Category Archives: Investing

My First Real Estate Investment

Real estate investment: From fixer upper to rental home.

A former handyman special after receiving lots of TLC

The economy was cratering in the fall of 2008. The world was seemingly on the verge of collapse with high profile corporate failures, Lehman Brothers evaporating from Wall Street virtually overnight, General Motors and Chrysler entering bankruptcy, and the U.S. government essentially printing money at a furious pace to eventually bailout the likes of AIG.

Closer to home job security was on everyone’s mind. I experienced an involuntary five percent pay cut. Many people were losing their homes, fuel prices were hovering at all-time highs of around $4 per gallon, and there was just this general sense of malaise if not outright panic.

We were setting up for a remarkable decade. If you were on the right side of things, you did well. If not, well, we see a lot of lingering signs of decline today not just economically but in the fraying fabric of our society.

It was then that I just happened into real estate. Just to be clear, at the time I was not at all interested in it. My only previous experience was the purchase of two homes, both primary residences, the most recent one in 2007. Continue reading “My First Real Estate Investment” »

I Broke My Own Rule and It Was Hellacious, Part 3

When a weed becomes a tree

When a weed becomes a tree.

Of course, when I said things were mostly handled for now it’s not yet hands off by any means. I’m not sure how much I had to identify, and how much just plain found me. But here’s a smattering of the things that cropped up in the space of about a month.

This is in addition to a long list of building items that had to be addressed, from adding a transition threshold to securing a loose toilet (how does that happen? It happens from moisture damage that slowly rots away the floor underneath said toilet) to replacing more than 30 air filters to patching holes in the concrete. Continue reading “I Broke My Own Rule and It Was Hellacious, Part 3” »

I Broke My Own Rule and It Was Hellacious, Part 2

Hole in the ceiling

Hole in the ceiling

At first I tried to get the management company to either change their mind or continue to work with us on a more limited basis, effectively making it easier for them. But that didn’t work.

It was clear we either had to get new management or sell the building. It didn’t seem possible, and certainly wasn’t desirable, to manage the building ourselves not the least of which was that I knew I’d be the one saddled with the burden.

So I posted ads to sell the building while also searching for new management. The ads produced a lot of responses from tirekickers.

There were a couple of serious potential buyers but their offers were, unsurprisingly, very low. Apparently the Internet can be the playground of vultures.

On my first trip to the city after receiving notice from management, I called and met with a number of other management firms and a curious thing happened. There’s no real convincing case to potential management about the loss of existing management. Effectively we were blacklisted. Continue reading “I Broke My Own Rule and It Was Hellacious, Part 2” »

I Broke My Own Rule and It Was Hellacious, Part 1

Watch your step

Watch your step

My first five years of investing in real estate went rather well. I’d gone from buying a first rental property to a handful, all of which were rented to good tenants, the kind that always pay their rent on time and have very few problems.

Then about five years ago I made a mistake. I broke my rule that I’d never buy into a property I wouldn’t be willing to live in, and that deal has been terrible ever since.

Breaking this rule was actually a byproduct of another bad move: Not doing my own due diligence. I bought into a partnership that owned a small apartment building (eight units) two hundred miles from where I lived, and a vacant apartment building next door that was part of the deal, sight unseen on the recommendation of a business partner that I owned another property with. He was involved with this one and suggested I come on board.

When we talked about it he suggested that he had done his homework and everything was good. Trust but verify. I can’t emphasize this enough.

Immediately after I came in we had a big problem. The building had been financed by a hard money lender at an interest rate of 14% for a fixed period of time to renovate what had been a vacant building. And payment was coming due.

The lender would either get paid back the money or foreclose and take the buildings. At that point I was faced with a choice of walking away and losing $30k I had just invested.

Not one to cave, I set about turning things around. It took some time but I got it done. The lender actually hugged me when we made the final payment. I guess he knew something I didn’t.

