My Townhome Investment

My Super Risky Townhome Investment – My Second Real Estate Purchase

Shortly after buying my first investment house I was scouring the throw-away papers. I was looking for a potential home purchase when I spotted a small ad for a townhome in Montclair California. Was this to be my townhome investment?

I was living near West Covina, a suburb of Los Angeles in the Inland Empire region of Southern California. It was about 20 miles from LA(Los Angeles). Montclair California was about 20 – 25 minutes away from my home.

It was within the area I wanted to invest in because it wasn’t too far away. Also since it was a suburb, the prices would be lower than comparable property closer to Los Angeles.

There had been a housing boom some ten to fifteen years earlier in the whole general area of the Inland Empire. Houses that most people could afford were considerably cheaper than the other surrounding counties near Los Angeles.

Fortunately for me I happen to live in that area. I knew it pretty well and decided to take a look at the townhome.

I knew, however, it was best to buy a single family house if it was for investment purposes.

The Townhome Location was Bad

The area where the townhome was located was on an undesirable street. There was a strip club just a few hundred feet outside the big complex where the townhomes were located.

In addition there were several other townhomes in the complex that had been recently foreclosed. Plus there were several more units for sale in the big complex.

All signs were bad! However, I was anxious to buy something and this was within my budget. That probably overrode my better judgement, which told me to stay away from that property.

In real estate the common knowledge for investors was location, location, location. Location is normally more important than anything as far as investing in real estate is concerned. Ignoring that is generally to your peril. I would advise potential investors against ignoring location.

The young person, a college student, who was selling it had just picked it up as a foreclosure. The VA (Veterans Administration) was selling it. If you are interested in potential good real estate deals you should read this for more information on foreclosures.

I took a look at the unit. I was impressed that it was in about perfect condition.

There were no other townhomes for sale near it. But there was probably one or two somewhere in the large complex still for sale.

The only thing that I could find wrong was the air conditioner was not working. If that needed repair it would likely be expensive. The area was nice and clean inside where the townhomes were located. The surrounding area was another story and was pretty bad.

I violated the Location, Location, Location Rule

After thinking about it for a short time I reluctantly bought that townhome. That is, in spite of the undeniable fact my townhome investment was in a bad area.

I knew quite a bit about electricity and electrical appliances. Previously I had been an electronic technician before. Not only that, but had even repaired electrical appliances, and was well versed in electronics.

I knew AC units rarely went out. This townhome wasn’t very old, so the likelihood of it needing major repair was low. I took a look at it and everything looked fine. I removed the circuit breaker fuses and took them home to check it to see if they were good.

They looked good, but one wasn’t, it was burned out. How lucky for me. I paid about $10 for a new fuse cartridge. That was the problem. The air conditioner worked fine once I replaced the burned out fuse.

There I was, maybe up s… creek having violated the very important location rule. That Montclair townhome investment was my second investment purchase. I thought that even if the property were in an undesirable area I could still sell it. I’d put a new wraparound mortgage on it and offer it for a low downpayment.

That way my risk would be less, I would not own the property. I could, however, still make money from it – if I were lucky. I’d make money by holding a new wraparound mortgage I would put on it.

Since I had broken the unwritten real estate rule of location, location, location, I probably needed some really good luck if I were to get out of it unscathed.

I needed to Sell My Townhome Investment

Now that I had the townhome my next job was to get rid of it, that is to sell it. I immediately put it up for sale. Terms were a one year lease option with some money each month from the rent to go toward the down payment.

I would put a wraparound mortgage on it that I would hold when I sold the property. The buyer wouldn’t have to qualify in the normal sense, but I did require a credit check once I did have a potential buyer.

My luck changed compared to my first investment house. This time I had a really difficult time finding a buyer, even though the terms essentially boiled down to a “no money down” deal.

The townhome stayed on the market several months. I had several lookers, but I rejected all of them. During those months with no buyer the townhome stayed empty because I didn’t want permanent renters, but potential buyers in the property. I was struggling to make the monthly mortgage payments while the property stayed empty.

