Real Estate Rental Property SH #1 Under Contract! (July 31, 2014)

by FI Fighter on July 31, 2014

in Real Estate Updates

Wow! A whirlwind of activities has transpired in the last 24 hours; I almost had to pinch myself this morning to actually believe everything that’s been going on…

As readers may know, lately, I’ve been attending some local Bigger Pockets Meet-Ups, and have been picking the brains of the local investors, looking for a way to get back into the Bay Area and purchase another rental property. Because prices are so insane right now, I kind of realized awhile ago that the only way I would realistically have a shot of getting in on a deal would be to partner up with others.

Last Sunday, I attended an open-house for a townhouse property located in a wonderful neighborhood… Actually, this townhouse was located on the EXACT same block as Rental Property #2. Since I was passing by, I decided to swing by and take a look around.

The house was staged very well. Most impressively, everything was basically turnkey, so a new owner wouldn’t have to fork over any more funds for renovations. The place featured: new laminate flooring, new granite countertops, recessed lighting, remodeled bathrooms, stainless steel appliances, and really, outside of the dirty old upstairs carpet, everything else seemed to be in excellent condition.

When I left the open house, I seriously had no inkling that I would try and make a move on the property. Actually, the listing price was for $490,000, so I already knew that it was priced way out of my budget…

But the more I thought about it, the more intrigued I was with the idea of owning another property in this neighborhood… You see, it’s located within walking distance of the new 49er’s stadium, and that whole area is undergoing massive redevelopment.

As of present day, I would classify it as a Class A property… Others might disagree, but eventually, over time, I have no doubt that the area will continue to improve drastically. Quite simply, there’s a ton of money pouring in (to the tune of $6.5 Billion), and that can’t help but bode well for the value of all the properties located in this region.

So, on Tuesday night, I entertained the idea of putting in an offer. I talked to a few friends, and they were on board with the plan. There would be four of us partnering up, total. I reached out to my shark of an agent — the same guy who helped me win Rental Property #1 and Rental Property #2.

On Wednesday morning, my agent informed me that offers were due that afternoon… The only way we could compete was to get a pre-approval letter that same day, and to submit an offer by that evening.

My friends and I wasted no time! We went to the bank during lunch and got a pre-approval letter good up to $600,000. Next, I talked to my agent, and he told me he had past experience working with the listing agent… He felt like he knew what strategy to use to help us win. While on the phone talking, I instructed him to be aggressive with any offers… In fact, I admitted to him that we all really wanted to win this one, and would be willing to pay over listing to make it happen.

My agent countered back… He said, “Let’s go in at listing, $490,000… I think we have a shot if we remove all contingencies — loan, inspection, and appraisal.

When I heard that, my first reaction was that my agent was off his rocker! It had been two years since we last worked together, and I was getting worried that he might have lost his “midas touch”. I blurted out to him, “Seriously?!? You want us to come in at listing for a property in the Bay Area that’s located in a fabulous location?!? I was at the open house… it was pretty crowded!

My agent stood firm on his stance… Because of our past successes, I decided to trust him on this. I felt like it was a complete long-shot, but finally relented, “OK. Let’s remove all contingencies and go in at the listing price… Keep me posted!

Well, by that evening, it was all silence… I got tired of waiting around, so I decided to take a jog outside. By the time I returned, I was greeted with two missed calls and a voicemail.

I didn’t know what to expect…

My agent is also a very even-keel kind of guy… Very expressionless in his speech, so even after 30 seconds of listening to the voice message, I had no clue if we had won or not…

Finally, he broke the news and suspense… Offer ACCEPTED! $490,000… our offer was the winning bid!

And since I’m all on vacation for basically the entire month of August, the real fun begins now! We have 30 days to close escrow! 😉

Here are some more articles discussing the “Stadium Effect” in Santa Clara:

Stadium Effect – San Jose Mercury News

$6.5 Billion in Redevelopment – San Jose Mercury News 

AT&T Park Comparison – Archers Homes

New Stadium Good for Santa Clara? – Bleacher Report

There is no denying the brand name of the 49ers… Further, the stadium and location will be in the national spotlight when Super Bowl 50 arrives on February 7, 2016… Better to get in before all the festivities and redevelopment happens, right?

