Financing and Managing Projects in Gary and Omaha

While deciding whether to keep or to sell our parents’ home, we calculated the cost of modernizing the framed, three-bedroom structure with the hope that the cost would not exceed the house’s market value in the depressed, but awakening Gary market. The basis of our analysis was a flipper’s proposal to buy the house for $15,000, invest up to $45,000 in renovations, and sell it for $80,000.

Ironically, his projected selling price of $80,000 is equal to the $7,000 my parents paid for the house in 1954, but in today’s dollars. Nevertheless, his plan would have created a whopping 33 percent return on investment (ROI) for him and his posterity before closing costs including realtor fees, transfer and conveyance fees, and financing costs, or take into account opportunity costs.

Some of the following formulas and statistics are from Attom, a property data company, then applied to our project:

Bob Vila’s 70 percent rule in house flipping rule – Maximum Buying Price

After-repair value (ARV) X .70 − Estimated repair costs = Maximum buying price

(80,000 x .70 = $56,000) –$ 45,000 = $11,000

note they offered $4,000 more than the $11,000 suggested using Bob Villa’s formula

Return on Investment (ROI)

ROI = net profit divided by the total cost of the investment

$20,000 ($80,000-$60,000) / $60,000 ($15,000 + $45,000) = 33 percent

The 33 percent calculated for this project is significantly higher that the average return on investment (ROI) for a house flipping project. In 2022, the average ROI for house flipping was 26.9%. Attom also reports that 65% of all flips purchased with cash.

Profit Based on After Repair Value

On average, a rehabber aims for a 10 to 20 percent profit of the After Repair Value according to Flipperforce

$80,000 x .20 = $16,000 (This project was to yield $20,000 or 25 percent profit)

As plans for the project unfolded, the renovation cost began encroaching the estimated market value and breaking the rules of thumbs. I got a bit nervous at the rising cost, but unlike that of a flipper, our investment goals are long term, not short term. Flippers, unlike us, says Mike Keen of Midtown Portage in the second article in this series, often have no ties to the community and “do the least they can, and take short cuts to make a profit.”

“After COVID eased in 2021, values of Gary properties increased enough that people were able to refinance their properties through banks,” affirmed Joseph Peterson, President of the Northwest Indiana Creative Investors Association.

“After COVID eased in 2021, values of Gary properties increased enough that people were able to refinance their properties through banks,” affirmed Joseph Peterson, President of the Northwest Indiana Creative Investors Association (NICIA), who we met in the first article of this series. Many of the NICIA members report using the favorable increase to expand their portfolio.

Typically, many in the group focus on cash flow of about $10,000 to $11,000 after expenses per year versus the $20,000 to $30,000 profit they could have made from selling a fully renovated house. The stakeholders can invest upwards of $80,000 in one house.

I also learned that investing in short term rental property is riskier than in a primary residence.  The increased risk makes obtaining property insurance more challenging and lenders offering significantly higher interest rates and more challenging terms.  Additionally, short term rental investors are often small businesspersons and as Keen pointed out, small developers are often not offered the same access to capital from local governments as are large developers.

Small developer Ethel Rock, who was another source of inspiration, experienced two years of trying to qualify for government grants before deciding to use her retirement funds to finance her project in Omaha, Nebraska. The Washington, DC investor said for this series that the city of Omaha told her that her project was too small, so “I pulled from my TSP (Thrift Savings Plan) and got help from my husband.” The TSP is a retirement savings and investment plan for federal employees and members of the uniformed services.

We financed the Gary project in a similar fashion. Using the funds our mother left, plus funds from my TSP account. “It was money I never had anyway and it was the home where mom found her peace,” quipped my brother on why he invested a part of his inheritance into the home. For me, I could either invest in the funds decided by my retirement fund or invest in Gary.

To have others invest my money for me meant that I would most likely fuel companies that won’t invest in Gary or in Gary’s people. So, I decided to include a direct investment in Gary in my portfolio, or to cast down my bucket where I am.

Ethel Rock in Omaha

Rock, who previously invested in an Omaha duplex, shared the same passion for The Gateway to the West, her hometown, as I do for the City Built on Sand, my hometown. She accentuated, “I know the area. I can see the gentrification and I wanted to get in on a property before the gentrification started.” Her old neighborhood, where she invested, is only one-half mile from Creighton University and downtown Omaha, and was the site of the historic 1898 Trans Mississippi World’s Fair..

My former co-worker’s second investment had become a four-one bedroom crack house.  “We used to get our hair done at a house across the street,” Rock said recalling the area’s better days.

However, ownership is only one dimension of her passion. “I wanted to establish a foot print in my hometown. Legacy building is very important to me. I wanted my nieces and nephews to see that we can do it, too.”  One result of her quest for legacy and generation wealth building was the identification of the building. “I named the apartments after my mommy, Climmie. It’s called The Climmie.”

Being 1,200 miles away from The Climmie has been a challenge that she has overcome. From her first experience, she gained contractors she could trust to create The Climmie. And, she has a tenant in her first investment to serve as a first line repairman at both properties and a cadre of reliable contractors for bigger repairs, when needed.

End Notes

Our team building journey was a bit different from Rocks. Before my mom began her end stage illness, I was already deeply involved in her financial affairs. She and I had gone through some contractors, a few who just simply did not show up after providing an estimate and others who simply said, “We don’t work in Gary.”

So, after some filtering, we have a reliable and creative contractor, groundskeeper, and homemaker (who would help with house managing) that we developed good, long-distance working relationships with before the first nail was hammered. In addition, a neighbor who used to walk me to school, continues to serve as our first line repairman and help with house managing and a cousin who lives nearby serves as a backup.

However, not everyone has a TSP account.  Other routes to financing include banks, but some fear that the nationalization of banks has made it more challenging for small developers to get financial backing. Nevertheless, financial institutions, including credit unions, with whom you have relationships, are usually good places to start.

Community Development Financial Institutions, CDFIs, are another good place to start.  CDFI is a United States Treasury designation.  One of the critical threshold requirements for a CDFI is that 60 percent of every dollar they have on deposit must be reinvested in the communities they serve, primarily designed to help with the economic empowerment and overall improvement of communities.

Host Financial offers financing specifically for short-term rental properties. They use the short-term rental income of the property, rather than the income of the individual, to qualify and approve the loan.

Financing and managing such projects can be challenging, but many of the lessons presented in Port of Harlem magazine over the past decades came to bear including those in a 2017 article, The State of Housing in Black America: Own the House, Rent the Car. One of the memories of that article was a comprehensive event we held on the subject at the Alexandria Black History Museum.  Interest in the subject was so massive, that we created a waiting list of attendees.  However, only about quarter of the people showed up.

Next: Cast Down Your Bucket Where You Are: Renovating IN Gary, IN – Short Term Rental, Marketing/Furnishing

Gary native Wayne Young is the publisher of Port of Harlem magazine. Founded by Young in 1995, the magazine is inclusive, diverse, and Pan-African. He is also president of the Port of Harlem Gambian Education Partnership, which funds and manages small projects centering around culture, education, and community in the West African nation. He recently repurposed his parents’ home in Gary into a short-term rental.