My Eleventh Investment Property and Fifth Four-Plex

My eleventh Investment property was probably my most risky and most creative property I have ever purchased.  It was not a REO, not even a short sale.  I did not even buy the property itself, I bought the underlying mortgage from the bank.

This property was owned by an investor that purchased the property in 03/2003 for $420K.  He also had another property in the area.

On one warm spring day, before the complex was cleaned up, there was a huge neighborhood brawl.  Several families were drinking, and a fight stated.  There was blood and broken bottles everywhere.  The cops arrived in full force, at least five or six police cars and 10 to 15 cops were there.  They hauled away a few people to spend the night in their lock up facilities.  This property was always the subject of major drama in the complex.

The Association sent a letter to the tenants involved, threatening eviction if they did not move voluntarily.  One family moved the next day; another needed 60-days to move.

The owner that had one of these families could not take the vacancy expense as he was running such a tight operation financially.  He must have missed some mortgage payments, and the bank proceeded to foreclose.

Once the foreclosure started, most of the tenants in the building moved out or were scheduled to move out.  One stayed, and was not paying rent.  The property was in very rough shape.

I had been the president of the complex for at least three terms by then.  I was in contact with the bank to make sure that they maintained the building and continued to pay their dues.  After all, of we are supplying services, we need to get paid.  If you are not paying, we are not plowing or picking up trash in that location.  (If it were not for that action, we would have missed getting paid…)

The bank also needed to maintain heat so that there would not be any frozen pipes and water issues.  As president, it was my job to make sure that building did not cause damage or loss of value to any other buildings in the complex.

When the bank had the Sheriff’s sale scheduled, they had mentioned a price that I could buy the property at the sale for.  It was an attractive price, but would have required all cash, and was mostly a sight unseen venture.  I had already purchased one property like that, so I knew the risk, but I was not 100% ready for the risk quite yet.  There were still tenants in the building, and it was the beginning of the Minnesota winter season, both of which added a huge risk to any Sheriff’s sale purchase.  The owner still had access to the building and could do additional damage.  There would also be a six-month holding time while the redemption period expired.

I kept in contact with the bank, and offered the property to several other investors.  If I found an investor that wanted the property, I forwarded the bank and investors contact information to each other, so they each could make a deal.  I wanted an investor who had the same vision to the future of the complex as me to own it.  No one could make the deal happen, either because of the risk, or the amount of capital required.  A ‘normal’ mortgage deal could not be completed, as there was no property to mortgage until the end of the redemption period.  You cannot buy a mortgage with a mortgage.

Two months into the redemption period, the bank had the renters out.  The bank had also enlisted the help of a property manager, or a “receiver”, to take care of the property.  The locks were changed.  The owner could no longer get into the property without notifying the receiver first.  Winter was only two months from being over.  There was only four months left to wait out the redemption period.

So I decided to “bite the bullet.  The price I needed to come up with was $197,037.57.  I sent a letter to the bank and I gave myself about 30-days to come up with it.  That took away more risk, and gave me additional time.  I had an attorney look over the paperwork, and all looked well.  On 2/15/2012 I had purchased the mortgage from the bank.  The building would not be mine for another four months.

I monitored the property almost daily to make sure nothing happened, as I was in the complex working on my other buildings.  The water main in the building was shut off.  I was paying the heat and electric.  Much of the risk was mitigated.

After the purchase of the mortgage, the mortgage assignment needed to be recorded.  That is an additional $46.  But it could not be recorded before the property taxes were current which was another ~$4,400.  And the deed tax needed to be paid, another $800.  And the water bill was delinquent for $500.  And HOA dues were behind for another $1,500.  Al in all, it was a $205K purchase.  And it was paid off, with the exception of my home equity line on my own personal residence that I used for a portion of the funds.

Since I had already purchased a few properties in the area, I knew the potential return of this property.  I had remodeled many too, so I know a solid approximate cost.  It was an end unit, near a wooded area, so it had a prime location in the complex.  I think it has the best location.  I knew I could do all of the work, but to get it done faster, I would need help.  With a single unit remodel, your opportunity cost of one month’s rent at a time.  With a 4-plex, it is four months’ rent at a time.  So the opportunity costs beg for a quicker turnaround.

Once I had the property, there was a lot of work.  All the appliances need to be replaced, stove, dishwasher, refrigerator, and air conditioners.  Hot water heaters were replaced.  Shower valves and toilets were replaced.  I put new carpet in the bedrooms, laminate floors everywhere else.  Kitchen cabinets, faucets, sinks, vanities and countertops were replaced.  All shut off valves were replaced, including the main one for the building.  Tile bathroom floors, remove center walls and put in kitchen center islands.  We installed garage door openers, washer and dryer hookups (and supplied the appliances).  All window screens had to be built.  Deck sides and rails were replaced composite materials.  All interior doors and the apartment entry doors were replaced.  Everything was painted, including walls and ceilings.  Numerous walls and ceilings had to be patched.  I hired much of the work out, but I was there working too.  I was not only supervising, but learning and doing a large bulk of the work.  All in all, it was a $60K remodel, about $15K per unit, plus a lot of sweat equity.

We used two 40-yard dumpsters.  Put on at least 75 gallons of paint.  I probably breathed in enough dust to fill my lungs twice or more.  I was working every evening after work, from 6:00 to 8:30+, every night.  On the weekends, I hired a guy to work with me, and we met at 8:00 AM every Saturday and Sunday (except for the month he was in jail when I worked by myself).  He worked until 5:00 PM or so, I worked another hour or two after that.  I took vacations and worked.  Even took a sick day or two and worked.  I managed my other 20 renters and worked my full time job while I was doing this.

It was an incredible journey, but once it was done I had a fully paid for building, completely remodeled.  The end of the redemption period expired ~6/15.  The first tenants moved in on 9/1/2012, about 10 weeks after we started.  On 10/15/12, 11/15/12 and 1/1/2013 additional tenants moved in.  The place rented as soon as we could get the units ready.  In about six months, all four units were totally remodeled and filled with tenants.

Now, this is one of my highest rent buildings, with the most cash flow.  It is paid off, 100%. The home equity line I took out on my personal residence took just under 18 months to pay off; it was paid off by 7/1/2013.  The interest rate was 3.49%, so interest expense was minimal.  It takes less than one unit to pay all of the expenses, including reserves for vacancy, maintenance and management.

I was now the majority owner in the complex, owning five buildings out of thirty.  Should I buy more?