“Luck is what happens when Preparation meets Opportunity” yields 95% ROI in less than 3 months!

Part 2 of 2:

The risk/opportunity factors, as I saw them, were:

1) the accuracy of their value projections for the house once fully remodeled;

2) the likely timeframe to complete the remodel and successfully market and sell the house; and

3) the type and content of the documents needed to define my participation and protect my investment, within reason.

Once I reached conclusions on these 3 risk/opportunity factors, I would be able to estimate my Return on Investment (ROI) and my relative risk to obtain that ROI. Oh, and I still needed to come up with the $25,000 of cash!

Since I had recently purchased a portfolio of rental houses, my operating cash had been depleted, and without dipping into 401k’s or mutual funds (which would have taken too long to convert to cash anyway), I only had about $5k of instant cash in the bank. When Sean proposed the deal structure to me, he was savvy enough to directly ask me, “Mike, do you have the liquid cash to do this deal this week?”. With only $5k readily available in the bank, I didn’t have the liquid cash, did I?

So I answered him like any responsible business person would: “Sure, I’ve got the money to do it; I just need a day to do my due diligence”.

Was I being deceitful? Certainly not!! I did have the liquidity; it was sitting there in my unsecured LOC just waiting for a rainy day… or a great opportunity. As long as I could deliver the $25k of cash, it didn’t matter to Sean or the other investor how long that money was seasoned in my checking account, if at all. It also didn’t matter if I was obtaining the cash by borrowing it from my bank under a pre-arranged credit facility. All they cared about was getting the $25k to finish the remodel and cover the carrying costs until the property was sold.

It was time to dive in and do my due diligence on this deal. The first task was to estimate the future value of the house, after remodel. I used a subscription service to search the county records for information about the house, as well as comparable sales within the last 6 months. I concurrently asked a realtor friend to run reports showing comparable sales and active listings from the MLS. I reviewed the project information provided by Sean and the other investor, to verify the current cost basis of the project, along with budgeted costs to complete. I toured the partially completed house and talked with the General Contractor, getting comfortable that the remaining work could indeed be done within the new budgeted targets. Within hours, I was able to address my first 2 risk/opportunity factors, as outlined above, and determined that the project would likely come in within the new targeted budget and timeline, and that the resulting remodeled house could likely sell within 3-6 months for a price that would net me a profit share of $15-25k.

My last piece of due diligence was to ensure the necessary paperwork was in place to document the transaction and protect my position. After reviewing the contract already existing between Sean and his investor friend, I prepared a Promissory Note and a concise Revenue Sharing Agreement that described how profits would be split after all expenses and debt were first paid off (including my Promissory Note!).

The parties accepted the documents, so we all executed them and I simply logged into the Wells Fargo website, went to my $35k LOC account, and electronically transferred $25k of it into my checking account. Then I drew a cashiers check on that account and bought myself a deal.

Voila! The transaction was completed, and I recorded my financing position with the county recorders office so my Promissory Note would be a matter of public record. That way, whenever the property transferred or got refinanced, the title company would see my Note and contact me for a payoff.

Since I was now a party to the project, I received periodic updates from Sean as to how the project was progressing, and joined him on-site several times to check out my collateral. They did a fantastic job on the remodel and within six weeks, I received $35,000 back (all of my initial investment plus $10,000 more), and then I got another $14,000 six weeks after that, to complete my share of the remaining profits. So I only had to pay interest on my LOC for 6 weeks, totaling about $350. Therefore, my investment of $25,000 yielded a profit of $23,650 — or 94.6% ROI — in less than 3 months. That’s an annualized rate of return of more than 400%!! Not bad for a relatively safe, collateralized investment.

