Real Estate Rental Property SH #2 Closed Today! (September 18, 2014)

by FI Fighter on September 19, 2014

in Real Estate Updates

49ers

Gotta strike while the iron is hot! Or rather, strike before the revitalized Santa Clara area in the Bay Area becomes completely overpriced and unaffordable!

Today, my investing partners and I closed on our second real estate deal together. This property is a 3/2 townhouse backed by a 7/1 ARM at 3.75%. We closed escrow today and should be receiving the keys tomorrow night! Similar to the property we secured in July, this one is also located in Santa Clara, next to the new 49er’s stadium.

And just like that first side hustle deal, this one is all about the appreciation! As readers may be aware, I recently accepted a new engineering role, so I won’t be declaring early FI in the next year. As such, I’ve reshuffled the deck a bit and altered my investing strategy. Rather than focus on immediate cash flow, I’m partnering up with some cash rich investors to try and speculate on tomorrow’s appreciation.

Is that risky? Yes, definitely… Appreciation is never guaranteed, and markets go up and down all the time. Depending on where we are in the cycle, this may or may not turn out to be a good short-term deal.

Long-term, I’m very bullish when it comes to the Bay Area. I see massive redevelopment in the works, and billions of dollars flowing into Santa Clara. More specifically, $6.5 billion to help revitalize and develop a downtown area in Santa Clara to complement the new centerpiece, Levi’s Stadium.

From San Jose Mercury News:

City Council on Tuesday night unanimously approved a deal with mega-developer Related to start the final phase of planning for the 215-acre mixed-use project that would give Santa Clara its downtown back after it was torn down in the 1950s and ’60s.

The full City Place proposal is so big it would require seven phases of construction. In addition to offices, the development includes 30 restaurants, a 350-room hotel — up from 200 rooms planned last year — and 380 apartment units. There will be another 1 million square feet of shops, including two or three department stores, along with plans for a movie theater, a comedy or jazz club, a bowling alley and an arts performance center. A “European-style” arts district, parks and plazas are included, too.

Santa Clara is already on the map, but this is certainly going to put us way over the top,” said City Manager Julio Fuentes.

Yes, it’s true that this massive project will take many years to complete, and the first phase isn’t even scheduled for completion until sometime in 2019… But that’s why I’m trying to get in NOW. I’m buying my ticket to the dance well in advance, just in case this project does prove to be a massive success (like AT&T Park before it in San Francisco). This location could very well indeed become the premiere entertainment capital of the entire South Bay Area!

If that weren’t enough, just 10 minutes away, you have Samsung pouring in an additional $300 million towards a new research and development campus that will help transform the North San Jose region. The new Samsung campus will house 2000+ workers!

So, there is definitely no shortage of money coming in! If the wealthy are placing their bets in this region (and believe with full conviction in the future vitality of this area), who am I to argue? I’m just a small fish trying to survive in a gigantic ocean filled with sharks… If I can just have a small piece of the (wealth) pie, I should end up doing more than fine in the long run…

What do I see? An in-demand area where all the hustle and bustle is. An entertainment hub. Lots of high-tech jobs. Most importantly, increasing property values and robust rent appreciation through the years.

At this point, I should make clear that this “gamble” is only something I considered doing after learning of the new job offer. Originally, I was planning on retiring at 30… If that were the case, then this deal wouldn’t make a whole lot of sense… Financial independence and early retirement require enough cash flow to cover all expenses… This deal does NOT generate cash flow (not much anyway)!

But since I now intend on working slightly longer, I’ll have some more time to beef up the cash flow. The additional income and bonuses also allow me the opportunity to make these type of appreciation plays. In fact, my entire $30,000 signing bonus (and then some) is being allocated to this deal!

Most likely, I’m going to ease off the gas pedal now that my partners and I have secured a second appreciation deal in the Bay Area… Predictably, my focus will now revert back to stashing cash and working on future cash flow deals.

But I do have one additional appreciation play in the works, which I’ll probably announce later tomorrow… 🙂

In the meantime, here are what the cash flow numbers should look like today, provided we can rent the unit out for $3,000/month, which is our target:

Side_Hustle2_Cash_Flow

Not very good, but it’s tough finding cash flow deals in the Bay Area. The 7/1 ARM isn’t ideal, but it did help us save 1% on the interest rate.

Note: These cash flow numbers won’t reflect true reality. PM will be self-managed, vacancy should be low, but maintenance won’t ever be ZERO. These are just baseline PITI (plus HOA) numbers we used for comparing with other similar Bay Area investments. The objective was to at least break even with the fixed expenses… Preferably, to start off in the GREEN after PITI (plus HOA) as much as possible…

Time will tell if we made a wise investment decision or not… I don’t have a crystal ball and can’t predict what tomorrow will bring… So, the best that I can do is to try and make an educated guess on what the future holds. What do I see? Silicon Valley remaining a powerhouse in the world economy and a most desirable place to live.

Again, time will tell…

Fight On!

