potential to make money I had my banker call the partners of the house development up and offer them $8,000 for several of the lots in cash.  The cussing on the phone was hilarious to me.  lol  I got called all kind of names (they didn't know I was on the line listening).  A little later the first counter offer from the partners they came off $10,000 from asking price of $37,000.00 for each lot to $27K.  Next they lowered it again to $20,000 per lot, I said no again.    A week later they lowered it to $18,000.00 per lot but I would have to buy 5 additional lots to what I had wanted.  I haven't heard from them since I told them I'd pay $12,000 per lot with my counter offer for the lots I wanted plus the extra 5 they wanted me to buy.  $12 K is the highest I'm willing to go simply because I want a large margin of safety in case it takes longer for me to sale the lots, plus I require a descent return on capital.  This back and forth has been going on for about a month but I do enjoy the negotiation over prices esp if I think I can get a great deal for it.  Cash is king when people really need the money.

 

Time will tell whether I get the lots or not.  My plan for those lots if I get them is to sale them off over a 5 year period at about $32K each.

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Very interesting reading Regnar.

 

I too have had some interesting encounters with inspectors, regulators, etc,

 

they can be very difficult to deal with because you walk a fine line. You can’t let them walk all over you, yet you can't afford to alienate them because they can cause you a world of trouble.

 

I participated in building a couple of small subdivisions some years ago. Numerous inspectors were involved as you can imagine and some were extremely ‘picky’ and were driving me nuts - especially the guys from Highways.

 

At one point their engineer requested a change in the radius of a curve because it missed code by a couple of feet. Changing it would not be easy since the street had been surveyed and the rough roadwork had already been done. I pointed out that the radius change would actually translate into a difference of only about 6" in the actual placement of the asphalt which would really amount to nothing since the actual path of the asphalt can vary by more than that anyway. “Nope, the radius has to meet the minimum specs.” Once again I said “Okay, no problem”  since strictly speaking they were right and I did not want to cause future problems for myself.

 

A week or so later they pointed to a paved private lane accessing the subdivision and informed me that this curve didn’t met code either and would also need to be changed. I told them that it was a private lane and there was no requirement for it to meet code. Their response was that it could become a public street at some future point and because of that it should be changed to meet code.

 

This went back and forth for several days until I politely, but firmly told them that it would be expensive and time consuming to do this, that there was no legal requirement that it be changed, and that I would not be changing it. Not only did that end the discussion, but amazingly it was the last time I heard from them until the project was finished. When I applied for ‘Final Approval’ they signed off without question or comment.

 

I learned from that experience. As the line from “The Gambler” goes, “You gotta know when to hold them and know when to fold them”.

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  • 9 months later...

Sometimes the best deal...is the one you walk away from.

 

I suspect if you did this deal, you would STILL be working on it. You probably also be tearing your hair out and be at the end of your rope. Looks like it was best to walk away. Let someone else deal with it.

 

Excellent writing, as always.

 

Keep up the good work!

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Smart to walk away. I work with the NYC dept of buildings and I understand your pain...but these type of projects are difficult without multiple layers of financing and having connections within the building dept.

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Reading between the lines, you were being asked for a bribe. 15 minutes of inspector time on site?, sudden appearance of a new 'code' book?, very uncomfortable with your taking notes?, town where you need friends? 

 

The smart thing is to walk, & never do business in this town again. Somebody will have been hurt because you wouldn't play, & they may well have a long memory.

 

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Reading between the lines, you were being asked for a bribe. 15 minutes of inspector time on site?, sudden appearance of a new 'code' book?, very uncomfortable with your taking notes?, town where you need friends? 

 

The smart thing is to walk, & never do business in this town again. Somebody will have been hurt because you wouldn't play, & they may well have a long memory.

 

15 minutes in the building, probably an additional 30 outside the building, and it was like pulling teeth... I kept asking questions about what we needed to do (as in "hey, here is this thing we noticed, are you guys concerned over it?) and it just didn't seem to go over all that well. I like to think better of people than to have them expect a bribe, so, I will give them the benefit of the doubt and say that we just had different personalities. :)

 

The beauty of this, is that it all took place in my state's capitol city... literally, a 5 minute drive from where our notoriously strict licensing laws are made. Regardless, I have no plans on EVER buying real estate in Frankfort.

 

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