To be perfectly honest with readers, this investment is simply a “side hustle”. I don’t even want to call this investment Rental Property #6 because it won’t cash flow at all! Without factoring for closing costs, my contribution will start at $24,500.

The way I look at it, I’m investing in a hyper-growth stock that doesn’t pay dividends. When it comes to this particular investment, I simply feel that the risk/reward factor is heavily skewed on the reward side… Without a doubt, I have absolute conviction that this area will shine over the coming years, and property values will continue to surge tremendously.

Of course, I could be wrong… and of course, another recession, or market crash could ensue… As such, I am taking on a bit of risk here. By partnering up with 3 other savvy investors (who also make outstanding salaries at their day jobs), I feel like I am doing the best that I can to mitigate risks…

A 3 bedroom townhouse in Santa Clara priced at $490,000 is extremely affordable, if you ask me. If the schools in this area improve and the redevelopment goes to plan, I really feel like the upside here is sky-high. But we’ll see over the next 3-5 years…

Here are the “cash flow” numbers:

Bay_Area_SH

Yikes! Cash flow negative! That’s a no-no, right? Well, luckily each one of the four partners in on this deal also owns other cash flow positive assets to help cover this spread!

Again, this is a risk/reward play on future appreciation… Yes, it’s speculation… But so was Google (GOOG), Apple (AAPL), and Tesla Motors (TSLA), at one point in time… Ultimately, no risk, no reward… The important thing is to take smart, calculated risks… which is what I feel like I am doing here…

In 5-10 years, I hope to look back and say, “Yup, it’s all hindsight now… But even back then, I had a pretty good feeling about this investment.

Time will tell… Wish us luck! 😉

Fight On!

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{ 44 comments… read them below or add one }

1 Retire Before DadNo Gravatar July 31, 2014 at 10:55 am

FIF,
Whoa! Definitely surprised to see this one, a spec. You’re a cash flow hawk, but you make a good case here and spreading the risk among others certainly helps. Gotta take a little extra risk when it feels right. Best of luck! I’m working a new rental too. Should be posting about it in the next few weeks. It’s all about location too.
-RBD

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2 FI FighterNo Gravatar August 1, 2014 at 6:16 pm

RBD,

Yes, this one’s a little bit more risky, but the potential for reward is also much greater.

Best of luck on your own new rental. Sounds really exciting and I’m looking forward to reading your updates!

Cheers!

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3 JC @ Passive-Income-Pursuit.comNo Gravatar July 31, 2014 at 11:19 am

I was surprised to see this one as I figured you’d pretty much be taking it easy until you’re back from your trip. But if you see value in something you have to strike when you can. With the new stadium and rebuild of the area it certainly seems like y’all could have a great property on your hands even though it’s starting out cash flow negative. I’m still looking myself but it’s a bit frustrating for various reasons. Thanks for the update!

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4 FI FighterNo Gravatar August 1, 2014 at 6:17 pm

JC,

Yeah, this move surprises me as well… very much unplanned for.

Ideally, I wouldn’t close on a new property just as I’m leaving for vacation… In this case, the deal is good enough where I’m willing to work through some less than ideal conditions…

Frankly, this deal probably won’t be available later in the year, after I return from my trip.

All the best!

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5 EvanNo Gravatar July 31, 2014 at 11:36 am

Best thing about having a blog is you can come back in a year, 2 or 5 and re-read your present day mindset!

Good luck, sounds like a fantastic opportunity

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6 FI FighterNo Gravatar August 1, 2014 at 6:18 pm

Evan,

Yes, I very much agree with that — one of the joys of blogging, everything is chronicled and time capsuled.

Thanks for the support!

Best wishes!

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7 MartinNo Gravatar August 2, 2014 at 11:28 am

That was exactly what I was thinking too 🙂 The only problem with this is that in may occasions I cannot find that post anymore as it is buried deep in the blog history 🙂

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8 JasonNo Gravatar July 31, 2014 at 12:01 pm

Yikes, FI!

I’m surprised that you went for it, TBH. Yes, it does not cash flow, but in my mind, the bigger risk is actually partnering with others. I wish you the best.

