Rookie Reply: Tony’s Troublesome Shreveport Deal ($29k LOSS)

Ashley Kehr:
This is Real Estate Rookie, episode 176. My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson, for Rookie Reply.

Tony Robinson:
And welcome to the Real Estate Rookie podcast, where we focus on the investors who are at that beginning part of their journey, giving you the inspiration, the information you need to keep going or to get started. So, Ashley Kehr, what’s new? What’s going on? Give the world an update.

Ashley Kehr:
Well, I’m back on my couch. I finally, which seems forever, three months ago I guess, got my ACL surgery. So, I had torn my ACL and my MCL. My MCL healed on its own. So, I had to get my ACL done two days ago. And so, I’m here on the couch recovering.

Tony Robinson:
Yeah. Well, wishing you a speedy recovery, Ashley. And just take it easy next time you’re on the slopes, okay? I don’t want you back here in a couple months with the other MCL and ACL all damaged and whatnot.

Ashley Kehr:
Yeah, I’ll probably be if I’m wakesurfing now.

Tony Robinson:
Yeah.

Ashley Kehr:
Switch to a summer sport.

Tony Robinson:
Yeah. Well, we got a decent story for today, right? So those of you who’ve been following the podcasts for a while, you probably have heard me try to sell you my house in Louisiana. But luckily for all of you, I was able to sell it to someone who I think is going to use it as a primary residence, which is probably what it made sense for. But Ash and I were talking, we figured it might be a really cool, I don’t know, case study I guess, to kind of share the backstory and the numbers with you all on kind of how this Louisiana property went down, how much money I lost on this deal, and hopefully you guys can get some lessons from it. So I don’t know, Ash, anything you want to add before I get into the backstory here?

Ashley Kehr:
Well, I think that just we’ve talked about this deal for over a year now, and this is going to be the episode that finally puts the whole journey together as to how you purchased it and how you kind of ended up with it and what the deal looks like now. So first of all, congratulations on finally selling it. I-

Tony Robinson:
Thank you.

Ashley Kehr:
I think both of us were looking forward to not having to talk about it.

Tony Robinson:
And just fun facts, right? So the city that this property is in, it’s in the city of Shreveport, Louisiana, and Ashley until two weeks ago, thought that it was in Freeport, Louisiana. So, there is no Freeport Louisiana that I’m aware of. If anyone else was confused, it’s Shreveport.

Ashley Kehr:
Yeah. Honestly, I didn’t know if it was Freeport or Treeport. So, definitely [crosstalk 00:02:41]. For how long we talked about this deal, I was never very clear on the city, but I did not think it was Shreveport.

Tony Robinson:
Neither of which is correct. So, yeah. Well, let’s get into it then, right? So this property was a single family in the city of Shreveport, and this is actually the second investment property I had ever purchased, right? Exciting, right? Property number two. I think everyone’s pumped for that. And what made this deal I think unique on the initial purchase was that the financing I was able to get for this deal was really good. I essentially had $0 out of pocket. I literally did not have to bring anything to the closing table to buy this property. I found a credit union out in Shreveport that was willing to lend on both the purchase price and all of the construction costs, as long as that total project cost was less than I think 72% of the after repair value. So I’m just going to run through the numbers really quickly, and then I’ll pause for a sec.
So, we bought the property for about $72,000. On the rehab, we spent about $45,000. So, we were all in for about 117. And the way that they kind of assess the loan is during escrow, I had to submit my scope of work. And then based on that scope of work, the bank sent out an appraiser and the appraiser walked the property in its current condition. And they said, “Hey, based on the scope of work that you gave me and me walking the property, here’s what I think the property will be worth once you complete your rehab.” And that appraiser pegged it at a $177,000 ARV. So a pretty decent spread there, right? So I’m at one 117 all in, ARV is 177, which is, I don’t know, 65% or something like that at the ARV. So for the bank, I checked those boxes, and they said, “Hey Tony, you found a good deal. We’re going to fund everything for you.” That’s why I bought it to begin with, right? Because it was really good financing. So-

Ashley Kehr:
Tony, can-

Tony Robinson:
[crosstalk 00:04:50]. Yeah, go ahead.

