176: Rookie Reply: Tony’s Troublesome Shreveport Deal ($29k LOSS)

This is Real estate rookie episode 176.

My name is Ashley Kerr and I'm here with my co host Tony Robinson for Rookie Reply.

And welcome to the Real Estate Rookie Podcast where we focus on the investors who are at that beginning part of their journey, giving you the inspiration, the information you need to keep going or to get started. So, Ashley, care, what's. What's new, what's going on? Give the world an update.

Well, I am back on my couch. I finally. Which seems like forever, three months ago, I guess I finally got my ACL surgery. So I tore my acl, my mcl. My MCL healed on its own, so I had to get my ACL done two days ago. And so I'm here on the couch recovering.

Yeah, well, wishing you a speedy recovery, Ashley, and just take it easy next time you're on the slopes, okay? I don't want you back here in a couple months with the other mcl and AC are all. All damaged and whatnot.

Yeah, I'll probably be from wake surfing now.

Yeah.

Switch to a summer sport.

Yeah. Well, we got a decent story for today, right? So those of you who've been following the podcast for a while, you probably have heard me try to sell you my house in Louisiana. But, you know, luckily for all of you, I was able to sell it to someone who I think is going to use it as a primary residence, which is probably what it made sense for. But Ash and I, we're talking, we figured it might be a really cool, I don't know, case study, I guess, to kind of share the backstory and the numbers with you all on kind of how this Louisiana property went down, how much money I lost on this deal, and hopefully you guys can get some lessons from it. So. I don't know. Ash, anything you want to add before I get into the backstory here?

Well, I think that just we've talked about this deal for over a year now, and this is going to be the episode that finally puts the whole journey together as to how you purchased it and how you kind of ended up with it and what the deal looks like now. So, first of all, congratulations on finally selling it. I thank you. I think both of us were looking forward to not having to talk about.

It.

And just like. And just like, fun fact, right? So the city that this property is in is in the city of Shreveport, Louisiana, and actually until like two weeks ago, thought that it was in Freeport, Louisiana. So there is no Freeport, Louisiana, that I'm in aware of. So just, you Know if anyone else was confused, It's Shreveport.

Yeah, honestly, I didn't know if it was Freeport or Tree Port, so definitely for how long we talked about this deal, I was never very clear on the city, but I did not think it was Shreveport.

Neither of which is correct. So yeah.

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Reese's Peanut Butter Cups. They go perfectly with music, podcasts and welcome back to the show. Even nature sounds. Oh, and the thing where someone crinkles tissue and whispers at you.

Hello.

Look, I'm not here to judge what you listen to. I'm here to judge you for not eating Reese's while you listen to it. Reese's. Ashley, go back to the nature. Sounds.

Nice. Yeah, that's really nice.

Well, let's get into it then. Right, so this property was a single family in the city of Shreveport and this is actually the second investment property that I'd ever purchased. Right. So, you know, exciting, right? Property number two. I think everyone's pumped for that. And what, what made this deal, I think unique on the initial purchase was that the financing I was able to get for this deal was really, really, really, really, really, really good. I essentially had $0 out of pocket. Like I literally did not have to bring anything to the closing table to buy this property. I found a credit union out in Shreveport that was willing to lend on both the purchase price and all of the construction costs as long as that total project cost was less than, I think like 72% of the after repair value. So I'm Just going to run through the numbers really quickly and then I'll pause for a sec. So we bought the property for about $72,000.

On the rehab, we spent about $45,000. So we were all in for about 117. And the way that they kind of assess the loan is during, during escrow, I had to submit my scope of work. And then based on that scope of work, the bank sent out an appraiser and the appraiser walked the property in its current condition. And they said, hey, based on the scope of work that you gave me and me walking the property, here's what I think the property will be worth once you complete your rehab. And that appraiser pegged it at a $177,000 ARV. So pretty decent spread there, right? So I'm at 117 all in. ARV is 177, which is like, I don't know, like 65% or something like that at the ARV. So for the bank, I checked those boxes and they said, hey, you know, Tony, you found a good deal. We're going to fund everything for you. So that, that's, that's why I bought it to begin with, right? Because it was, it was really good, really good financing.