In my corporate jobs, I would have earned roughly the same $24k during that same time period — but that’s where the comparison ends. My corporate positions required me to work around 55 - 60 hours per week for that money, without much incremental upside. This investment, on the other hand, required about 8 hours of time during the first 2 days (due diligence and preparation of the paperwork), and then only about 1 hour a week after that, because the general contractor and Sean’s investor friend were the ones doing the laborious work on the project. I was free to do other deals, and make additional money during those 3 months, which I did. I leveraged other peoples’ time and other peoples’ money (remember, I borrowed the money from the bank) to help complete a successful remodel project and to make a handsome profit at the same time. All because I was well-prepared and was willing to seize the opportunity.

Later that year, I was telling a friend an abridged version of this transaction, and I recall him saying, “Wow, I wish I had that kind of luck”. To which I replied, “Luck had nothing to do with it — this was simply an instance of running into an opportunity that I was already prepared for, and having the good sense to identify it and take the appropriate actions. Anyone can do it, if they first prepare for it”.

****** Author’s notes ********

Make it a point to spend a few minutes this month to prepare yourself for whatever it is you’re interested in, so you will be ready when opportunity knocks. If you are interested in investing in real estate, take the preliminary steps to get pre-qualified with a lender, know your FICO score, line up traditional and creative sources of capital, and identify people whose knowledge you can leverage to increase your chances of great success. I will launching a step-by-step investing series on this Blog, starting next week, so be sure to check back in or sign up for RSS feeds by clicking the button in the upper right hand corner of this page. In the meantime, feel free to improve your ‘luck’ by visiting Sean’s and my website, www.FortressInvestor.com , where we deliver turn-key, remodeled, cash flow investment properties below market.

Submitted by Mike Lima, real estate investor & principal of Fortress Investments 3, LLC.

Buy Cash Flow Properties For Only $7,500 Total Out of Pocket

Related posts:

1. Getting Started in Real Estate requires Preparation, not “Luck”

“Luck is what happens when Preparation meets Opportunity” yields 95% ROI in less than 3 months!

Part 1 of 2:

This quote by Seneca, a Roman philosopher from the mid-1st century AD,  has been one of my favorites for years.  Some variations have spun off from it over time, one of which I tweeted last week at( www.twitter.com/TheRealMikeLima ). It’s a great saying because it reminds us that we create our own ‘luck’ based on the things we do, or do not do.  Whether you’re just getting started in real estate, or whether you’re an experienced investor, this advice is sound.

But never did this phrase resonate so strongly with me than it did in my early days as a full-time real estate investor.  That’s when I first seized the meaning of this saying and put it to quick and successful work.

It happened in January 2004, when I was still a “rookie” investor.  It had been only 8 months since I had left the corporate world, after 18 years of “working for the man”.  I had been fortunate to gain a wide variety of experience, with 5 years in public accounting for a huge CPA firm; 6 years as the Corporate Controller and Director/VP of Finance for a $100 million consumer products company; 3 years gaining Sales/Marketing/Operations experience with a Fortune 500 technology company; and then 4 years as COO/VP for an international software company.  My jobs took me to many places, here in America as well as overseas, including Europe, Asia, and Africa.  I made a good living, averaging 6-figures compensation plus expense accounts, medical benefits, 401k contributions, and the like.  But I was still “working for the man”.  No matter how well I performed, the company would receive the vast majority of the dividends for years to come.  I made a decent living, but didn’t have the luxury of significantly improving my lifestyle or controlling my own schedule.  So when the opportunity presented itself, I began earnestly building my new future, and that started with a real estate shopping spree in mid-2003.

At the time, I had been a full-time investor for less than a year, and a part-time investor since 1992, and while I had already done 25+ deals, they were all traditional buy-and-hold transactions.  I would buy the houses below market, get them into rent-able condition, and then find lease or lease-option clients to cover my mortgage (and provide some cash flow) while I built up equity.  I had yet to step outside of that comfort zone, even though I had read about the many other ways one can make money in real estate.  It’s one thing to read about it, but quite different to take the plunge and dive in. What if I missed something in my analysis?  What if I don’t have the correct documents to protect me properly?  What if….???

Maybe that was my collegiate and corporate brainwashing coming out– get education, then analyze.  Make a list of all the downsides, and then analyze some more. Paralysis by analysis can be the result.