While the eight unit building had been renovated (enough anyway) to be habitable and occupied, and a property management firm looked after it, it turned out the other vacant building was pretty much useless.

The area would almost certainly remain low income for the indefinite future. The cost to renovate it would have been multiples of what it would be worth. The lot was an odd size, and there were many zoning restrictions making it unsuitable for any other use we could come up with.

Meanwhile, all my partners (four of them at the time) were almost completely hands off – signs that this may have been part of the problem. After much legwork I managed to sell the vacant building for about $30k, providing 90% seller financing for five years.

Yes, the buyer would pay us $3k as a down payment and then make monthly payments of about $500 for five years. It was the best deal I could find. And amazingly, he’s still paying us on time on the dot after three years.

Then I managed to find a mortgage broker who found financing for us at an astounding rate of 9% fixed for 25 years. We were bent over the barrel but there wasn’t any alternative. This is what happens when there is no competition, which can occur when no lender wants the risk of exposure to an iffy property.

So there we were, proud owners of a dilapidated building housing derelicts, and mortgage holders of the condemned building next door – complete with dead birds and mushrooms growing through the floors.

At least we didn’t have to deal with it ourselves. Over the next few years, we just threw good money after bad. There were the periodic capital calls where each partner had to pony up their share of additional funds needed to float the building. Management would let us know there were things that needed to be fixed. Some things were, some things weren’t.

One partner was bought out of his share, and then there were four of us left. Each month I’d get reminded of this when I saw the management statement and reconciled the bank account.

It was mostly treading water financially and deferring maintenance. Frankly we were absentee, abdicated our responsibilities and ignored most of what was going on.

The main undertaking after the initial refinancing was another attempt three years later, after the initial prepayment penalty period had run out. Unfortunately, the appraised value took a dive from $300k at the first refinancing down to $192k due to two main things:

1. Continued decline in the condition of the property.
2. A halving of net income in the most recent year

The income reduction was partly driven by lost rent and repair costs due to a police standoff. A tenant of ours decided to discharge a firearm in her apartment. Someone called the police and when they arrived she refused to come out.

Some six hours later they tear gassed the apartment, busted down the door and took her into custody. Fortunately, no one was harmed. But the building’s value and reputation took another hit.

Then our hands off approach came to an abrupt end one day when I received a notice from the property management company stating that they were not going to renew our annual management contract because the building was too much hassle. Never had it occurred to me that this might happen.

While they had always seemed to deal with us fairly and gave us ample notice, it was still a shock to realize we were in a serious bind. We had essentially been fired as clients.

How would we find new management? How would we maintain the building? What if we couldn’t do one of those things, how could we sell it? It was underwater and we’d take another big hit to even sell it close to the appraised value.

Essentially I could have walked away a month into the deal for $30k. Instead, now I was facing a loss of an additional $30k after five years of hassle just to make the problem disappear. And walking away was not an option since one of my partners (the one that got me in this) and I had personally guaranteed the mortgage.

I had to go there and do my best to fix the situation. What would you do?

I Did No Better Than the Market

The years 2014 and 2015 were quite a time in the stock market. I cranked some numbers recently to review my market performance over the past two years and came to a certain realization about it, upon which I based the title of this post.

Prior to 2014 my portfolio mainly consisted of 401k mutual funds and I didn’t pay much attention. It would have been a good idea to do so as the market has had a great run beginning circa 2009, and I was a little more than fashionably late to the market as an active investor.

Appreciation vs. Total Return

To be clear, there are multiple ways that market numbers are often bandied about. Sometimes it’s the value of the stocks (or more accurately the price of the stocks). Other times it’s the value of stocks plus dividends received, and which are then reinvested. This is known as total return.

Those figures are theoretically possible to emulate if one is running a large portfolio such that transaction costs are so small a proportion of each trade as to be negligible. Certainly the latter case of total return sets a higher bar. It also reflects a more complete picture. Continue reading “I Did No Better Than the Market” »

Betting On A Red Horse

Ferrari 458 Speciale

Courtesy Ferrari N.A.