Do you have an specific exit strategy for this property that everyone has agreed with? If not, now is the time to talk about it and make sure to get it into writing. The last thing you want is for some partners wanting to sell and others not wanting to sell.

Just something to think about.

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9 FI FighterNo Gravatar August 1, 2014 at 6:20 pm

Jason,

No doubt, I agree with you… This is my first partnership, and I’ll learn over time how things go.

For this particular deal, I’m partnering up with other investors who have other properties as well, so I’m hoping no single party will be too heavily invested in this one…

Whether it’s for cash flow or appreciation, I’m treating this investment as a side hustle… It won’t make or break any of my FI plans.

We will need to hash out all the details prior to closing, in writing, no doubt.

Best wishes!

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10 LynxNo Gravatar July 31, 2014 at 12:23 pm

I have been reading your blog for a little while and am intrigued but not surprised. This evolution in strategy to looking for straight out appreciation is bold and aggressive. Deals like these are what but the super charged growth in your portfolio building. I have also made these types of investments but while this is only a small part of my portfolio the potential returns are usually worth the calculated risk. I am enjoying watching the strategies you utilize on your journey to FI. Best of luck.

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11 FI FighterNo Gravatar August 1, 2014 at 6:22 pm

Lynx,

Yes, this play here is to supercharge the growth in the portfolio… Yes, cash flow is extremely important, especially when it comes to early FI, but I like to balance cash flow and appreciation as best I can…

Long-term, appreciation may even trump cash flow, so that’s why I want to play in both sandboxes.

All the best!

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12 RefinerrNo Gravatar July 31, 2014 at 1:48 pm

Have fun with your adventure and good luck!=)

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13 FI FighterNo Gravatar August 1, 2014 at 6:22 pm

Refinerr,

Thanks! Looking forward to some good travels! 🙂

Take care!

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14 No Nonsense LandlordNo Gravatar July 31, 2014 at 3:16 pm

WOW, no guts no glory. And a partnership at that. This one you should have a manager, as it will be hard to allocate the work involved to all partners equally.

I hope prices go up like you think, but it is all dependent on what wages do. And as properties go up in value, more supply will come on the market.

Good luck!

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15 FI FighterNo Gravatar August 1, 2014 at 6:24 pm

Eric,

Yeah, this is one of my bolder moves… As you know, it’s a speculation play since there’s no cash flow, so hopefully things work out!

There’s a lot of wealth pouring into this area, so I’m hopeful the wages will keep up and be able to support rent here… If areas like Palo Alto and Cupertino are and indicators, there’s still a TON of room for rent appreciation in Santa Clara. Hopefully the 49ers and all that redevelopment help do it!

Take care!

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16 DoneByFortyNo Gravatar July 31, 2014 at 3:19 pm

Hey there FI Fighter. I should say congrats for scooping up another property. I’m sure you guys have covered this, but under what circumstances do you guys decide to sell? Did you set up a partnership agreement?

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17 FI FighterNo Gravatar August 1, 2014 at 6:26 pm

Done By Forty,

At $600k we will each have roughly 100% return on our original investment (sans commission fees, seller fees, cash flow negative months, etc.). 200% return at 700k… I don’t really have much confidence in any stock that can do that for me in the next 2-3 years…

So, it’s a gamble, definitely… Hope it works out!

All the best!

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18 DoneByFortyNo Gravatar August 4, 2014 at 8:58 am

Right, I see the return potential, which is huge. But what if one or two of the investors want to let it ride for bigger profits, and the others want to sell and take the gains? Is there a means of deciding that?

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19 FI FighterNo Gravatar August 4, 2014 at 9:21 am

Yeah, we’ve talked about things like that… with only one golden goose, it can be difficult deciding what to do…

I’m speaking prematurely, but what if we could land another golden goose? Get two, and the dilemma becomes a lot easier to deal with… in theory.

Hopefully, more deals to come!

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20 DoneByFortyNo Gravatar August 5, 2014 at 7:52 am

That’s certainly one way to skin the cat. My recommendation would be to set up a partnership agreement that specifically addresses the issues of exit strategies and conflict resolution. Needing a simple majority on sales decisions seems like a reasonable path forward: it’d need to be 3-1, but 2-2 would deadlock.