So, Tony, can you stop financing like that right now? Do you think so?

I know when I talked to that credit union during COVID they had stopped that specific loan program. But you know, I haven't purchased entry reports since, so I'm not sure if they're, if they're still offering that. But, you know, I mean, things have definitely starting to loosen back up since COVID has kind of subsided a little bit. So I would assume that there's probably, there's probably a bank out there somewhere that's doing something like this. Cool. All right, so we, we bought the property, right? We ended up closing on it. Rehab takes, I think like three and a half, four months, something like that. We bought it right near the end of the year. So like December timeframe and there was some bad weather that kind of slowed things down. But I want to say we were, we were completely done with this thing by like the middle of middle of March. Okay. So the, the, the con, the construction loan or the loan that we used to purchase, it was also really good debt, right? So it was a one year interest only at 6%. So we had a really low payment during that first year because, you know, it was interest only right at 6%. So anyway, we, we end up getting a tenant in there. We hire A property management company. We're able to rent it out for 1350. And I want to say the mortgage was like, I was trying to find the initial closing disclos, but I couldn't find it. But I want to say the mortgage was somewhere around like, I don't know, 1100 bucks, something like that. So we were probably cash flowing. Not a whole lot, like 150 bucks maybe right on this one property, right. And you know, no, no money out of pocket. 150 bucks, you know, hey, figured why not, right? So we have a tenant in there from, I want to say like March of 2020. They stay there for a year and so for March of 2020 and then they end up moving out in March of 2021 or I think like the end of February 2021 and year time frame, we end up abandoning long term rentals altogether. And we, you know, we went kind of crazy with the short term rental stuff and we decided, hey, we don't want to keep this property anymore. Like it doesn't really fit with the rest of our portfolio, doesn't fit with our long term goals. So, you know, let's sell it. So once the tenant moved out.

Actually let me take one step back, right? So one month before the tenant moved out, so the tenant moved out in February. One month before the tenant moved out, we get a note from our insurance company saying, hey, you know, I don't know what the heck had changed, but our insurance premium doubled. So initially we were already paying pretty expensive money for the flood premium. It was 27, $2700 a year and it ended up jumping up to over four grand a year on the insurance premium for the flood. So when you, when you added in that new cost, our mortgage for that property went up to like fourteen hundred dollars. And you know, I think like fourteen fifty or something like that, right? So even more than what we were renting it out for. So we lost money the last month the tenant was there because they were only pay 1450. We had to pay the mortgage of 1450 and then we still have to pay our, like our property management company, I think like 100 bucks or something like that. So we lost money. We said, hey, let's just sell it, right? Let's just get it off our hands and move on. So that property ends up sitting empty for an entire 14 months or 13 months. Right. Because we just sold it last month.

So during that time you were making the mortgage payments out of pocket?

We were making a $1,400 a month mortgage payment for I Want to say it was almost a year. Exactly. Right. So whatever 1400 times 12 is, it's like almost $17,000 that we spent over the year carrying that mortgage. Right. And it wasn't because we weren't trying. Right. We had the property listed. We were. We initially listed for less than what it appraised for. Right. So remember, it appraised for 170. I think we initially listed it for like, 165 or something like that. And we just kind of kept pulling down the price every couple of months, hoping that it would sell, and it just wasn't mo moving. And then, you know, we hadn't been to the property since we. Since we closed on it originally. And we kept seeing some of the buyers remarks, like when they would turn the property away, and they kept mentioning, like, a buckling of some tile in the. Like in the hallway or something like that. So we had the realtor go out and check it out, and he was like, hey, yeah, it seems like something's happening here. So we had to send a crew out there, and they end up finding some kind of problem with, like, the subfloor that costs, like, another $8,000 to fix. Right. So now we're in $17,000 for the. For the mortgage payment. We have to spend another $8,000 to repair the floor, and then we end up dropping the price below what we owed on it. Right. So we just wanted to get the thing sold. So I think we ended up selling it for, like. I can't remember what the number was. I think we sold it for, like, 129. And our. Our mortgage balance was like, 135, something like that, and I think it was 130. And then we. We sold it for like, 129. But, you know, closing costs and all that stuff. So when we end up actually selling the property, we didn't get money back. We had to write a check to escrow for, I think, like, $4,000. Right. So you add everything up. We had $17,000 in the mortgage that we had to carry for a year. We had another $8,000 that we had to spend to repair the flooring. And then we got to write another check at closing for $4,000. So that's $29,000 that we. That we bumped dumped into this into the Shreveport property. And that's why I was trying to sell it to everybody for an entire year.