I’m not one to bet on horses. I never play the lotto (even with the record 10 figure jackpot currently in the headlines), and I have never even made it to a blackjack table in Vegas despite a few attempts. I didn’t even pay much attention to Williams Grand Prix, another stalwart of the Formula One (F1) circuit, when the company went public. But this time, it’s a little different. Ferrari is now a public company following a spin off from Fiat Chrysler (FCAU), and I have some shares of stock in the Prancing Horse.

The Legend

You might say I’m long on the legend of the Prancing Horse, which began with Enzo Ferrari (1898-1988) as a racing driver for Alfa Romeo in the early days of the automobile. Upon the birth of his son Alfredino (“Dino”), he retired from driving to concentrate on running Alfa’s F1 team, and then eventually setting up shop on his own.

In that bygone era of racing cars painted in national racing colors rather than adorned with sponsorship livery, road going Ferraris were sold to fund operations of the racing team. Ferrari has always been a company that sold cars to go racing, which is quite the opposite of most every manufacturer that has been involved with the sport before or since. It is also the one with the most wins and championships in F1, and the only one that has been part of the sport all through the post-WWII era, starting with the 1950 season.

Unsurprisingly in such a competitive business, the company’s fortunes ebbed and flowed over the years. Dino Ferrari, whom Enzo had likely been grooming to eventually takeover, tragically died of muscular dystrophy in 1956 at the age of 24. Then in the 1960s Ferrari almost sold the business to Ford but backed out. “The Deuce” (aka Henry Ford II) was incensed and commissioned the creation of the Ford GT40, which eventually ended Ferrari’s dominance of the famed 24 Hours of Le Mans endurance race, by winning four times straight beginning in 1966.

Fiat, under the leadership of Gianni Agnelli, bought a stake in the company in 1969 and later became the controlling shareholder. The company went on to some of its greatest successes after Enzo’s death in 1988, launching a slew of critically acclaimed and commercially successful models beginning in the 1990s and returning to its winning ways on the F1 circuit with a combined 14 driver and constructor titles between 1999 and 2008.

Green Pastures

Ferrari is a solid, if expensive investment. It is a trophy property after all. In the short term the share price is subject to fall due to the initial hype surrounding its IPO and the high Price/Earnings (P/E) ratio. However, over the long term I can’t think of many more solid investments in the “automotive” sector. Here’s why.
Continue reading “Betting On A Red Horse” »

A Piece of Ferrari

Ferrari California T convertible

Ferrari California T

A few weeks ago Fiat Chrysler Automobiles (FCA), majority owner of Ferrari, announced it would spin-off the fabled Italian marque next year by floating 10% of the shares on a stock exchange and distributing another 80% to its shareholders.

While details explaining exactly how FCA will go about doing so have yet to be announced, reports indicate that one would have to buy them on the market or be an existing shareholder. How I understood it is if you want to get your mitts on a piece of Ferrari you will probably do better to buy Fiat Chrysler shares than wait to buy Ferrari shares next year, even if it means having to buy convertible debt.

Why Is Fiat Chrysler Floating Ferrari?

Basically they are borrowing on Ferrari’s good name because FCA needs to raise some $60 billion to fund product development through 2018. Various estimates have pegged Ferrari’s value at around $7 billion while FCA’s entire market cap (including Ferrari) is only about $18 billion. No wonder FCA wants to spin off the Prancing Horse.

Ferrari is worth more standing on its own than under the Fiat Chrysler umbrella. So separating Ferrari will more accurately reflect the value of the brand, increasing the amount against which FCA can borrow for product development.

So early last week I bought some FCA shares (stock ticker FCAU) not only because I’m a Ferrari fan – which is a terrible reason to buy stock – but also because I think it’s a good long term investment (even if I don’t view FCA in the same light). Here’s why.

Continue reading “A Piece of Ferrari” »

When the Ceiling Caves In

Ceiling collapses after drywall nails fail.