But my corporate and fiscal background did provide me with many tools which, when drawn upon successfully, would lead me to success within real estate. One such tool was the foresight to plan and prepare for the future.  I had been diligent about building a strong FICO (credit) score of ~ 800, which served me well as I purchased and financed many houses the year before, quickly amassing a $3 million portfolio.  I had also prepared by selecting a strong bank (Wells Fargo) and developing a good relationship with them.  I had become a preferred customer of the bank, which I leveraged by asking them for an unsecured line of credit (LOC), and they gave me a $35,000 line!  That meant instant access to cash if/when I needed it. An unsecured LOC is not backed by any collateral, such as cash in the bank, or property, and thus it is harder to obtain from a lending institution, and the interest rates are higher.  My unsecured LOC carried an interest rate of about 12%, which wasn’t the cheapest money, but was still a lower rate than nearly all credit cards offered, so it made good sense to have it in place, just in case an emergency or opportunity presented itself.

In January 2004, such an opportunity did present itself, and I was prepared. A business acquaintance, who later became my business partner (Sean Terry), came to me with a deal that he was involved in. Sean had a very different background than I did. Rather than going to college and climbing the corporate ladder, Sean was busy climbing real rope ladders and trudging through muck as part of his Marine Corps training, before moving on to start several businesses in true entrepreneurial fashion. The Marines taught him to essentially disregard fear, which served him well in these entrepreneurial endeavors.  In this case, Sean was working with another investor and they had found a below-market house in a nice neighborhood, where remodeled homes were selling at good prices. This house needed to be fully renovated — including a new roof, new kitchen and baths, more livable square footage, a more open/efficient floor plan, new flooring and paint, and new landscaping — in order to fetch their targeted market pricing and profit goals. 

They had purchased the property with hard money (translation = private, high interest rate financing), and were halfway through the remodel.  But their extra cash was tied up on other projects, so when the General Contractor fell behind schedule and behind budget, they didn’t have the additional cash reserves needed to service the hard money debt and finish the remodeling project. That’s when Sean approached me and offered me a great deal if I could inject $25,000 of quick cash.   (Hmmmm, I thought…”Luck is what happens when Preparation meets Opportunity”).

In exchange for the $25,000, I was offered a return of $5,000 on my money for a 6-month promissory note, plus a one-quarter share of any remaining profits on the project, all to be paid when the house was completed and an exit strategy was realized. This was potentially a sweet deal, but there wasn’t time for procrastination, as the parties needed the money fast and were undoubtedly seeking funds from other sources in parallel.  So I knew I had to assess the risk and make a decision quickly…

****************

Part 2 of 2 is coming tomorrow. 

Make it a point to spend a few minutes this month to prepare yourself for whatever it is you’re interested in, so you will be ready when opportunity knocks.  If you are interested in investing in real estate, take the preliminary steps to get pre-qualified with a lender, know your FICO score, line up traditional and creative sources of capital, and identify people whose knowledge you can leverage to increase your chances of great success.  I will launching a step-by-step investing series on this Blog, starting next week, so be sure to check back in or sign up for RSS feeds by clicking the button on the upper right corner of this page.  In the meantime, feel free to improve your ‘luck’ by visiting Sean’s and my website, www.FortressInvestor.com , where we deliver turn-key, remodeled, cash flow investment properties below market.

Submitted by Mike Lima, real estate investor & principal of Fortress Investments 3, LLC.

****************

 

Buy Cash Flow Properties For Only $7,500 Total Out of Pocket

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I was thinking today of a great person I could quote this week that would give folks an idea of how a successful real estate investor thinks.  I thought of Sam Zell, Stephen Ross, and Trump.  But the problem is, I really don’t know these individuals that well to give a prospective on how they act in a pressure situation or conduct their day to day lives.  Then I thought of the perfect person, Mike Lima.