{ 14 comments… read them below or add one }

1 TraderNo Gravatar September 19, 2014 at 2:49 am

Wow! It’s really amazing the speed you make bussiness out there. You are now diversificating risk, I guess.
Keep going!

Reply

2 FI FighterNo Gravatar September 21, 2014 at 7:56 pm

Trader,

Yes, this move helps me diversify more into the Bay Area, which I think will be my primary market and main focus in real estate moving forward.

Cheers!

Reply

3 Mr. FrugalwoodsNo Gravatar September 19, 2014 at 3:48 am

No one can ever accuse you of shying away from opportunity!

I’d be interested to know more detail about how the investment is structured with your fellow investors. Are there buyout provisions?

Reply

4 FI FighterNo Gravatar September 21, 2014 at 7:57 pm

Mr. Frugalwooods,

Yes, I still need to write a post about the partnership arrangements and exit strategies. More details to follow once we get the two properties rented out, stabilized, and producing cash flow.

All the best!

Reply

5 writing2realityNo Gravatar September 19, 2014 at 6:08 am

Mr. Frugalwoods touched on a pretty important point here, which is the relationship with your partners. How have you structured the “sell” decision, or any other decisions to be made. What happens if one person wants out? These things can get complicated with so much money involved.

Either way, best of luck with these latest two adventures!

Reply

6 FI FighterNo Gravatar September 21, 2014 at 7:59 pm

writing2reality,

Yes, we still have a lot of items to sort out, and I will wait until everything is ironed out before posting it on the blog.

Sorry for the delay!

Take care!

Reply

7 BrianNo Gravatar September 19, 2014 at 6:21 am

Gutsy move. The long-term trends seem definitely in your favor.

Do you have a definitive exit plan? Like if the property hits 700,000 will you list it?

The bay area certainly is some of the most unique real estate in the world. Rates are horrible but the chance for appreciation is enormous.

You’ve made some pretty aggressive assumptions from a cash flow perspective. Zero vacancy, zero management fee. Looks like a HOA and taxes are quite high too.

Good luck! High risk, high reward. I’m rooting for you.

Brian

Reply

8 FI FighterNo Gravatar September 21, 2014 at 8:00 pm

Brian,

Yes, we have an idea of the price point we would like to sell at… We just haven’t formalized an agreement yet on paper.

Yes, the Bay Area is a pretty unique real estate market. I’m hoping these investments are more along the lines of, “low to moderate risk, and extremely high reward” but we’ll see how things work out.

All the best!

Reply

9 Even StevenNo Gravatar September 19, 2014 at 8:43 am

I mean it is a risk, but as a real estate guy you are breaking even to own a property that you think will appreciate and if not at least entertain renters to pay the mortgage, that’s not as risky to my senses. Maybe if it was an interest only loan and if it was a crime infested area that you were hoping to revitalize, then that to me is risky.

Any backup money/emergency fund in case you can’t get it rented for say 6 months?

Reply

10 FI FighterNo Gravatar September 21, 2014 at 8:02 pm

Even Steven,

There should be no reason why we can’t get a tenant soon… In fact, we’ve had applications coming in, so we are confident we can secure one before October…

The Bay Area rental market is pretty hot, and as long as the unit is in decent shape, there’s no reason for a 6 month vacancy… The location of our latest two rentals is also well situated in the heart of high tech, so I’m optimistic we’ll land someone good as well.

All the best!

Reply

11 MaryNo Gravatar September 19, 2014 at 10:22 am

That’s great. Not as risky since everyone has money to cover the shortage if there is one. Our property #3 won’t be generating much income either. In the long run, supposedly, it’ll pay for kid #3 college education.

Since you’re by Levi stadium so often, if you ever want to buy football tickets, let me know. Season ticket holder of four seats.

Reply

12 FI FighterNo Gravatar September 21, 2014 at 8:05 pm

Mary,

Good luck on your third rental! Yes, it’s tough to generate cash flow in the Bay Area today, but with the way rent has been rising in the last few years, it should happen sooner rather than later.

Thanks for the offer! I’ll let you know if I’m ever around town and ready to catch a game. 🙂

Take care!

Reply

13 FerdiSNo Gravatar September 20, 2014 at 7:07 pm

Congratulations — even if you don’t quite break even, I’m convinced you’ll find that this is a great investment. I’m in the East Bay. Rental income is shooting up as the city gets too expensive. Some talk of another bubble. I think we’re far from that…

Take care!

Reply

14 FI FighterNo Gravatar September 21, 2014 at 8:07 pm

FerdiS,

Thanks! I’m confident this deal will be a winner in the long run, but yes, it is tough to break even in the Bay Area, even with a substantial downpayment…

It’s tough to put down $100k+ on a downpayment and watch it earn minimal cash flow… Fortunately, I’m partnering up on this deal, so the barrier to entry was rather low… Unfortunately, in today’s hot market, it takes some strategizing to find ways into this rental market.

All the best!

Reply

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