Ashley Kehr:
Can you still get financing like that right now? Do you think?

Tony Robinson:
So I know when I talked to that credit union during COVID, they had stopped that specific loan program. But I haven’t purchase in Shreveport since, so I’m not sure if they’re still offering that. But I mean, things have definitely starting to loosen back up since COVID has kind of subsided a little bit. So, I would assume that there’s probably a bank out there somewhere that’s doing something like this. Cool? All right. So we bought the property, right? We end up closing on it. Rehab takes, I think, three and a half, four months, something like that. We bought it right near the end of the year, so December timeframe, and there was some bad weather that kind of slowed things down. But I want to say we were completely done with this thing by the middle of March, okay?
The construction loan, or the loan that we used to purchase it, was also really good debt, right? So, it was a one year interest only at 6%. So we had a really low payment during that first year, because it was interest only, right? At 6%. So anyway, we ended up getting a tenant in there. We hired a property management company. We’re able to rent it out for 1350. I was trying to find the initial closing disclosure, but I couldn’t find it. But I want to say the mortgage was somewhere around, I don’t know, 1100 bucks, something like that. So we were probably cash flowing, not a whole lot, 150 bucks maybe, right? On this one property, right? And no money out of pocket, 150 bucks. “Hey,” I figured, “Why not?” Right?
So we have a tenant in there from, I want to say, March 2020. They stay there for a year. And so from March 2020, and then they end up moving out in March 2021, or I think the end of February 2021. And during that year timeframe, we ended up abandoning long-term rentals all together. We went kind of crazy with the short-term rental stuff. And we decided, “Hey, we don’t want to keep this property anymore. It doesn’t really fit with the rest of our portfolio. It doesn’t fit with our long-term goals. So, let’s sell it.” So, once the tenant moved out… Actually, let me take one step back, right? So, the tenant moved out in February. One month before the tenant moved out, we get a note from our insurance company saying, “Hey, I don’t know what the heck could change, but our insurance premium doubled.”
So initially, we were already paying pretty expensive money for the flood premium. It was $2700 a year. And it ended up jumping up to over four grand a year on the insurance premium for the flood. When you added in that new cost, our mortgage for that property went up to 1450 or something like that, right? So, even more than what we were renting it out for. So, we lost money the last month the tenant was there because they were only paying 1350. We had to pay the mortgage of 1450. And then, we still had to pay our property management company I think a hundred bucks or something like that. So, we lost money. We said, “Hey, let’s just sell it.” Right? “Let’s just get it off our hands and move on.” So that property ends up sitting empty for an entire 14 months or 13 months, right? Because we just sold it last month.

Ashley Kehr:
So during that time, you were making the mortgage payments out of pocket?

Tony Robinson:
We were making a $1,400 a month mortgage payment for, I want to say it was almost a year exactly, right? So whatever 1400 times 12 is, it’s almost $17,000 that we spent over the year carrying that mortgage, right? And it wasn’t because we weren’t trying, right? We had the property listed. We initially listed it for less than what it appraised for, right? So, we weren’t ready to appraise for 170. I think we initially listed it for 165 or something like that. And we just kind of kept pulling down the price every couple of months hoping that it would sell. And it just wasn’t moving. And then, we hadn’t been to the property since we closed on it originally.
And we kept seeing some of the buyer’s remarks when they would turn the property away, and they kept mentioning a buckling of some tile in the hallway or something like that. So we had the realtor go out and check it out, and he was like, “Hey, yeah. Seems like something’s happening here.” So, we had to send a crew out there and they ended up finding some kind of problem with the subfloor. That costed another $8,000 to fix, right? So now, we’re in $17,000 for the mortgage payment, we have to spend another $8,000 to repair the floor, and then we end up dropping the price below what we owed on it, right? So, we just want to get the thing sold. So I think we ended up selling it for… I can’t even remember what the number was. I think we sold it for 129 and our mortgage balance was 135, something like that.
I think it was 130, and then we sold it for 129. But closing costs and all that stuff, so when we ended up actually selling the property, we didn’t get money back. We had to write a check to escrow for, I think, $4,000, right? So, you add everything up. We add $17,000 in the mortgage that we had to carry for a year. We add another $8,000 that we had to spend to repair the flooring. And then, we had to write another check at closing for $4,000. So, that’s $29,000 that we dumped into this Shreveport property. And that’s why I was trying to sell it to everybody for an entire year.