Mike is my business partner and the other, most important half of Fortress Investments, LLC. Mike is the real deal, and has an innate ability to view a situation from a different altitude.  He is by far one of the hardest workers I know and always sees the good in people.

It’s not easy being a full time real estate investor especially in these turbulent financial times, but the highlight about Mike is he ALWAYS keeps a positive outlook on tough situations and portrays a subtle confidence that everything will work out just fine.

This is a choice he makes, he could easily focus on the negative doom and gloom but he knows that won’t get us to where we need to be.

Here are three successful attributes I’ve learned from working with Mike Lima

1. Put yourself in other people’s shoes, and try to view the situation from their prospective.  This is very hard for me to do, whenever I’m about to go ape $#@% on someone, he swiftly shows me an alternative prospective that puts a whole different light on the situation.

2. Choose to focus on the positive. This is a true choice we can make.  Try for a week to only choose a positive viewpoints instead of negative.  The result will be amazing.

3. Shatter barriers by blowing through them with no mercy.  Mike love extreme physical sports.  I remember when I first met Mike; we had a meeting at a house we were dealing with on Halloween day.  He woke up that morning at 3am and drove to the Grand Canyon.  He ran to the bottom, ran back up in record time then proceeded to drive home and make it in time to attend our meeting.  THAT IS CRAZY… I would have been dead…for sure.  I could share countless stories that would blow your mind, but the point is this.  If you think you can or if you think you can’t…..Your right.  You pick!!

Mike is the glue that keeps our company moving forward and I really appreciate the hard work an effort he devotes.  We both have a blast doing what we do.  I can say it’s a ton of work but it’s sooooooo worth it!!!

Happy Investing!!

Buy Cash Flow Properties For Only $7,500 Total Out of Pocket

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The answer Lori is yes! We’ll be doing a two part series just for you on how we evaluate and buy multi family properties. But first we have to define what multi family properties are.

Here is the definition from Wikipedia for Multi-family Residential (also known as Multi-dwelling unit or MDU) is a classification of housing where multiple separate housing units for residential (i.e. non-commercial) inhabitants are contained within one building. The most common form is an apartment building.

Now when investing in multi family apartment buildings there is a distinct difference in financing as regards to the number of units there are per building/parcel number.

4 Units or Less

If you’re purchasing 4–units or less, then a conventional loan can be obtained to finance the purchase.  This is huge because under current conventional guidelines and investor can finance 4 units and under using traditional conventional financing.  I’ll give you an example, we purchased and renovated a 4–plex in North Phoenix a month or so ago and we sold it to an investor out of New York who is in the process of refinancing the property into a conventional loan.  The property was built in 1987 and each unit has 2 beds and 2 baths which are 950 sqft. Each unit will rent for ~$700-$750 a month.  After expenses and debt service this property could generate over ~$14,798 a year in cash flow.  The beauty is that the investor is getting a 6.5%, 30 year fixed loan and is going through the traditional conventional lending process which is a lot easier than obtaining a commercial loan.  Oh, and he is also going to have $63,000 of Equity, based on the appraisal that was just completed! 

Loan Qualifications for 4 units or Less:

1. 680 Credit Score

2. 25% Down Payment

3. Documented Income

5 Units Or Higher

Back in 2003–2005 it was seemingly easier to secure commercial financing for larger apartment complexes.  Today it’s a whole different story, due to the credit crunch; commercial banks are becoming a lot stricter on who and what they lend on. A while back we secured a loan for a 329 unit apartment complex that we were considering purchasing for $13 million.  The loan process was very painful, the amount of information they requested was amazing, including property financials, pro formas, resumes, net worth statements, complete lease audits for every unit, contractor estimate for repairs for each unit and so on.  The due-diligence and the appraisal alone cost us over $10,000.  I’m glad to say we didn’t purchase the property because we couldn’t agree on the amount of the seller credit that was going to be applied for deferred maintenance.

