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From the RealEstateJournal Archives
Young Investor Expects
To Sell Property at a Loss
by Jane Hodges
July 19, 2007
The Investor: Matt
Ellis, 25, moved to Colorado Springs, Colo., from Georgia after graduating from
college. He decided to move to the small city on a whim, but his decision to
become an investor was deliberate -- he hopes to launch a real-estate career, he
says. While working as a bank teller, he read up on the real-estate industry,
networked and bought this multi-family property
from another investor in 2005. Mr. Ellis works as a college counselor for the
University of Phoenix in the Denver area.
The property: The
3,102-square-foot building was built in 1984 and has four apartments, each with
two bedrooms, one bathroom, a wood-burning fireplace and a storage unit. Two
apartments have tiled kitchen floors. The property has seven uncovered
off-street parking spots.
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Purchase price:
$269,000 in October 2005. Mr. Ellis financed 100% of the home's price with two
loans -- a bank loan at a 6.9% interest rate for 90% of the purchase and a
seller-financed loan at a 7% interest rate for the remaining 10%. The $269,000
amount included his closing costs.
Additional investment:
$1,000. The property didn't require major repairs or renovations, just minor
upkeep and painting between tenants and a minor plumbing fix, Mr. Ellis says.
The strategy: He bought
this property -- and another identical to it, which he also intends to sell --
from a veteran investor and personal mentor in May 2005. When Mr. Ellis
purchased this property, he intended to hold it for cash flow (profit from
rental income after mortgage costs, interest, taxes and insurance are deducted).
The building produced about $100 per month in cash flow on average, he says. Now that he's
married and lives closer to Denver, a 50-minute drive away, managing the
property has grown difficult, he's found. He plans to investigate ways to invest
or participate in real estate that don't require the hands-on duties of being a
landlord. He initially set an asking price of $285,000 for the four-plex, but
has lowered it to $265,000 in the hopes of finding a buyer.
The pitfalls: Mr. Ellis
faced two major problems as a landlord. The first, he says, was not screening
tenants thoroughly -- he was forced to evict two tenants. In retrospect, he says
he should have worked harder to find better tenants instead of rushing to fill
vacancies with renters who ultimately got behind on rent or were evicted for
other reasons. Also, the delayed return of military personnel from Iraq to local
military bases has kept the local housing market soft and lowered demand for
rentals. His monthly profit has been small because he financed the property's
purchase with a 100% loan and faced higher monthly mortgage payments as a
result, he says. An investor who could put 20% down and secure a more favorable
mortgage may fare better than he did, he says, adding, "It has potential for
cash flow."
The transaction: Mr.
Ellis hasn't secured a real-estate agent and intends to sell the property
himself, largely because paying listing commissions would add costs in a deal
where he already expects to lose money, he says. He will come out behind on the
investment even if he gets his $265,000 asking price, he says. He made about
$2,100 in profit from rental income during the time he owned the property, but
according to his calculations, may incur up to $2,000 in capital gains taxes
when he sells. He is willing to pay up to a 3% commission ($7,950 at the asking
price) to a buyer's agent -- but only if he gets a full-price offer. If he gets
less than asking price, he hopes to negotiate a lower commission, proportional
to the size of the buyer's offer, he says. He says his property's lack of
appreciation tracks the local market's, which has been flat since late 2005,
according to Sperry Van Ness/Doug Carter LLC, a commercial real-estate and
multi-family housing firm in Colorado Springs.
Do you think this was a good investment? Share your thoughts on this property.
Do you have a second home or rental property that you think would make a good My Investment profile? Email a description and photo of your property.
-- Ms. Hodges is a free-lance writer in Seattle.
Email your comments to rjeditor@dowjones.com.
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