When the ceiling caves in…

It was a late summer evening, a Friday night at around 8 o’clock. The phone rang. It was Lorraine. There was a hesitation in her voice, like she was going to deliver bad news and she didn’t want to make it sound like bad news.

But I already knew. After all, as far as I could remember she had never called before. Ever. All of our exchanges had been via email. She worked for a property management company. I was one of their clients. Until that point all of our exchanges were rather mundane. Taxes needed to be paid, the additional parties added to the insurance policies and the property inspections conducted. All routine activities.

To receive a call at that hour, it couldn’t have been good. This time it was about a ceiling in a rental property. Specifically, the ceiling had come crashing down for no obvious reason.

“Was anyone hurt?”, I asked.

“No one was home”, came the reply.

A sigh of relief. It was in a little girl’s bedroom. As one can see from the photo above, the entire ceiling of the room ended up on the floor, exposing the rafters in the attic. As many people can attest, owning rental property isn’t always a bed of roses.

Lorraine wanted to know what I wanted them to do. I asked if they had ever had this happen with other properties under management. Somewhat surprisingly, it had happened a couple of times among their 650 homes. So what did they do about it?

Stuff Happens

The ceiling caving in is a problem. But it’s not the only problem. Things fail all the time, some times catastrophically. Cars breakdown. Buildings fail. People of off the deep end. Entire societies can breakdown. I’m not apocalyptic but the reality is it takes vigilance to prevent or at least counter the chaotic nature of the world.
Continue reading “When the Ceiling Caves In” »

Do Shantytowns Have Condo Fees?

Shantytown

Of shantytowns and homeowners associations.

There’s usually a sizable difference in the purchase price of single family homes and condominiums of similar grade. Adjusting for differences in square footage and certain amenities, the required condo fees are usually higher than single family homeowner association (HOA) fees.

Could that difference in fees make up for the difference in purchase prices? How much more property could you buy if, instead of acquiring a property with a condo fee, you bought one without? Here’s one way to look at it.

I have a condo where the fee is over $300 per month. That includes trash service, water and electricity, as well as maintenance of common areas and all that good stuff. But let’s suppose I had instead bought a home nearby that didn’t have a homeowner association. How much more home would that $300 condo fee buy?

First, realistically it would be more like a $200 difference since I would have to pay for utilities and such any way. Assuming a 30 year mortgage and 5% annual interest, that extra $200 per month works out to a little more than $37,000 – an amount that will, unlike fee increases, appreciate in the owner’s favor.

In other words, if I had put that extra $200 per month toward buying a bigger property, I could have bought a home that cost about $37,000 more. Would that have been likely in that area? No. But that doesn’t mean that’s always the case.
Continue reading “Do Shantytowns Have Condo Fees?” »

Keeping Up With Your Cash Calendar

One thing I do is keep a simple calendar that shows me at a glance my anticipated cash flows, when to expect upcoming dividend and rent payments, as well as key expenses. You may want to do so as well.

Stock Dividends

When earnings announcements occur, companies usually also announce the ex-dividend date (the date before which one must own shares in order to receive the next dividend payment), the payment date and the date of the next earnings call.

For stocks I already own, using a calendar lets me plan when I’ll need to take action with these payments, whether to reinvest them and, if so to start thinking about where to place them.

If I’m considering buying stock then I want to know the ex-dividend date. I’ll mark it on the calendar with an “x” followed by the day of the month (“x14” for the ex-dividend date falling on the 14th day of the month).

These dates are also useful to know when unloading shares. Sell on the ex-dividend date or after and you’ll have received the dividend payout, locking in the dividend as cash. However, when trading opens on the ex-dividend date, the share price will already have been adjusted down by the amount of the cash payout. So in theory your sales proceeds will be a wash – though share prices constantly fluctuate.

It’s also good to know when to expect the annual report, and keep an eye on analysts’ earnings “guidance”.

Continue reading “Keeping Up With Your Cash Calendar” »