Loan Qualification for 5 Units or Higher:

1. 700+ Credit Score

2. 2+ Years Experience

3. 30%-40% Down Payment

4. Documented Income and Net Worth

5. Property Management

6. Debt Coverage Ratio 1.2 or Higher

Don’t let this scare you off from buying 5 units or higher, there are some smokin deals out there right now that make sense. We’ll get into some creative ways to avoid having to jump through the commercial financing hoops in part two of this series.  Let’s move on to evaluating a multi family deal.

The best spreadsheet we’ve found was developed by Scott Scheele from Commercial Adamancy called the Opportunity Evaluator.  This spreadsheet is great because it gives you correct input fields needed to determine if the deal is good or not.  Below is an example of the 4–plex we mentioned above in North Phoenix.  We’re going to cover each and every aspect of the spreadsheet so you can use it to your benefit.

1. Vacancy & Credit Loss: We use a 10% vacancy rate in our calculation; this number can fluctuate due to the market and area.  I know of some markets that have vacancies as high at 18% and as low as 4%.  Try to find out what the vacancy rate for your area is by asking a local apartment specialist.  It’s better to be more conservative and estimate on the high side.

2. Operating Expense: Verify cells 7–28 the best you can, be sure you call the utilities companies and verify the annual amounts paid along with verifying the taxes and insurance.  If you have extra items use cells 29–34. 

3. DCR-BANK:  This is the Debt Coverage Ratio; the bank will use this to determine if the property has sufficient cash flow to cover the debt service after the expenses are paid.  Most backs like to see a 1.2 DCR or higher.  If the number is below the 1.2 DCR than your paying too much for the property.

4. Property Info: This is where you put the property information; try to make it as accurate as possible.

5. Loan information: This is where you enter your loan amount and interest rate; this will calculate “interest only” not “princpal and interest.”  If you are obtaining a princpal and interest loan make sure to adjust numbers accordingly.

6. Capitalization Rate:  Capital Cost (asset price) = Cash flow / Capitalization Rate
For example, in valuing the projected sale price of an apartment building that produces an annual net cash flow of $23,248, if we set a projected capitalization rate at 10%, then the asset value (or price we would pay to own it) is $232,480.  The Cap Rate may vary from area to area, so check with an apartment specialist and ask what the going Cap Rate is for the unit size in question.

7. Actual Cap Rate: This is the actual Cap Rate of the property at the $130,000 purchase price.

8. Cash Flow Before Taxes: This is the annual cash flow before you pay personal or company taxes. In the example this property could produce $1,232 a month in cash flow after expenses and debt service.

9. Gross Potential Rents: This is the gross amount the property could produce in cash flow before expenses and debt service.

So how do you know if you have a good deal or not?  In cell 6 drop in the going cap rate for the units you are looking to acquire (you can get this number by asking an apartment specialist in your area) in cell W2 it will show the approximate value of the property.  If your purchase price is lower than this number there’s a good chance you have a good deal on your hands. 

Now remember this is spreadsheet used to do a quick and dirty analysis and is not to be used for a buying decision, if the property looks good I would hire an appraiser as part of your due diligence to give actual value of the property.  In the example 4–plex above the appraised value came in at $255,000.  We used this initial spreadsheet to determine if we potentially had a good deal and then we had a licensed appraiser give us an opinion of value prior to acquisition.

In part two of this series we’ll give you some techniques strategies to acquiring multi family properties.  Make sure you subscribe to the RSS feed so you don’t miss a tip!

If you have any questions about this article please feel free to leave a comment below.

Happy Investing!

Buy Cash Flow Properties For Only $7,500 Total Out of Pocket

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This report is brought to you by The Cromford Report.

Arizona Housing Market Report April 2009 - Dramatic Developments

There are several key indicators showing remarkable developments in the market in just the last two weeks. It is clear the market is undergoing a dramatic and accelerating change.

Months Supply has dropped from 7.4 to 6.0 in just 14 days.

Pending Listings are heading into uncharted territory setting a new record almost every day.

