April 2016 Dinner with Damon

Last week I had my dinner with Damon, and he was very happy to report that, after over a year of bad repairmen and bad decisions, he finished work on his Vacancy Bank property. Here are some before pictures:

Standing at the entranceway

Living Room Wall

Kitchen

Half Bathroom

One of the Bedrooms

Crappy Stand-up shower

Full Bathroom

As one can see, it really looked like shit. Damon went through a lot of headache, but the end result was good:

New Living room. Looks much nicer with an actual wall

New Kitchen cabinets. The only thing I hated was the inclusion of the dishwasher

The half bathroom looks much better now

Bedrooms look nicer too

Full bathroom

Inspired by REA John, I'll show a quick walkthrough of Damon's renovated Vacancy Bank property:

There. Notice I said that the improvements were “good” and not amazing. While he did a lot of good work, he made a huge mistake in painting the floor with oil-based paint. It definitely looked better than what was there before, but now the whole house has a sticky feel to it when walking on its floors. It can be heard in the video while I'm walking. I’m not sure how he can fix that, but I would have simply stripped the floor and then put some polyurethane on it. The next mistake he made was buying a dishwasher. One of the things I’ve learned as a landlord is to keep things simple when it comes to buying appliances for apartments. I would NEVER buy a dishwasher for a rental because tenants break them far too easily and they're pretty useless. The most I would ever buy for a rental is a washer/dryer.

He also has it rented out to his boyfriend’s nephew and his friends… 4 people in all. I immediately told Damon I thought this was a bad move. I consider renting out to my family or family of my friend(s) as an absolute last resort. He’s only had the place available for less than two weeks and gave up on a traditional tenant far too quickly. The offers he was getting was for $500 and $600 a month, and there were a couple reasons why. The most obvious reason was that the work wasn't completely finished yet. He still had construction stuff all over the place, and there were a couple areas that still needed some paint. Another reason was the exterior view of the place:

No matter how much work is done to the insides, the outside is what draws the prospective tenants in. Some simple landscaping would have made a huge difference, but Damon was tapped out of money in the end.

Rather than continue getting laughed at by prospective tenants for asking $950, Damon took the easy way out and rented to people he's connected with. This can only end up bad. Not just because one of them is related to his boyfriend, but they’re also 4 single people. For a single unit home, I would much prefer having an actual family living there. With four different people living there, any one of them can leave. Then another person might leave or move in. This constant interchanging of tenants within the same tenancy opens the door to a myriad of different problems that Damon wouldn’t have to deal with if it were just one family. I don't care how long it took, I would have held on and waited for the right tenant. A family with no connection to me willing to pay at least $850. There's always a better choice if one looks hard enough, but maybe Damon had had enough. Regardless of the issues, I congratulated him on finishing the project. After all that hard work, one would think there’d be a reward at the end of it, right? Watch this…

Damon told me that he borrowed money from his 401K to purchase his property, $15,000 in all (10K for purchase + 5K for closing costs and etc.). He also borrowed $30,000 to do the repairs and repair his credit. But the interest for that loan was from Lending Club, which is a massive 29% rate. So he’s been paying $1,000 every month for over a year, let’s say $13,000. In total, he’s paid $28,000 out of pocket and owes $30,000 from the loan… $58,000 in all. The appraisal for his property is just $55,000, so that’s a loss of $3,000 so far. Once Vacancy Bank pays everyone back, they’ll only have $10,000 remaining, which is the profit from the appraisal. The problem is that Damon’s 401K doesn’t accept partial payments, so they can’t accept the remaining $10,000 without another $5,000 added.. If Damon doesn’t come up with $5,000 to add to the 10K before closing next month, he loses the $10,000 outright. Add the initial loss of $3,000, he now stands to lose a total of $13,000 from this deal. Ugh!

Government agencies make no sense. Why can’t they just give Damon all the money and let him distribute the repayments?? Damon admitted that, after going through all this, he’s never working with Vacancy Bank again. I’m so glad I used him as a guinea pig because I almost bought a property through them as well. His new tenants will be moving in on May 15th, paying $950 a month. With refinance payments coming in at $500 and the property taxes pretty low,  Damon looks to profit about $250 a month after maintenance costs. Not a bad profit, but it'll be years before he can recoup his losses from this deal (52 months to be exact).

After talking about PRP #4 and the work I needed to get it done, we ended the dinner. I feel like I learned a lot from Damon’s experience with his first refinance property. These are the lessons I take from him:

• Have a good handyman/contractor ready to go, and a backup in case things go south. It took him over a year to get the place done, and that cost him $1,000 a month on top of his normal expenses. Ridiculous.

• The property must be in a good area with high rentability. The inside of his property is decent, but the outside looks god-awful. The area isn't great, but it's currently going through some re-gentrification. So maybe the rentability will go up once the neighborhood renovations are completed.

• Make the process as simple as possible as far as financing. Going through government programs is the complete opposite of “simple as possible”. Damon chose Vacancy Bank in part because of it's 90% LTV. But the results show that he would have been better off with a 75% LTV and no government strings attached.

And that’s that. I encouraged Damon to buy more properties, get better at doing refinances, and treat this as a learning experience that will make $250 a month. He liked that, and I think he’ll do another one at the end of the year. See, it never matters whether Damon succeeds at this game. It's all about me. His purpose in my life is to do things I can learn from, and he won’t be worth a damned thing if he doesn’t continue to buy properties. The more he does, the more real-world education I get. And the more mistakes I can learn from...