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21 FI FighterNo Gravatar August 5, 2014 at 8:10 am

Yes, we definitely need to iron out the partnership details. Once closing is complete, we will most likely work with an attorney to help get things in order. Transferring into a LLC is another option, although I have never done it before… This would mean converting into a commercial loan and losing our low interest, fixed 30 year rate.

Probably a good idea still, though, since liability and asset protection for each member will be the most important thing.

Thanks for the input!

22 CodyNo Gravatar July 31, 2014 at 4:44 pm

How far away is this from your primary residence? Worst case scenario, would any of you guys ever consider living there?

Saw you listed a cap rate, don’t know if that’s an error or not. It doesn’t make sense to cap a negative cash flow property. IRR will make more sense, you’ll need to project a selling price in the future for it to work.

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23 CodyNo Gravatar July 31, 2014 at 8:58 pm

Oops my bad I saw your mortgage as an expense.

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24 FI FighterNo Gravatar August 1, 2014 at 6:27 pm

Cody,

This area is very nearby my other Bay Area rentals. Worst case, I think you’re right, and any one of us could make it a long-term home… It’s located in a wonderful location.

With Cap Rate, I’m assuming a $490k purchase, so in that case, there would be no negative cash flow… Cash on Cash Return is marked X since the negative cash flow impacts that metric.

Cheers!

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25 Charles@gettingarichlife.comNo Gravatar July 31, 2014 at 8:46 pm

Fi
Numbers look like hawaii here. At that investment rate looks like a fixed, you’re not going with an arm? If your horizon is 7 years or less that would work

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26 FI FighterNo Gravatar August 1, 2014 at 6:28 pm

Charles,

Yeah, the Bay Area ain’t cheap, that’s for certain! Numbers assume a 30 year fixed mortgage, so no ARM…

A 5/1 ARM might be a better choice… we haven’t decided yet.

All the best!

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27 Financial SamuraiNo Gravatar August 1, 2014 at 7:18 am

Gutsy! I like it! Who are your partners anyhow and is it a 4 way split on profits essentially?

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28 FI FighterNo Gravatar August 1, 2014 at 6:29 pm

Sam,

Thanks! Partners are people who I am well acquainted with… Yes, it is in essence a 4 way split…

Each one of us has a bunch of other rental properties and investments, so this is just a side hustle…

Best wishes!

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29 Financial SamuraiNo Gravatar August 1, 2014 at 8:45 pm

Any thoughts on why they sold at the price? What do you think they are seeing which you might not be?

I bought my new house from two daughters who live in Washington and inherited the property when their mother passed. She had not lived in the house for 2.5 years.

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30 FI FighterNo Gravatar August 3, 2014 at 9:44 pm

Sam,

It’s currently owner occupied… My guess would be that the owners were under water for a few years, and now that the market is back up, they want to seize the opportunity and cash out while they are in the green…

That, or maybe they are getting older and don’t want to be around all the hustle and bustle that the stadium would bring to the area…

I’m just guessing, but one person’s trash is another’s treasure… or something like that, hopefully 😉

Cheers!

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31 TylerNo Gravatar August 1, 2014 at 12:20 pm

As your real estate empire grows, especially with partnerships entering into the picture, consider consulting with an asset protection attorney. Preferably one who specializes in real estate. Each investment is exposing your personal assets to a growing amount of liability, and this partnership is adding a new wrinkle so I’d recommend looking into some business structuring (land trusts, LLCs, etc) to make sure you’re protected from risks from your tenants, partners, or otherwise. Asset protection is like insurance, you don’t need it until you do. Long time reader, first time commenter wishing you the best of luck!!

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32 FI FighterNo Gravatar August 1, 2014 at 6:30 pm

Tyler,

Great point and thanks for the comment. Litigation protection and asset protection cannot be understated… We will all need to look into this carefully before closing and figure out a course of action that works for everyone.

Take care!

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33 Curtis@PayOffMyRentalsNo Gravatar August 1, 2014 at 1:30 pm

I’m with Jason on this one.

I’ve partnered with others on real estate in Costa Rica. I’ll never, ever, EVER do it again. You might as well buy a REIT. This deal has its upside, but I think it’s mitigated by the downside of the partnership.

