How to become a millionaire

[guru1000]

BE, is the building fully occupied now?

I ask, and I'm sure you have given this consideration, but why not (if you haven't), get full occupancy, and do a cash-out refinance.

Numbers would certainly help here. Here is a preliminary, estimated run, for others to learn. For those who don't understand the following terms, google them and learn!

Scenario:

Net Operating Income (NOI) = $4,000 per month
Net Cap for Area (Assuming B-C List Neighborhood) = 7% cap
Value of Property (Annual Rent / Net Cap)= $48,000 / .07 = $685,714

Lenders will lend up to 80% of the property value, assuming NOI exceeds the mortgage payment by at least 15%-25%. Accordingly,

Total Refinance with Cash Pull= $685,714 * . 8 = $548,571.

Now if BE spent $400,000 in total, mortgage and out-of-pocket, and the NOI were $4,000 per month at full occupancy, upon this cash-out refinance, she would gain an instant $148,571 profit and still hold $137,142 in equity ($685,714*.2), while still keeping the property which will pay down the mortgage balance over time with a monthly net cash flow (after paying all expenses) of 600 per month--AND huge tax write offs over time.

Men, learn the terminology and this idea delineated. R/E can make you millions if you shrewdly understand the numbers.

 

[BeExcellent]

It is not. I agree with the cash out refinance. I have to rewire the building fully in order to bring all units on line. New service, rewiring, plaster and lathe construction, building code issues for major renovation project and so forth. Rather than sink the additional money into the building I have instead used my capital to build out the portfolio and build a cash flow engine. Along the way I have gotten the local utility, the city inspectors and the city attorney on board. I bought the capital equipment to do it, but had lots of red tape to get through. There have been building code changes, a new building inspector I had to build a relationship with, all sorts of ad hoc little hurdles. Then there's getting electrical contractors rounded up (they prefer new builds rather than old PITA retrofits) but I am ready to roll once I get a few more things in place. The electrical refit will cost around 50K give or take 10K. Nobody will bid out the job. So we are talking time & materials.

Highest and best use appears to be Air B&B with a large residence on the front side. There is a funeral home across the street that has lots of wakes and services and there is also fairly steady demand for business/seasonal events lodging. I could convert to a mixed use when I do the rewire, add a firewall to separate residential/business and then have a marketable turnkey operation to cash out or sell. I may convert it, cash out and live there myself. If I do that I can sell my own residence at a profit and live in an income producing asset. So there are various ways to skin this thing. It is a small market away from a big metro area so studio rents are low and very high turnover. A lodging play is much better IMO. Additionally there are newer units that have been built right next to the local community college. That has cut into my student market again leading me to the lodging/mixed use option.

@guru1000 Your figure for total out of pocket will be pretty close once I have all renovations done. The residence conversion would take 5 units. I would also fully split out gas, water, and electrical from the income producing portion of the building in the process. I would then have 8 income units I think I could arrive at a $4000.00 NOI. That would make the rest of your equation work.

So that is my exit plan for the moment. But until I get ready to do all that (which may require cash out of pocket) I'm solidifying the rest of the portfolio, paying things off and maximizing cash flows. The rents have risen some in my markets so that is helping as well. So I'm treading water on the building right now to offset other income and get into a position of maximum strength to undertake this major final push. I expect my bank will seriously consider a construction loan as well. They have been impressed with my ability to carry this thing through tough times and are aware that I have simultaneously built my net worth into the 7 figure range in spite of this project. I will also have the tax benefits which are not inconsequential. I've become a shrewd cash manager through this whole experience.

 

[TheProspect]

My 4th investment property was (is -I still own it) a small historic apartment building. It has 13 units, 9 studios, 3 1 bedrooms, 1 2 bedroom. It's Spanish eclectic with the Ludowici green tile roof, wrought iron balconies, terra cotta architectural details and stained glass. It was originally built in the early 1900s and extensively restyled into Spanish style in the 1920s. It's 9000 sqft under roof. My mentor told me not to buy it. 1929 or earlier construction means 1929 systems. Systems are very expensive to repair/overhaul. Ask me how I know.

It was also full of drugs, hookers, deadbeats and deferred maintenance. It had developed a bad reputation and was a blight for a whole historic neighborhood.

None of that scared me. It should have. Two weeks after I closed the cops picked up a big drug dealer on my property. They picked him up for aggravated rape (not of me, lol). I was naive & determined & had an answer for everything.

I was handling this project from 1000 miles away. Forgot to mention that part.

Thank heavens I earn a solid 6 six figure income professionally because that place would have bankrupted a lot of people. But I had the financial strength to carry it. And the iron will to solve the problems it presented.

But it's also somewhat functionally obsolete (400 amps of power for the whole place.). You cannot run 13 units worth of major kitchen appliances, microwaves, blow dryers, stereos, TVs and computers on a 400 amp master service. Ask me how I know

So I bought the place, thinking I got good terms (Actually I did) and I've since put more $$ cash into the place out of my own pocket than it originally cost me (meaning I have cash amount greater than what I borrowed invested in the building.). About 150% of what I borrowed. Cash.

My investor laughs at me about it. He told me not to buy it but I didn't listen. I knew everything you see. Only I didn't. So we always have a good laugh. I was an idiot know-it-all.

I divorced my ex husband. I can't divorce this building, lol. But let me tell you, I've gotten a college education in real estate from it. I survived and learned what the hell NOT to do.

But if I took the 100s of thousands of dollars I borrowed and the additional 100s of thousands of my own cash and had that decision to make over again...I'd already be utterly unemployable. I'd be financially free already. As it is I'm close anyway.

It's does offset quite a bit of other income and I had the financial strength to carry that albatross and support my family and build out the rest of my portfolio (which grosses now more than my professional income) so I managed to double my income after this error but I also realize had I not made that error I'd be that much further along.

Let's just say I listen carefully now when millionaires talk business with me. I'm only a baby millionaire & realize I have lots to learn.

I still ascribe to "Go Big or Go Home", but I'm smarter because I've made some expensive mistakes. Meaning I have "experience".

HOWEVER...

It's smarter to learn from someone else's mistakes than to go make them all yourself to be sure they were really mistakes...but I was pretty hard headed.

But hard headed has a silver lining. Hard headed people are not quitters. I knew I screwed up royally in the first year. I couldn't sell. So I had to figure it out, get creative. I also had to make other good investments to offset this bad one, and I've done that in spades. No way would I quit.

And that building isn't totally out of the woods yet. But it was featured on the Holiday Homes tour last Christmas...there was a line out the door to see it. I have a long term exit strategy in place that I will execute once the rest of the portfolio debt is paid down.

I'm going to outlast, overcome and emerge victorious in the end.

And I feel proud when people commend me for single handedly running the criminals and crime out of there. The neighborhood has improved in value and the business people & law enforcement appreciate what I've done.

But it was still bone headed to buy the silly thing. That's ok. In the end those lemons will make sweet lemonade.

Lol it seems like being occasionally boneheaded can be a curse or a blessing.

I can relate.

Nearly every lesson in life I have learned has been the hard way.