Ashley Kehr:
Tony, but you’re still investing. So, why did this property not scare you from continuing to be an investor?

Tony Robinson:
Yeah. Man, there are so many answers to that question, right? The first thing is that I learned a lot going through this process. And I think what I learned has made me a better investor, right? Anytime you got to write a check for $30,000, you’re going to learn something hopefully. I will probably never buy another property in a flood zone. I’m scarred for life because of that. I think I’ll be more selective of the locations that I invest in just in general. This house actually was at the end of a really nice block. But it was literally at the end of the block, and then right next door to this house was an apartment complex. And the apartment complex had some riff raff. Even during the renovation, we had people break in and steal some of the contractor’s tools.
And a lot of the feedback we were getting from buyers was, “Hey, we like this location, we like this neighborhood, but we don’t like the fact that this is the one that’s next to that apartment complex.” So I think being able to kind of do a better job of knowing the area to say, “Okay. Hey, here’s a potential red…” It works for a renter. But for someone that wants to buy, that’s a potential red flag. So, I think kind of knowing what the differences are between a renter wants and what a long-term buyer wants. So yeah, not buying in a flood zone, making sure I do a little bit more research on my market if it’s something that I think I’ll end up selling. And then, the third thing is that you can’t always predict everything either, right? On paper, we knew that there was some flood insurance costs and we budgeted for that. The numbers still made sense.
Even my flood insurance guy was shocked that the premium went up. We shopped for multiple different people to cover this, and everyone’s quote was coming in around the same. I don’t know what caused that shift. I don’t know if there was some kind of risk that they saw. Obviously there was, but I don’t think there was a way that I could have planned for that. And I think that’s something to understand as well is that even if you do your best due diligence on the front end, there’s still going to be surprises, right? And you got to do your best to roll with them. But I’m grateful, Ashley, for the Shreveport property, because it was the first property that my partner, [Omid 00:14:59], and I did together. And had we not done that deal together, who knows if we’d be building this short-term rental empire that we’re working on right now? So even with the $30,000 that we lost, we’ve more than made that up with the money that we’ve made from our short-term rentals.

Ashley Kehr:
And I think the fact that you guys had that test in your relationship too, of going through that big struggle, that big obstacle of this property and figuring out what to do with it, if you guys could survive that as a partnership, I think you guys will be able to get through a lot of things that will come up during your partnership together. So, I think you had that test early on is already going to make you guys better and stronger building that empire.

Tony Robinson:
I don’t know if [Omid 00:14:59] is just crazy, but he still trusts me to find all the deals for us. Outside of that one, I think all the other ones have worked out okay for us. And here’s the thing too, Ash, where people will go to college and spend way more than $30,000 and get a degree that may or may not help them achieve financial independence, right? And build the wealth that they want. But people are terrified of taking that same $30,000 and potentially losing it on a real estate deal, right? And I get that, right? Because $30,000 isn’t a small sum of money. But I guess the point I’m trying to make is you should be just as willing to invest… If your true goal is to become financially free through real estate investing, you should be just as willing to kind of pay the price on that side as you would for a four-year degree, because in my mind, the real estate education, the real world bumps and bruises and losses of real estate, will probably teach you more than sitting in a classroom for four years at a university.

Ashley Kehr:
Well, Tony, thank you so much for sharing the full deal with us today and for going through what you learned and what others can watch for. I think it will definitely be beneficial to some of our listeners and hopefully not make them scared to get into real estate, because there can be a bad deal, but you learn from it, it turns into an opportunity cost, but there’s so many more great deals out there. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson, and we will be back on Wednesday with another Real Estate Rookie podcast.