“Failure is only the opportunity more intelligently to begin again. ”
– Henry Ford
Hello, and welcome back! Some day when we get our lives in order we will actually get these posts up when we intend to. This past weekend we were at Michael Blank’s Financial Freedom Summit in DC got so wrapped up in the excitement and networking that we set writing on the back burner. Things are firing up here though as we prepare to move to Japan and we are getting our ducks in a row. We have recently embarked on a marketing campaign as well and are working to increase our online presence and share our excitement. Please Like us on Facebook and be sure to check out our formal website as well as reading our blog! Now, without further ado, we are going to jump right into the thick of things.
The title came from a few local REIA meetups we attended hosted by our real estate agent, Melanie McDaniel. Many of the individuals that attended the meetups were military and we developed a close bond, almost like a family. People kept asking “What’s up with Carver?,” referring to our most recent investment purchase, and waiting to hear the latest development in the Carver Circle Saga. To give you some background, Carver is a triplex we bought through a JV with a couple other investors on Carver Circle in Portsmouth, Virginia (hence the name “Carver”). So, people would always ask “What’s up with Carver?” and I would always have a new interesting update. We would give them the most recent damage we had or the latest issue with a tenant (and there were many). For a “turnkey” property, you would expect few material issues with the property…boy were we wrong.
Truly, our experience with Carver was the impetus for starting this blog in the first place. We realized that these were issues that are not that common, but they are things that happen. Everyone always talks about the beneficial aspects of real estate: the cashflow, the great appreciating property, the excellent location, and the profits you can make off of deals. However, the reverse side can be disastrous. There are things you can see coming and things you can’t. So, my purpose: to talk about the things that have happened, the red flags we saw in the beginning and the subsequent things that we may or may not have prepared for.
So, how did we find Carver? During the same time in Jan 2019 while South Street was under contract, I received a Redfin email alert about a triplex that went on the market. If you haven’t already, I highly recommend signing up for email alerts for properties that meet your particular criteria–whether that’s multifamily or SFR. Redfin, Zillow, Realtor.com will all send you links when a property comes on the market. For us, the criteria that we set were multifamily, (anything two-four units), in the Hampton Roads Area, and a certain price range (under 300,000).
One day after work, I saw this Redfin e-mail update for a triplex that was asking price of $209,000 and it was in a rough part of town. Douglas Park, a subneighborhood of Portsmouth, is probably one of Hampton Roads’ worst neighborhoods but has a surprising abundance of multifamily homes, mainly triplexes. So, on that point it really takes a good operator to know the geographic area in which you’re operating, even down to the individual streets. A prime way to do this is to be the boots on the ground, driving these areas and getting a feel for the path of progress, if one exists. Is it one street over from a bad neighborhood? Is it making progress or is just going to keep getting worse? Is it a Class A property in a Class D neighborhood (red flag!)? Those are just some of the things to consider when looking at these properties in the future.
So, this property comes across my inbox. It was three,700 sqft units, each 2 bedrooms/1 bath. What was great (initially) about this property, was that it was essentially turnkey. It was a flip that a local investor had bought and was going to BRRRR it (or buy, renovate, refinance, rent and repeat). After buying and renovating, however, he decided he was going to sell it so he could apply his money elsewhere. Needless to say, the property had been stripped down to the studs and was essentially brand new. A few of the upgraded renovations included new carpets, granite countertops, and stainless steel appliances…What more could an investor want?
Based on what I saw and the price, I knew the triplex was going to go pretty quickly because after doing some CMA (or comparative market analysis), I found that each unit could conservatively rent for about $850-900 per unit. This comes out to be $2550-2700/month. The 1 percent rule states that a property must be able to rent for at least 1% of the purchase price to be able to cashflow. For example, Purchase price $75,000 with rents at $800 would be 1.06%. Following the 1 percent rule, Carver came out to be 1.3%! Just based off the initial CMA we did, this looked like a pretty good deal. I knew if we didn’t move fast on this it was going to be gone before we knew it.
To recap: found it on a Monday night via e-mail. The next morning, I drove by it, just to get a sense of what the property and neighborhood looked like. The initial sense I got was that it was a Class B property in a Class C- neighborhood. There wasn’t much other progress and only a handful of new construction or flips in the area. There were still some renovations that needed to be done on it, and mind you this was still in January. A few small red flags there.
During that first inspection, I didn’t go inside to start off, I just saw the outside and the pictures from the listing. When I got into work that morning, I sent my realtor a text about the property to see if I could get any more information. She was able to get back to me and provide more information and I gave her an offer purchase price of $215,000, which was $6000 over the asking price. Even at $215,000 it was still going to be a killer deal based off of the numbers I was getting. Wednesday morning, my realtor was in talks with the seller’s realtor about a tour before putting in an offer. The response back was that there was a lot of interest in the property and if we were going to put in an offer, we had to put in an offer right now. They weren’t doing any tours…Another small red flag here.
I don’t usually have my phone on me so I wasn’t privy to all these conversations. Melanie sent me multiple texts and calls because the deadline to put in an offer was one o’clock that afternoon. Welll I didn’t get to my phone until 1:30 and my heart dropped that I missed the offering. Luckily Melanie managed to delay them and I was still able to get in an offer of $215k (again, almost $6000 more than asking price) before the deadline. By that afternoon, we found out that we won the contract mostly because of our above asking price offer. Everything according to plan…until we started doing the walkthrough. Some issues were (in hindsight) glaring, and other issues (also in hindsight), may have hinted at some of the trouble to come.
Tune in next time when we dig into the property inspection itself!