Successful real estate investors must often exercise vision, boldness and courage in pursuit of their investment goals. One group of real estate investors recently exhibited all of these key virtues while pursuing a recent deal.
The group's organizer, my friend Walt, is a realtor, real estate investor, and a real estate developer. He is relatively young, but has a wealth of experience having completed over 250 major real estate deals in about a six year real estate career.
Wherever Walt goes his vision sees real estate opportunity. He is always looking, thinking, evaluating, examining, researching, reading, visiting, conferring, and analyzing in the real estate arena. His wide understanding of the Utah real estate market and his constant review of properties and deals gives him the ability to recognize an opportunity when he sees one. Recently he saw one that got his attention as a potentially remarkable opportunity. His preparation helped him to have the vision to recognize opportunity. He was quickly able to look at this opportunity and frame a vision of what the run down property might become. He could see and envision the future potential returns.
Soon Walt was sharing his vision with a small team of qualified investors, a group of friends. Together they explored the property, performed a cursory due diligence and uncovered some daunting property flaws that discouraged some from continuing in the pursuit of the deal.
Others decided that though the risk that this property will be a money pit is real and though the vacancy rate on the property is very high, and though over a million dollars will have to be spent to bring the property up to an acceptable level they would continue to invest time and money in the pursuit of the deal.
Against their fear they decided to form a company, contribute money, seek financing and make an offer. This was a bold move when you consider that they knew that they didn't know everything they could or should know about the property. However, they decided to take a measured risk as they believed it to be a real opportunity. This took courage. Sometimes, we have to step beyond our fears, and beyond our comfort zone if we are to capture a great opportunity from the jaws of the competition. We have to move fast and we have to commit earlier than we might wish to.
The property is an interesting one. It is a multi-family property that has been very poorly managed. The past owner paid $7 million for the property. It was one property in a portfolio of properties and was geographically distant from the others. The owner was perhaps not as careful in the management of the property as she might have been. She had financed it with a $6.5 million loan.
The poor economy and suspect management lead to a run down property and high vacancy rates. As vacancy rates soared cash flow was inadequate to service the loan and still provide the upkeep necessary to keep rental units in a condition that would rent. This eventually lead to permanently high vacancy, low rents, and a default on the 1st mortgage.
The owner realized she was in trouble when she discovered that the buildings all needed new plumbing to replace the faulty polybutylene piping that had been installed when the buildings were built. Then a small child started a fire in one of the buildings causing $475,000 of damage. Gradually management stripped some units to refurbish other units as the cash flow wouldn't support buying new appliances. The stripped units, devoid of air conditioners, stoves, and refrigerators we no longer ready to rent and became permanently vacant. The owner did not renovate the burned units but kept the insurance payout for herself and basically abandoned the property to the bank that held the property. Soon the property was in receivership, but buyers and lenders were wary and the property sat without offers.
Walt and his friends surveyed the situation and decided they might have to spend anywhere from $1.2 MM to $2 MM to fix the project up and increase rents. Because of the poor economy in the area it was uncertain that completing the fix up would result in lower vacancy. Nevertheless, they had the vision that this would be the case and they proceeded with courage and boldness to pursue the purchase.
Eventually they were able to place the property under contract for $1.5 MM. They worked out favorable financing for the purchase price and part of the cost of renovation. The remainder they would cover from their own funds.
Time will tell whether or not they are right about being able to reduce the vacancy and drive top line revenue. They are hopeful. As it now appears they expect to be profitable even if they can only slightly reduce the vacancy rate. Following their vision they have developed goals and objectives that have lead to a plan of action. They are implementing that plan. They have plans for improved management, improved marketing, improved maintenance, and improved buildings. They hope to gradually increase rents and upgrade the tenant mix.
Of course things such as the global and national economy are still a threat to their success. Courageously they determined to boldly step forward and commit to their vision and plans regardless of these external, global risks. Entrepreneurs such as these are what keep civilization progressing to ever better heights. People such as these have the vision and the courage to take advantage of opportunity that is disguised as a massive problem set. They solve the problems and pay the price for eventual success.
What do these visionary, bold, and courageous real estate investors hope to achieve from this risky venture? They hope to turn their $2.7 million investment into a $5.5 million property. They hope to turn an $85,000 net operating income into a $440,000 net operating income within two years. They anticipate a minimum 200% return on their investment within two years, but may do even better.
They may never sell the property. It may become a cash cow for the group. If this deal pays off they will likely be encouraged to take another risk in the future. The history of the members of this investment group is one of individuals who have each taken risk, stretched themselves, and acted boldly in the past in order to now have enough capital after taxes and living expenses to be able to pursue this deal. They have paid a past price in order to be able to recognize and act on a good deal now.
It all starts with vision, but it goes nowhere without the commitment to act in boldness and courage and to put in the work required to make the deal and execute the plan. Time will tell if this group realizes the outsized returns that they anticipate. Tenants, banks, the community, and the investors will all realize positive things from this bold turn around effort.
I hope you will go and do likewise.
Investing in stocks, real estate, and precious metals is risky and could result in losing money. I am offering ideas for your consideration and education. I am not offering financial advice. Please do your own due diligence. I am not an investment adviser. Precious metals is not for everyone. I promote precious metals. You should do your own due diligence when making investment decisions of any kind. You should consult your own financial advisers before making any investment decision. I make no guarantees that by following any advice or suggestion I might make that you will realize any return. Beware, all commodity markets and other markets carry risk of loss.