Saturday, July 11, 2009

Real Estate Update: Tuition

I figured with all the changes around here, it was time for a real estate update:

1) Oak Hill manor is complete and rented. We were able to rent it out within a week of posting, we have really good tenants, and all of our leases have started.

2) We've learned some important lessons about duplexes, and will be very hesitant to deal with them in the future. Here's why:

a. Duplexes are a lot more work. Two of everything complicates things more than you'd think.

b. Although we are used to paying a slightly higher origination fee on investment property mortgages, we discovered this time that our lender charges an extra point on duplexes, above and beyond the usual investment property fees. Not a huge deal, but not cool either.

c. Here's a biggie - when it came time for the appraisal, we found out that the appraisers will not consider what single-family homes are selling for in the area. They will not consider what townhomes are selling for in the area. They will ONLY LOOK AT OTHER DUPLEXES. There are not many duplexes in the area, and duplexes tend to be a bit shoddier than OHM. Similarly, they will not consider cap rate, which is used on larger investment properties like apartment complexes. (The use of cap rate would've resulted in a much higher appraisal.) These factors, coupled with the appraisers' conservatism due to the current market, resulted in a very low appraisal. (Actually, two very low appraisals, since we paid hundred of dollars for a second opinion.) In fact, OHM appraised for about the same as the townhouses behind it, which are comparable to 1/2 of it. It was a very discouraging experience. And because it is investment property, we were only able to borrow 70% of the appraisal (before exorbitant closing costs). The end result is that WE ARE OUT OF POCKET A SIGNIFICANT AMOUNT OF CASH (i.e., tuition for this educational experience).

Obviously, this is unfortunate, with Andy accelerating our real estate efforts. But here are the "positives": 1) important lessons learned, 2) great cash flow, since our payment is lower than we'd anticipated and 3) a great interest rate (we locked in just before rates went up about 1/2 point).

3) We have a contract on a new project. We should close around 7/15. We'll post more details once we've closed.

4) We have a tentative deal on another project, which would close around 7/31. While I'm a little nervous about doing two deals at once, I think it help Andy fully utilize his time. He is excited because doing two projects at once may potentially allow us to keep one as a rental.

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