NOTE: THIS WAS ORIGINALLY POSTED IN JUNE 2005
It was both. My wife and I wanted to have some type of investment vehicle where we could work with each other each day (we love hanging out together). So the B&B was a natural choice because it utilized both of our skill sets: Running a biz, acctg, mgt, making things run better/cheaper, cooking, working w/people (her skills), and Running a biz, design/construction/rehab, cooking, making things run more efficiently, working w/people, marketing, and working from home (my skills).
The numbers were important. We wanted to live close to her family (all in CA), and making RE work here is, to put it mildly, a creative enterprise. Running a B&B works because we're putting in a lot of sweat equity-- and we bought undermarket. In the first year, we increased revenues 15% over past highs. We're on target this year to double that rate of growth (30%+). Banks love to see this.
Which brings me to our third reason for doing this: Making this biz a success made us way sexy to lenders, who wanted to loan us money for othe similar ventures. So we got a $1.5mil bldg that we plan to convert to a B&B worth in excess of $3 mil. If the city doesn't allow conversion to a B&B, our "Plan B" is to convert it to condos, which will also be worth in excess of $3 mil.
Cost for conversion: around $200-500K, plus 1-2 years.
Someone like Les Gee would never do something like this, because it's too time/labor/resource intensive. He's an acrobat, hopping from one deal to the next, always keeping his money moving. This is an excellent strategy, and works extremely well in Northern Cal, where appreciation is just plain mind-boggling.
Me, I'm a rehabber. I buy houses, fix 'em up over a few years, and sell 'em.
A few examples:
House #1: Bought in 1995 for $200K. Over the next 7 years, put $250K into it. Sold it for $757.5K (not too shabby). Most important item to note: Since I had lived in it for 2+ years, I got $250K TAX FREE. That's the equiv of nearly $500K in after-tax income, had I gotten this money via a "J*O*B". Plus I got the $250K back that I'd put into it.
House #2 Bought in 1998 for $169K. Over the next 7 years, put $150K into it. Sold it for $730K. Most important item to note: $411K in appreciation was too much for me, so I 1031'd' it. Took $200K out 2 years ago when we bought the B&B, and pulled another $200K out when I sold it, for the down on the new 10-unit apt bldg.
House #3 bought in 2003 for $475K. Over the next 2 years, put $25K into it. Sold it for $602K. Most important item to note: Since I was my primary residence for 2 years, I got $75K TAX FREE. That's the equiv of nearly $120K in after-tax income, had I gotten this money via a "J*O*B". Plus, I spent next to no time fixing it up (it still needed lots of work-- I sold it to another rehabber!)
All of the above examples are just steps on the way to my latest rehabs:
B&B #1: Bought it 18 mos ago for $1,350K. Put $350K into it. Current FMV (based on gross sales and RE values) is just shy of $2,500K. That's $800K of appreciation in less than 1.5 years. What's important: We got this appreciation using money for the down from one of the other houses, then used HELOCs from 3 houses for the $350K in fix-ups. Then, we sold the other houses, made money, and cleared the debt.
Used the money from the sale of 3 houses to buy:
B&B #2: Bought it 1 mo ago for $1,500K. Plan to put $250-500K into it. Current FMV w/changes: $4,500K, if we can get the same kind of numbers we're doing on B&B #1. This should be a cinch, since we'll have economies of scale (same staff, marketing, answering phones, etc. for both B&Bs). The most important thing here is we got $1,200K in loans (300K down) with virtually NO personal income last year. The loans were based on the bldg's ability to generate money, and the confidence of the lenders in our ability to make the changes happen.
I'm going to hit each of your questions, Jason, in individual posts. That's enough for me for today (brain is tired, and I stil have other work to do).
The take away from this post:
1995: I started w/ a $200K house and $40K down.
Today (2005), my wife and I have $4,000K in RE, $1,500K in equity,
and $100K in cash (not counting the additional $300K out of pocket that we also have after selling the houses).
By 2007, we'll have $6,500K in RE, $3,500K in equity, and that same $300-500K out of pocket. So we could sell the places for $6,000K (the buyer saves $500K), and still pocket over $3,000K, counting the out of pocket.
$3,000K at 5% intereest (30 year t bills) = $150,000 per year. Enough to get out of the rat race.
The really bizarre thing here is, we learned how to do this by playing Cashflow. Never would have tried it had we not learned about leverage and making businesses pay your bills.
