R E N T A L READER
THE ‘RECOVERY SHOT’
A Good Purchase After a Bad One and the Lessons Learned
If you read last month’s newsletter, you learned about my very first real estate investment purchase and how badly it went. Sometimes I feel like I am still licking my wounds, even though we worked out the problems and it generates very good cash flow now. Yes, as I shared, the lessons learned were great, and I think I am a better property manager because of it, but who wants to go through that pain? I certainly didn’t (and don’t). In friendly games of golf, you can often take a “mulligan,” an extra stroke after a poor shot that you don’t count on the scoreboard. In essence, it is a do-over. While a do-over is not possible in real estate (you bought it, so you own it), the second-best thing is a great “recovery shot.”My second real estate purchase was truly a recovery shot, and thank goodness for it. I expect we would not have kept investing like we have if we didn’t buy the second one. It was a three-family unit that was being sold by a bank after a foreclosure. While only 2 blocks away from the first property we bought, it was in a much better area, the units were all bigger with better layouts, and it had good off-street parking. With an offer above the asking price (uncommon at the time, but we felt it was worth it), we beat out multiple other investors who also bid on the property. After much financial maneuvering and acrobatics (e.g., hard money loans, cross- collateralizing properties, private money loans, etc.), we closed on the property and got to work. I could bore you with the details of the differences between the property and what we did to make the property operate well, but instead, let me focus on what I took away from that process and have implemented into all future purchases. You see, financial spreadsheets are make-believe. They are really good at capturing and modeling the hard costs (e.g., taxes, insurance, rental rates, and management fees). But they are not good when it comes to what really determines if an investment is a winner or a loser — the “hidden” costs. • Vacancy — How long is the property going to be vacant between tenancies? Yes, the proactivity of your leasing team influences this, but the property, price, and condition influence it heavily, as well. • Turnover costs — How often do tenants turn over, and how extensive is the required make-ready between tenants? Property management influences the It really comes down to one thing: The game is won or lost on the “hidden” costs.
length of time between tenants and extent of make-ready, but property, price, and condition do, as well. Bad debts — In essence, these are collection problems. Please note that not all properties are created equal. We have managed properties where we would be happy to see a
580 credit score, and we manage properties where anything below 700 won’t do. The property, price, and condition matter more to the quality of tenant than anything your leasing agent does for you on this category. • Maintenance costs —Some properties need to be repairedmore than others and some more extensively than others. Sometimes that is related to age, but it has more to do with the tenants you put into the property and the property itself. All of my purchases since this three-family unit have been focused on solid properties that will rent fast at slightly above-average market rents, that can keep solid tenants, and that are lighter maintenance. This has been the consistent thread in all of our purchases and has made all the difference.
While sometimes I get lured by what’s on the spreadsheet, I know firmly that what matters most is what’s not on there. Thank goodness I learned that on property No. 2.
Yours in awe of the recovery shot,
P.S. Not surprisingly, we at Robert C. White & Company are quasi-fanatical about the hidden costs. We know how much they matter, so we are very focused on vacancy, turnover, collections, etc. P.P.S. If you are interested in talking more about opportunities for investing in real estate in central Connecticut, let me know. I’m still buying, and I think we are in an interesting place with the market.
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