"Life is a sum of all our choices" ~ Warren Buffet
"Jim, this is a perfect investment for us", said my friend John, one of the participants in our discussion.
"You, Steve, and I can pool our money to come up with the down payment... and the money we collect from the rent will cover our monthly mortgage payment... it’s perfect!"
"Well... let me crunch the numbers you gave me to see if it makes sense", I replied, "I’ll let you know in a few days."
John and Steve have been my friends since college. John is a project engineer for a large defense contractor. Steve is a high school science teacher. Neither of them have any professional expertise in real estate outside of owning their own homes.
As it so happens, John works with a woman who rents a condo from an elderly couple. The condo is in a gated planned community not far from their work.
The woman told John that their landlords are looking to sell their condo as they are hoping to retire in the near future and would rather travel than fix leaky plumbing.
John asked Steve and me over his house to discuss the possibility of the three of us buying the property before it goes on the market.
John had called the elderly couple to inquire the asking price and some of the details regarding the taxes, homeowners’ association fees, Mello-Roos (special assessments for schools / fire / and parks), and insurance.
The couple was asking just over $200,000 for the property (which was right in line with the comps in the immediate area). The taxes and Mello-Roos were approximately $4000 per year and the association fees were $300 per month.
John also contacted his banker to ask about currently mortgage rates and lending criteria. The banker indicated that banks were indeed lending on income properties with favorable rates (less than 4%)... provided the investors put down a minimum of 30 percent.
In order for us to purchase the property, the three of us would each need to come up with 10% or approximately $20,000.
The monthly rental income was $1500 which was about the market rate.
After running the numbers, I could see where there would be a positive cash-flow of about $200 per month from the investment. In addition, there may be some appreciation of the asset sometime down the road.
Quantitatively, the deal looked pretty sound (at least at first glance).
My portion of the down-payment could be funded through my retirement account so I wasn’t necessarily worried about that particular aspect but there were some real qualitative things bothered me about this project.
· Currently, there were renters there, but what happens if the renters moved out? How long might the unit be vacant?
· How fiscally sound was the homeowners’ association? With so many condos in foreclosure these past several years, did the association actually have escrowed funds to do the necessary repairs when needed?
· The unit was now over 20 years old, how would we pay for repairs if and when we needed to make major repairs?
· What do I (or my partners) know about being a landlord? None of us had any experience in this field to ask the right questions and avoid what might be expensive pitfalls.
· Real estate might not be very liquid in this market. If something went wrong, we could be stuck owning something that we didn’t want to keep or risk taking a big loss if we needed to sell at a "fire sale" price.
There was also one calculation that I didn’t make when doing my first analysis.
I reviewed the income and expenses of the investment, but I didn’t consider the cost of time and money as opposed to putting the resources into an alternative investment.
If I considered all of the time I would need to invest in managing the investment... plus the $20,000... could I actually create a better return for my investment by doing sometime else?
This is the opportunity cost (or better said... the lost opportunity cost) on my investment.
This is an analysis that is sometimes difficult to truly assess. It involves a lot of "what-ifs" using assumptions that may or may not occur.
In the end, it distills down to a simple problem: We don’t know... what we don’t know... and we can’t accurately predict the future.
This is a concept that plagues me each day.
All of us have a limited amount time and/or money (even the richest among us). If we spend our limited resources doing something... then it is no longer available to do something else.
Each day at OptiFuse, our phones are constantly ringing with potential customers who are asking us to quote pricing and availability, provide them with sample parts, and/or help them with technical support.
We will always try and assist the customer with whatever they need in order to buy our parts.
However, for a variety of reasons, and more often than not, we will NOT make the sale.
Despite all of our efforts, our pricing might be too high, our delivery too long, our products not exactly equal to our prospects requirements, or a slew of other potential issues that will cause the customer to buy the parts from another source.
Some times we might spend months of time and thousands of dollars pursuing a sale only to be told no in the end.
We are of course disappointed that we did not make the sale... but more even more disappointing is that we could have put those limited resources towards other projects that we might have gotten.
There’s the dilemma...
If we don’t labor and plant the seeds... then we definitely won’t have any fruit of the labor in the future...
... but even if we do make the effort... we are still unassured that the efforts will pay any rewards.
Our only guarantee is that if we don’t do anything... then we won’t be afforded the opportunity to succeed.
In the end... I decided against participating in the purchase of the condo with my friends.
Steve and John are going forward with the project and I wish them well... I might rue the day for not joining up with them... but real estate isn’t my business...
Manufacturing and supplying circuit protection is what I know and what I’m good at... and in the end offers me the best opportunity for success...
Thank you very much for your support of OptiFuse where we can help you to find success with your circuit protection needs.
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