Kinda cool, eh?
-Russ H.
It was both. My wife and I wanted to have some type of investment vehicle where we could work with each other each day (we love hanging out together). So the B&B was a natural choice because it utilized both of our skill sets: Running a biz, acctg, mgt, making things run better/cheaper, cooking, working w/people (her skills), and Running a biz, design/construction/rehab, cooking, making things run more efficiently, working w/people, marketing, and working from home (my skills).
The numbers were important. We wanted to live close to her family (all in CA), and making RE work here is, to put it mildly, a creative enterprise. Running a B&B works because we're putting in a lot of sweat equity-- and we bought undermarket. In the first year, we increased revenues 15% over past highs. We're on target this year to double that rate of growth (30%+). Banks love to see this.
Which brings me to our third reason for doing this: Making this biz a success made us way sexy to lenders, who wanted to loan us money for othe similar ventures. So we got a $1.5mil bldg that we plan to convert to a B&B worth in excess of $3 mil. If the city doesn't allow conversion to a B&B, our "Plan B" is to convert it to condos, which will also be worth in excess of $3 mil.
Cost for conversion: around $200-500K, plus 1-2 years.
Someone like Les Gee would never do something like this, because it's too time/labor/resource intensive. He's an acrobat, hopping from one deal to the next, always keeping his money moving. This is an excellent strategy, and works extremely well in Northern Cal, where appreciation is just plain mind-boggling.
Me, I'm a rehabber. I buy houses, fix 'em up over a few years, and sell 'em.
A few examples:
House #1: Bought in 1995 for $200K. Over the next 7 years, put $250K into it. Sold it for $757.5K (not too shabby). Most important item to note: Since I had lived in it for 2+ years, I got $250K TAX FREE. That's the equiv of nearly $500K in after-tax income, had I gotten this money via a "J*O*B". Plus I got the $250K back that I'd put into it.
House #2 Bought in 1998 for $169K. Over the next 7 years, put $150K into it. Sold it for $730K. Most important item to note: $411K in appreciation was too much for me, so I 1031'd' it. Took $200K out 2 years ago when we bought the B&B, and pulled another $200K out when I sold it, for the down on the new 10-unit apt bldg.
House #3 bought in 2003 for $475K. Over the next 2 years, put $25K into it. Sold it for $602K. Most important item to note: Since I was my primary residence for 2 years, I got $75K TAX FREE. That's the equiv of nearly $120K in after-tax income, had I gotten this money via a "J*O*B". Plus, I spent next to no time fixing it up (it still needed lots of work-- I sold it to another rehabber!)
All of the above examples are just steps on the way to my latest rehabs:
B&B #1: Bought it 18 mos ago for $1,350K. Put $350K into it. Current FMV (based on gross sales and RE values) is just shy of $2,500K. That's $800K of appreciation in less than 1.5 years. What's important: We got this appreciation using money for the down from one of the other houses, then used HELOCs from 3 houses for the $350K in fix-ups. Then, we sold the other houses, made money, and cleared the debt.
Used the money from the sale of 3 houses to buy:
B&B #2: Bought it 1 mo ago for $1,500K. Plan to put $250-500K into it. Current FMV w/changes: $4,500K, if we can get the same kind of numbers we're doing on B&B #1. This should be a cinch, since we'll have economies of scale (same staff, marketing, answering phones, etc. for both B&Bs). The most important thing here is we got $1,200K in loans (300K down) with virtually NO personal income last year. The loans were based on the bldg's ability to generate money, and the confidence of the lenders in our ability to make the changes happen.
I'm going to hit each of your questions, Jason, in individual posts. That's enough for me for today (brain is tired, and I stil have other work to do).
The take away from this post:
1995: I started w/ a $200K house and $40K down.
Today (2005), my wife and I have $4,000K in RE, $1,500K in equity,
and $100K in cash (not counting the additional $300K out of pocket that we also have after selling the houses).
By 2007, we'll have $6,500K in RE, $3,500K in equity, and that same $300-500K out of pocket. So we could sell the places for $6,000K (the buyer saves $500K), and still pocket over $3,000K, counting the out of pocket.
$3,000K at 5% intereest (30 year t bills) = $150,000 per year. Enough to get out of the rat race.
The really bizarre thing here is, we learned how to do this by playing Cashflow. Never would have tried it had we not learned about leverage and making businesses pay your bills.
Kinda cool, eh?
-Russ H.
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