Tony. But you're still investing, so why did this property not scare you from continuing to be an investor?

Yeah. So, man, there's so many answers to that question. Right? The first thing is that I learned a lot going through this process.

And I think what I learned has made me a better investor. Right. Anytime you got to write a check for $30,000, you're going to learn something. Hopefully. I will probably never buy another property in a flood zone like the, you know, I'm scarred for life because of that. I think I'll be more selective of the locations that I invest in, just in general, you know, this, this house actually was at the end of a really nice block, but it was literally at the end of the block. And then right next door to was an apartment complex. And the apartment complex had some riff raff. Like even during the renovation we had people break in and like steal some of the contractors tools. And a lot of the feedback we were getting from buyers was like, hey, we like this location. You know, we like this neighborhood, but we don't like the fact that this is the one that's next to that apartment complex. So I think being able to kind of do a better job of knowing the area to say, okay, hey, here's a potential rent, like it works for a renter, but for someone that wants to buy, that's a potential red flag. So I think kind of knowing what, what the differences are between a renter wants and what a, what a long term buyer wants. So, yeah, so not buying in a flood zone, making sure I do a little bit more research on my market if it's something that I think I'll end up selling. And then the third thing is that you can't always predict everything either. Right? Like on paper, we, we, we knew that there was some flood insurance costs and we budgeted for that. The numbers still made sense. But, but even my, my flood insurance guy was shocked that the premium went up. And we shopped, you know, we shopped for like, you know, multiple, multiple different people to cover this. And everyone's quote was coming in around the same. So it was just, I don't know what caused that shift. I don't know if there was some kind of risk that they saw. Obviously there was, but I don't think there is a way that I could have planned for that. And I think that's something to understand as well, is that like, even if you do your best due diligence on the, on the, on the front end, there are still going to be surprises. Right. And you got to do your best to roll with them. But I'm, I'm grateful, Ashley, for this, the Shreveport property, because it was the first property that my partner, Omid and I did together. And had we not done that deal together, you know, who knows if we'd be building this, you know, short term rental empire that we're working on right now. So even with, with, you know, the $30,000 that we lost, we've more than made that up with the money that we've made from our short term rentals.

And I think the fact that you guys had that test in your relationship too, going through that big struggle, that big obstacle of this and figuring out what to do with it, if you guys could survive that as a partnership, I think you guys will be able to get through a lot of things that will come up during your partnership together. So I think just having that you had that test early on is already going to make you guys better and stronger, building that impact.

And, you know, I don't know if Omid is just crazy, but he still trusts me to find all the deals for us. And, you know, outside of that one, I think all the other ones have worked out okay for us. But, you know, and here's the thing too, Ash, right? Like people will go to college, you know, and spend way more than $30,000 and get a degree that may or may not help them achieve financial independence, right. And build the wealth that they want. But people are terrified of taking that same $30,000 and, you know, potentially losing it on a, on a real estate deal. Right? And you know, and I get that right, because $30,000 isn't a small sum of money. But I guess the point I'm trying to make is you should be just as willing to invest. If your true goal is to become financially free through real estate investing, you should be just as willing to pay the price on that side as you would for a four year degree. Because in my mind, the real estate education, the real world, bumps and bruises and losses of real estate will probably teach you more than sitting in the classroom for four years at a university.

Well, Tony, thank you so much for sharing the full deal with us today and for going through what you learned and what others can watch for. I think it will definitely be beneficial to some of our listeners and hopefully not make them scared to get into real estate. Because there, there can be a bad deal, but you learn from it, it turns into an opportunity cost. But there's so many more great deals out there. I'm Ashley at Wealth from Rentals and he's Tony at TonyJ. Robinson. And we will be back on Wednesday with another real estate rookie podcast.

Hey rookies.

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