I was born in Mt. View and raised in San Jose. So I know the area pretty well. Your market is way outta my league. I love Santa Clara. The El Camino Real is full of nostalgia for me.

I wish you well on this one.

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34 FI FighterNo Gravatar August 1, 2014 at 6:32 pm

Curtis,

Sorry to hear about your bad experience with partnerships… Since I haven’t done it before myself, I am not certain at this time how I feel about it… With $25k invested (initially) and strong confidence in growth in this area, I am hopeful that the reward will be worth the risks…

Time will tell… Hoping for the best, and yes, I definitely have to plan for the worse as well.

All the best!

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35 Financial SamuraiNo Gravatar August 1, 2014 at 8:48 pm

I don’t think $25,000 is that much either. Worst case is a 100% loss or you are stuck with it for longer than you want. No biggie as the costs are split 4 ways.

The contention is if partners start bickering. That always stinks.

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36 MartinNo Gravatar August 2, 2014 at 11:36 am

This is actually a good point. If one investor stops paying others will have to step in or all will lose. If all three investors start bickering, Fighter may end up in it alone.

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37 The Wallet DoctorNo Gravatar August 2, 2014 at 11:05 am

Congrats on getting the offer accepted! Your numbers overall are looking pretty good. Keep us updated on how those investments pan out!

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38 FI FighterNo Gravatar August 3, 2014 at 9:45 pm

Wallet Doctor,

Thanks! I’ll be sure to keep the updates coming as the deal moves forward!

Take care!

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39 MartinNo Gravatar August 2, 2014 at 11:32 am

Wow, Fighter,

You are going big here! Hope no one counteroffers your bid and you won’t end up in a price war. So I wish you a good luck on this so it ends as is and you close at this price.

I also think it is a good idea partnering with other investors. I wish to do the same in my investing account, but so far I didn’t find anyone willing to invest with me, so I am alone. The reason is, that with pooling cash I can get better commission, better margin (like portfolio margin) and take trades I cannot afford with my small account. Same as with your property which you wouldn’t be able to afford alone.

So good luck and keep us posted.
Martin

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40 FI FighterNo Gravatar August 3, 2014 at 9:46 pm

Martin,

Yes, we are swinging for the fences on this one! The contract has been accepted so we just need to make sure we can close the loan. We are locked in at the $490k purchase price since we stripped all contingencies on our offer.

Yeah, partnerships can have their benefits, since it allows you a lower barrier to entry. Also, you can spread the risks to more parties… There are downsides as well, so that’s why I’m trying to do a little of this and a little of that.

This is a side hustle that hopefully pays off in the end.

Best of luck in your stock investing!

All the best!

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41 Kathy @ RentalRealitiesNo Gravatar August 4, 2014 at 8:23 am

Congrats! I know what its like to think “Maybe we’ll look for another property in 6 months” and then find yourself under contract 2 weeks later. 🙂

I’d be interested to hear more about how you’ve structured your partnership. Specifically, are any of the partners silent? Do you vote on major decisions? What happens if somebody wants to sell before the others are ready to? Going in with others has always been outside of my comfort zone, but then again my market is easier to swing without them.

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42 FI FighterNo Gravatar August 4, 2014 at 9:17 am

Kathy,

Thanks! Haha, yes, I definitely know that feeling all too well! It seems every purchase I make was either unplanned for or pulled in by a few months… sigh… this is why I never have any cash…

I will write a post on the partnership details after the loan closes. Right now, that’s our #1 and most important priority… We have hashed out some preliminary talks about what we want to do moving forward.

All the best!

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43 MaryNo Gravatar August 4, 2014 at 9:08 am

That’s great! So do you mind renting out your parking space for the games!?! lol

How is your interest so high at 5.5%? I’m in escrow in property #3 and received 4.5% just last week. Though my loan is only half of yours.

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44 FI FighterNo Gravatar August 4, 2014 at 9:19 am

Mary,

Yes, and possibly renting out the unit when Super Bowl 50 arrives!! 😉

Interest rate projection is conservative at the moment… we were quoted around 4.65% or so from the lender… but the rate isn’t locked yet. We are aiming to go 20% downpayment…

Congrats on property #3! That’s awesome!

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