Value Add with Capital Out
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Value Add:
One of the most central ways to invest in real estate is a common process known as “buying and flipping”. Under this model, real estate buyers purchase a home, add value to the property through home renovations and improvements, and resell for a profit.
For example, if one were to buy a home for $500,000, strategically invest $100,000 into value-boosting home improvements, and resell for $800,000, the profit from this house alone would be $200,000.
The first step involved in home flipping is to have your home inspected. By assessing the current state of the property, you will become aware of the areas most in need of improvements. After you’ve determined the areas of your property most in need of renovation, the next step is to actually implement these upgrades. Depending on the renovations being done, it may be necessary to demolish current structures or re-establish the foundation before moving on to new construction.
Here, at Uptown Syndication, we have followed this model on a variety of our properties.
In an interview with AJ and Chris Shepard, the founders of Uptown, they explain their first home innovation process:
What made you interested in investing in this type of deal?
“We were young, new investors that had the world in front of us. But for real, we probably got the deal because we were willing to put in the work that needed to do this project. We put in as much capital as it cost for the land and it took a lot of hours of our time to get this completed. We still own it today and are about to refinance it to take out more money to invest in additional projects.”
How did you find this deal and how did you negotiate it?
“MLS - We negotiated with the bank who had taken it back from a builder. Not in livable condition, so we negotiated a lot. I think 40%. Open permits, a real eye-sore”.
How did you finance this deal?
“Bank of Dad. I know we say this a lot, but the money was cheaper than hard money and it was available. Throughout all of these deals, we have always paid him back in full at the end of the project. We have always financed our own construction.”
How did you add value to the deal?
“ We finished a basement that did not have a slab when we got it. We had to put in rough plumbing and pour the slab and retaining wall. We also had to finish the open permits.”
What was the outcome?
“We finished the project and refinanced. The value in 2010 came out to be 325k which provided us with 225k cash. The bank literally paid us 25k to do the project. The cashflow when we did this was not incredible, but broke even. Having 25k on a 30 year mortgage was more valuable to us at the time than making $100 or $200 more a month. We knew we were going to hold on to it for a long time.”
Lessons learned? Challenges?
“Taking on a lot of work in a project can be a lot of value, but there are a lot of opportunities for things to go wrong. The more that needs to be done, the more attention that needs to be paid to the project. Anything involving permits is also very challenging, even for us today.”
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
“We worked with Mike Maier with Fairway mortgage at the time and worked with Guild Mortgage.”
