In the last episode of "As the State Street Turns," we spoke of State Street becoming a rental for us.
This is a good solution to an untenable situation. If you can't sell or even if you can sell, but not on your terms or on terms that are agreeable to you, then rent until you can. Renting will bring your cost basis down and provide cash flow to cover the carrying costs +++.
Well, since that last post, we have been in talks with one of our business partners in a different endeavor (a real estate brokerage franchise). We have talked about the importance of having a cash reserve to move forward with in the event that we see a downturn in the economic cycle. <By the way, this is something that will happen. It is only a question of when and not one of if.
So our partner has agreed with us that a reserve is good. Keeping the doors open every month is the result of spending a huge amount of money. Not having a reserve can mean disaster during the next economic downturn. We talked about cash. We talked about starting with three months of reserve, building that to six months, and then pushing that to at least one year's reserves. Ideally, we think that two or more year's of reserves is the ticket (think Apple or even the world's largest design firm, Gentler -both with healthy cash reserves) but we are way too premature to be talking about that idea for any length of time.
We then talked about his idea of a cash reserve in the form of an asset that might appreciate and throw off a little money in the interim. Hmm? What could we put our money into that would give us a little bit of additional cashflow and might appreciate in lieu of cash in the bank? Nope. Nada. We drew a blank. No ideas at all.
Just kidding. We talked about rentals and we talked about a couple of specific areas where owning a rental might make a lot of sense down the road. When the VA sale fell through on State Street, we talked about that property as well. Our agreement with our partner is that we are not buying it to help us out. If it isn't a good deal, we should pass. And Box Bend should rent it out and go from there. However, at the end of the day, it is a good deal. It is a good deal because at this price point almost every single thing that we could address has been addressed. Anything that is not addressed should be covered by the home warranty we offered with the sale.
SIDE NOTE: A home warranty is a good idea even if you are a landlord and not a purchaser of property for flipping or renovating. This is cheap insurance, and if something breaks, the deductible is very small.
If we went out with our partner and purchased a new piece of rental property at our price point, we would almost certainly be putting money into it to fix all the things that are wrong with it. Even new construction experiences call backs for issues. As landlords ourselves, we know this to be true.
So we can pick up State Street instead, and a lot of the big items have been replaced or are brand new. The rental rates in that sub-market are good, too.
For Box Bend this is good news. We were always a little hesitant about selling it. We see that area as appreciating rapidly over the next five years. However, our business in Box Bend is not primarily to buy and hold. Our business is to renovate and sell. With this arrangement we get our cash out of the deal -the vast majority now, and the rest by midyear 2016. We retain our rights until it is paid off by our other business. We also get to keep half of State's cashflow through our other company and half of the asset, and we can move forward with the next set of problems seeking our solutions within the skill sets of Box Bend. Win-win-win-win.
We stand corrected. State Street will be a rental (at the time of this writing), only it won't be a Box Bend rental.
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