Having the ability to keep focused is a key success factor in real estate investing. I can relate to this in several ways when it came to the real estate boom and bust several years ago.
At about the time I started closing the five bad flips in early 2005-although at this point I didn't know they would be disastrous-I thought it would be prudent to diversify my investment product by acquiring small condominium units in Las Vegas. My thought process on this matter was that the days of flipping would not be as plentiful as they were at the moment, and that long term thinking required that I get something in the hopper in 2005, maintain a medium-term hold period of twenty-four to thirty months and dispose of those units for a profit. The rationale was that buying $1,265,000 worth of condo product with a 10 percent per annum appreciation rate on a two year hold would yield $250,000 to $300,000 plus in appreciation. Given that Las Vegas had 40 percent plus per annum appreciation in the preceding two year period, I felt that 10 percent would be a prudent pro forma. And although new tract home flip opportunities would slow down in the given markets that I had planned on investing in over the next couple of years beyond 2005, buying non-flips at an average cost per unit of $110,000 to $150,000 made a lot of sense, given a pro forma net profit layout estimated at $200,000 after closing costs on all nine units.
More over, this strategy acted as a hedge against the inevitable slowdown of flip opportunities. Not that flip opportunities would no longer exist, since they still had to an extent in 2007, but the scarcity of such deals necessitated a two prong investment strategy that would net significant cash returns, without having to rely exclusively upon flip transactions as the first prong, and as my sole source of bread and butter. In fact, this strategy did nearly work, since in December of 2006, after only three and a half months of marketing and nearly a year after having closed these nine units, I put the nine-unit condo portfolio under contract, as they were packaged and marketed, into escrow for the list price of $1,525,000-based upon an original acquisition price of $1,265,000. On paper that would be a $260,000 gross, with net proceeds in the $200,000 to $225,000 range. As luck would have it, escrow fell apart shortly afterward in the first week of January 2007.
Keep in mind that throughout 2006, monetary resources were thinning out substantially for me given the financial drag that four of the remaining five bad flips I had acquired in 2005 were still on the books with mortgage debt servicing being paid on them. Two of the four remaining flips were the two Burbank deals. At this point in March 2006, just five months before I would put the nine condo units on the market in August 2006, my cash reserves were depleting at a rapid click.
And even though I had sold five good flips from one developer in Riverside, that netted me at least $210,000 in cash reserves by late 2006, the five bad flips, four of which I still had on the books, คอนโดมือสอง ราคาถูก had substantial mortgage debt service obligations that were rapidly depleting reserves, especially given the drag created from the two Burbank homes. To constructively combat this rapid descent, it was about this time in October or November 2006 that I closed down my Los Angeles office for Potter Equities, which just three months precedent to that date, had put the nine condo unit portfolio on the market. Unfortunately, and as mentioned earlier, the condo portfolio fell out of escrow four months later in January 2007. Notwithstanding terminating my office lease, I also terminated my studio loft apartment lease in Pasadena. And to shore up this bloodletting, a $110,000 business line of credit was secured. With cost cutting at a premium, I relocated permanently and operated Potter Equities out of my second home in Phoenix, Arizona.
What had also hurt me in 2005 was the $102,000 I laid out to acquire the nine condo units. The average down payment was $10,000 to $15,000 per unit in comparison to the usual $4,000 to $5,000 in closing costs that I'd normally spend for one acquisition. Furthermore, I was not getting the 95 percent to 100 percent LTV financing on these non-owner occupied condo loans, but rather, most of the loans were with 10 percent down. Part of this change in leverage financing was a reflection of the market in late 2005 in terms of financing. At the time, slightly more stringent underwriting standards were being promulgated throughout the mortgage industry. This was a shock to the system, needless to say, and was indicative on how I had strayed from the investment model I had created for myself, despite the changing capital markets and the new LTV parameters. Flip methodology mandated one to leverage with as little money as possible, thereby reducing one's risk exposure. With $102,000 absorbed in the acquisition cost in nearly an eight week period for the nine condo units in late 2005, in which the properties were closed and acquired from the developers, that was a severe shock to the cash reserves. Moreover, considering that typically during the acquisition of a new tract flip I would spend $4,000 to $5,000 per deal-and, in some cases, spend nothing at all and actually get rebated $2,000 to $5,000 at the closing table, the dilemma I had created was a disaster in the making. This was a textbook classic example of being over leveraged and without sufficient reserves.
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