On Wednesday, I posted an IG story about not working out in 10 days.
A few minutes later I got a text from a friend inviting me to work out later that same day.
We ran 5K as a warm-up and then continued to run 4 more miles in intervals.
~7 miles total. It was easily the most amount of running I've done in a single day in a very long time.
Few thoughts:
- I'm grateful to have people in my life that reach out when I'm "down".
- No part of me wanted to do a track workout. I loathe running. I said yes anyway. My ability to recognize "fear" or "discomfort" and push through anyway typically serves me well. This was no exception.
- I walked while he continued to run. My left knee and right hip couldn't keep up, so I walked the last 2 miles instead of pushing through and potentially hurting myself. I almost knew this would happen, and I could have let it stop me, but I'm glad it didn't.
With all that said, I hope it's a while before he invites me to do that kind of workout again. You know who you are, and I know you're reading this.
Love you, brother. Let's lift some weights next time.
Livin' La Vida Luna
Which book do you want to read, Luna?
The hardest one to get, of course...
I Lost $5,463.43 on my Latest Flip
It seems like everyone and their mother is making money in real estate right now.
So why did I just have to bring $5,463.43 to closing for the property I just flipped?
Hold my hand, please. Let’s go through this shit-storm together.
Quick Recap
In June 2021, we bought a duplex in Madison, NJ for $485,000.
In October 2021, we went under contract to sell for $560,000.
In March 2022, the sale finally went through. It took 5 months because of a shared driveway easement issue with the neighbor.
To be clear, we spent zero dollars making improvements to the property.
Despite the $75K of Gross Profit, I had to bring $5,463.43 to closing.
How did we burn $80K over the past 9 months?
Acquisitions Costs
Let’s start with acquisition costs.
I actually outlined all of this in another video titled, “Top 10 Hidden Costs When Buying Real Estate"
But we can go through it again quickly here.
Lender’s Fees:
Between origination points and service fees, my hard money lender charged me $6,200 to acquire this property on a loan amount of $363,000. 2% of the loan amount was paid out in lender’s fees.
Title, Recording, & Legal Fees
Between Title Insurance, Recording Fees, and Admin fees, I paid out roughly $4,400 to the Title Company that facilitated this transaction.
My Legal Fee upon purchase was $1,500.
There were probably another thousand dollars or two in miscellaneous costs before buying the property, but in total, the bulk of my acquisition costs came out to $12,000.
- $6,200 - Lender’s Fees
- $4,400 - Title Fees
- $1,500 - Legal Fees
- = $12,100 in Acquisition Costs
Carrying Costs
Now let’s talk about carrying costs.
The insurance on this property is just under $200 per month. Over 9 months, that came out to about $1,800.
The property taxes on this property are $8,100 per year. Over 9 months, that comes out to $6,000.
However, we had to pay an extra $350 in interest because we were delinquent on our property taxes.
I typically don’t pay property taxes on a fix and flip project that I intend to exit within 12 months. The interest on delinquency is anywhere from 8-18%.
I’d rather pay the interest when I sell than lose the working capital mid-project.
Finally, I used 100% financing on this deal. My hard money lender gave me a loan for $363,000 and my private money lender gave me a loan for $152,500.
The total loan amount here was $515,000, and I was paying 8% interest on that money.
We held the property for 9 months so $515,000 * 8% / 12 * 9 = $31,000.
Between Insurance, Property Taxes, and Interest, we spent just over $39,000.
- $1,800 - Insurance
- $6,350 - Property Tax
- $31,000 - Interest
- = $39,000 in Carrying Costs
Disposition Costs
The last major bucket of costs incurred on this project were the costs of sale.
Here’s the closing statement:
We spent ~$18,000 on closing costs:
- $4,700 on Transfer Taxes
- $11,000 on Buyer’s Agent Commission
- $1,200 on Attorney’s Fee
- $1,200 on other misc. fees
- =~$18,000 in closing costs.
My partner on this project happened to also be our agent. Thankfully he waived his commission.
Additionally, because of some water damage in the basement, and faulty mechanical items, we agreed to a $12,000 seller credit.
Bringing our total cost of disposition to $30,000 and our cash to close to $5,463.43.
One Big Bucket of 💩
So when you add the three buckets (acquisition, carry, and disposition) together, we spent ~$73,000.
- $12,000 - Acquisition Costs
- $31,000 - Carrying Costs
- $30,000 - Disposition Costs
- =$73,000 total
That doesn’t include the money spent on inspections and appraisals before buying the property. Nor does it include the grounds maintenance, utility payments, and property management while holding the property.
It could have been a lot worse. I think we’re lucky to get out of this project with a mid-4-figure loss.
Lessons:
If we could go back in time knowing what we know now here’s how we’d do things differently.
1) We’d get a title survey before purchasing the property. That way we could put the easement issue on the prior owner.
2) We’d immediately improve the vacant unit with new kitchens, baths, floors, and a fresh coat of paint. That would have cost $30K but yielded an additional $60K in sales price (at least).
3) When the variance is minimal, take the cash offer with fewer contingencies. We went with our highest offer, but it happened to be an FHA buyer. We knew the FHA were sticklers, but we couldn’t predict how badly they’d gouge us on this project. We had a $550K cash offer from an investor with minimal contingencies. If we took that, we would have sold this property 5 months ago and saved $15K+ in holding costs.
4) Debt is safer than Equity. Despite this project being upside down, my two lenders made their full return. I had to come out of pocket to make sure that happened. Oftentimes, when a lender sees there's $75K of gross profit in a deal for me, they ask about taking equity instead of debt. I assure them they're better off as lenders. Debt gets paid no matter what. Equity partners are the ones left holding the bag.
Equity < Preferred Equity < Debt.