March 2009 was exceptional in many ways, almost all of them positive, which may seem surprising to some given the general housing gloom reported around the country. Those who have been reading these notes for the last several months will not be surprised however. The Greater Phoenix residential market is not conforming to the national pattern. It is on a completely different trajectory.

Probably the most surprising statistics are those related to pending sales. Anyone who wants to see the magnitude of the phenomenon should see the chart Pending Sales by Major City. This morning we recorded the largest ever annual growth in pending sales across the valley (all areas and types) - the first time ever this has moved over 100%. Avondale, Glendale, Goodyear, Peoria, Phoenix and Surprise all show all-time record highs in pending sales for single family detached homes. This means higher than 2005! The difference is that 2005’s buying frenzy was fueled by a shortage of supply, whereas the current buying is fueled by attractive pricing. The only major cities that are not really participating strongly in the overall growth are Scottsdale and Tempe, where pending sales are up, but not at exceptional levels.

What are these sales? Well, two thirds of pending sales are REOs. The banks are having little difficulty moving foreclosed properties to new buyers. REO average days on market for active listings have fallen from 227 in November to 117 today. Another interesting sign is that active $/SF pricing for REOs fell from $84 in mid November to about $78 at the end of January, but has remained in between $77 and $78 for the last two months. There is no discernible downward movement in the average $/SF asking prices for REOs across Greater Phoenix. Probably of even greater significance is that average pending list $/SF for REOs has also stabilized between $65 and $66 and has stayed within that range for three weeks now. Average sold $/SF has declined from $67 at the beginning March to $63 in early April, but remember that pending $/SF tends to be a leading indicator of future sales prices, with a 30 to 45 days time lag.

Market Snapshot

The only really gloomy number we see is the number of new Notices of Trustee Sale (NTs), which hit a record high of 10,689 (for Maricopa County) in March. Some people are suggesting this indicates more carnage to come. We agree this is a depressing number, but would respond that we believe you should pay more attention to the number of actual trustee deeds (TDs). Remember that an NT is just a piece of paper, whereas a TD is a REAL foreclosure. What happened to TDs? They were at their lowest level in 11 months! And notices of canceled trustee sales were at a very high level of 3,168. Furthermore unrecorded trustee deeds currently stand at only 498. This is the lowest number we have seen for a long time. What can be happening here? Theories include:

The lenders are trying harder to work things out with their borrowers.

The government schemes to help borrowers are having some effect in slowing down TDs.

People with negative equity who want to move are stopping their mortgage payments to get the lender to agree to a short sale. They receive an NT but have no intention of being actually foreclosed. In fact they could pay their mortgage if they chose to, but if they did, the bank would probably not allow the sale of their home.

Certainly we can see it is taking longer to go from NT to TD and we strongly suspect a lower percentage of NTs are eventually becoming TDs. Don’t be fooled by the growth in the NT count or pending foreclosures. Our advice is to watch the TDs carefully.

Meanwhile the supply of REOs is becoming quite thin in certain spots heavily frequented by bargain hunters. For example, take Queen Creek 85243, in many ways the epi-center of the foreclosure crisis in the valley. There were only 79 active (not AWC) single family detached listings for REOs in this ZIP code yesterday, with 165 in escrow. There were 169 active at the beginning of February and only 128 in escrow. So there are 90 fewer active REO listings than 2 months ago and 37 more sales in process. This is a very strong REO market.

We can see signs that the supply of very cheap REOs is getting sold off quickly. A trend to watch is the mid-price and high-end REOs where sales are much slower and the supply is not decreasing. It’s possible that these higher price areas may take much longer to turn round than the lowest priced end of the market which is giving strong signals that a price floor may be close at hand.

Are we at the point where sales pricing turns round? Well, this is what a market bottom looks like. We are either very close to a turn round in sales pricing or all the data is conspiring to fool us.

Take your pick.

If you’d like to lean how to buy cash flow properties for only $7,500 out of pocket check out our website at FortressInvestor.com

Happy Investing!

Buy Cash Flow Properties For Only $7,500 Total Out of Pocket

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