On last Friday I began a new journey of a new apartment complex in Texas. This complex is a group investment (real estate syndication) that I sponsored. The investment is owned with no Debt to eliminate the main risk that I believe cost the previous owner the building. Too much debt! I will be bloging about this investment over the next couple of months as a way of communicating to the investors in the syndication and as a means to share my experiences with other investors who may be interested in real estate investing.
This building is 31 units mostly 1 bedrooms with a few 2 bedrooms in a medium sized town not too far from my home base of Austin TX. The building was empty except for a babysitter who made sure that the copper did not grow legs. Most of the stoves and refrigerators did grow legs so I’m not sure how much confidence I put in his ability to baby-sit. For those who don’t know what “growing legs” means; the definition of growing legs is when things of value get up and walk away all on their own without any help or any knowledge of anyone around them.
The units are built with flat roofs and cinder block walls covered in a faux brick. The flooring is a combination of carpet and tile. Each unit will be getting a new stove, refrigerator, microwave and flooring as needed. Some units need a little some units need a lot of repairs. There are more units that are in decent shape then there are units that need a lot of repairs. The building has 1 water meter but separate electric meters. There is no gas service to the building. The kitchens have tile countertops in most units and a few of them have new cabinets. The one bedrooms are decent sized I believe they are about 465 SQFT maybe a little bigger but not much. The two bedrooms are about 700 SQFT. There is a small laundry room as well with enough water hook ups for 4 washers and 2 dryer hookups.
I found this property on a well know national real estate investment listing website and went to see it a few days after seeing it listed. I am a paying subscriber to this website and this one investment has paid for that subscription many many many times over. When I went to see it I knew that I should make an offer on it and the listing broker shared with me that the sellers were true “don’t wanters” with the proper incentive to move this asset at a price that would go now. It was priced in such a way that attracted me too go see it at it when most other foreclosed properties are over priced. That attractive pricing is what motivated me to go and see it right away and even then I still initially offered 30% less than the list price! I really wanted to see at what level of motivation the sellers truly had and I was rewarded with a truly record setting purchase price. The seller’s agent believes that locally my purchase price will set a record low purchase price for the local multiple listing service.
After seeing the property 1 time I went home and that night wrote an offer and emailed it to the agent that night. This was a Saturday so he would have to wait until Monday to fax it to the asset manager for the lender. By Monday they countered reducing their very attractive list price by only 10% but I was not moved very much. I raised my offer by about 12% and the bank accepted the offer and we were off to the races! They accepted the offer and wanted to see the cash! Fortunately I had developed several lines of credit that allowed me to make this purchase with cash and then collect the funds from my investors to pay off the lines of credit that I used to make the purchase.
The purchase price is less then 1/2 of the county’s tax assessed value! That’s right less then 1/2 and that value was low compared to the market value of the asset! In 2005 the property sold for almost 4 times what I paid for the property today! This is the type of deal that your do not lose any sleep at night over!
One of my most scientific measures of a piece of real estates performance is the sleep at night test! The sleep at night test is simple. So simple it is genius. It is can you sleep at night after you purchase the asset? If so you know that you have a great deal, not a good deal or one that will require you to perform miracles, but if you broke everything you still could get your money out of the asset then you can sleep at night! If you can sleep at night then you know that for the most part you will be all right and your investment will be successful.
After the sleep at night test, then I used all of my CCIM skills and performed a very technical analysis of the area, the property’s financial performance, the alternative use possibilities, the market in general and the market segment where this assets fits and determined that the overall level of risk associated with the asset was within acceptable levels. Do you have intimate knowledge of the risk factors affecting your property? If not you should contact a CCIM for help in determining those factors and how they affect your specific property and its financial performance. (Call me at 512-782-8982 or email me at ron@theseaygroup.com) If you are not sure what a CCIM is you can find out more at WWW.CCIM.com. CCIM’s are considered the PhD’s of commercial real estate.
After I could sleep at night I called on a few investors who know a thing or two about investing in their own right. They gladly agreed to be the first investor in this asset and almost purchased the entire asset themselves! These investors were smart enough to hire a great real estate fund manager who earns them outsized returns in real estate and other investments using their IRA’s. The manager that they have hired normally doesn’t get motivated to invest their funds until the returns equal more than 20% annually with very little risk. Each of them started when they were very young with very little money and has grown their investment fund in a very short time frame to an amount that most people working for 30 years will not be able to begin to achieve. They normally do not use leverage to reach those returns, in other words they like to pay cash for assets and keep all of the cash flow that the investment generates. They don’t live off the investment fund returns so each and every month it grows by leaps and bounds. I got their permission to share their identity and the identity of their fund manager. They are my kids and I am the renowned fund manager!
If you want to learn about how become a fund manager for your children to help start them along the path to financial independence call me (512) 689-6742