Starting in 2008, we took advantage of the disruption in the residential real estate market to buy, rehabilitate, and sell single family homes in high volume.
Starting in 2008, we took advantage of the disruption in the residential real estate market to buy, rehabilitate, and sell single family homes in high volume.
Starting in 2008, we took advantage of the disruption in the residential real estate market to buy, rehabilitate, and sell single family homes in high volume. Leveraging our own capital as well as 3rd party equity and debt, we primarily sourced homes from the Trustee Sale auctions in the greater San Francisco Bay Area. We later also added online/bank auctions and direct MLS listings to source deals.
Properties purchased at auctions typically have substantial need for remodeling. The pool of investors is also fiercely competitive. To remain the low cost operator, we typically do our own legal work (title, evictions), remodel using trusted long term contractor partners, and sell with our in-house brokerage - Panam Properties
This home was acquired all cash for $500,000 in 2014, had approximately $35,000 remodeling budget and sold for $690,000 in 4 months, resulting in an unlevered IRR of 25%+, we would do about 3-4 houses with the same capital in a year, providing north of 100%+ returns on unlevered capital. With prudent use of leverage, returns were magnified.
Purchasing property at Trustee Sales require that you show up to the court house with the full purchase amount, no title insurance, and usually no look inside the property. We examine title records to make sure we are purchasing the correct foreclosing lien and research back taxes, property condition and post-remodel valuation in the retail market.
This property was purchased for $342k, and sold for around $500k after it was remodeled within a year, resulting in an unlevered IRR of 20%+. Similar to the above example, the capital base was recycled one more time into another project resulting in an annual unlevered return north of 50%. With prudent use of leverage, returns were magnified.
Through opportunistic deal sourcing, we often identify homes where our purchase price is low enough where if we fix up the property and rent it out we can cover a full cash out of the home with 30 year fixed financing.
This effectively creates a free call option on the home appreciation since we have none of our capital left in the deal. The home starts off at day zero with built-in equity.
Because of the tighter lending standards post-2009 it was hard to qualify for these loans with our unconventional income. Nonetheless, we have rentals that have provided excellent cash flow and appreciation.
The appreciation was always a bonus in our underwriting. In hindsight, we were too conservative and did not forsee a quick return to the '06 peak.
We currently maintain and manage these properties. Historically we have not raised rents all the way to market and re-rate rents to current market only on tenant turnover. As a result we have had some tenants that have been with us for 10 years+.
We may 1031 these properties to more passive investments over time or multi-unit when pricing makes financial sense.