If you’re an aspiring real estate investor, don’t make the same mistakes I made. Read this first “10 terrible mistakes real estate investors make”

Sell my Townhome to another Investor?

Finally I got an offer to buy my townhome. It was from an investor. My guess is he would turn right around and resell the property. I didn’t care because my purpose was to hold the mortgage.

Later I had doubts about selling it to him after I checked San Bernardino County records and found that he had over 100 properties in his name. That made it imperative to meet the potential buyer in person to see how I felt about selling it to him.

At the time I was a contract programmer working in Downey California at the Los Angeles County Data Processing Center. I arranged for him to come there and I would interview him there. He did, and after talking with him I decided I would sell it to him, even though he obviously knew much more about real estate investing than I did.

I figured he would just sell off the property and make a little profit. Since I only was concerned about the mortgage (and the area the property was in) I assumed the buyer would be out of the picture very soon. I was right!

These “no money down” purchases and selling can probably still be done. However, the tax laws have changed making it impractical in areas (like Southern California) where property prices are very high. In addition, both the VA and FHA now require the buyer to essentially qualify when assuming their loans and the buyer is supposed to live there at least a year before anyone can assume the loan. These things change, so use your due diligence before you try the techniques I used.

 

My Townhome was a “no money down” Deal to the New Buyer

As it turned out that investor turned right around and resold the townhome to someone else in a couple of weeks. Amazingly, the person he sold it to was also an investor! I made another $700 at that time because in my assumable mortgage I charged $700 for someone to assume the loan, along with a credit check of any new buyer.

I had sold the townhome as a “no money down” deal, but I did manage to make $1800 due to how I arranged the closing costs. That covered about two months of the previous house payments I had to cover while the property was sitting empty.

So that investor got my townhouse property as an essentially no money down deal, but even more amazingly, that new buyer of that townhome resold it to his sister a couple of months later.

I collected another $700 at that time and gave her a break by selling it to her because her credit record was spotty. Even though her credit wasn’t A1, I had a good feeling she was reliable after I met her in person, so I approved the purchase.

I made Escalating Payments for the New Buyer of my Townhome

Because my townhome investment had been in a depressed area as far as I was concerned, I scheduled the payment arrangements on my AITD mortgage to the new buyer. The payments started out low and as the years went by payments would escalate somewhat.

I did that so it would be more affordable to lower income people who might purchase it. I also raised the price $5000 more than what I paid for it along with an interest rate increase of one percent.

Just that increase of 1% made a difference of $700 a year more money I’d make since I sold the property for $70,000. Not a lot, but just the stroke of a pen did it. That plus the $5000 more than what I paid for the property would add up over the years. As it turned out that mortgage was kept 17 years so that little bit of increase turned into an amount that cannot be ignored.

During those times I had a decent job as a programmer/analyst but having a family usually kept me short of funds. But real estate investing was in my blood. I had taken two years of real estate back in college when I attended Pasadena City College in Pasadena California.

So with two investment properties under my belt, the townhouse already sold, I now had a few hundred dollars cash flow from the two properties. I should make it clear that I still owned the Elm street house, my first investment house, but it was rented under a lease option plan.

My townhome above was sold and I had an AITD#* type mortgage on it.

Although I broke all the rules and wisdom of location, I still managed to come out ahead over the long term. Yes it was frustrating initially, but over many years I made over $75,000 profit on this no money down townhome investment. Not too bad for maybe 2 months part-time effort.

 

* Note: I am using the term mortgage because most people know what a mortgage is, but in actuality I owned a Trust Deed on the property.

# Note The AITD link above is a Realtor’s warning about using such creative financing. Of course that’s only one side of the story. In fact, I got rid of my Real Estate Salesman’s License because most real estate sales persons didn’t want to present my offers. They didn’t understand AITD’s or “no money down” techniques.