This story appears in the December 28, 2014 issue of Forbes. Subscribe
Forbes' Investment Guide is now hitting the stands, and in it we bring you stories of regular people making savvy investments--we call them Unknown All-Stars. Here, the spotlight is on a Pittsburgh man who launched a renovation business during the recession and has profited handsomely by focusing on distressed real estate.
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All-Star: Brian Mendelssohn
Age: 37
Hometown: Pittsburgh
Day Job: Principal, Botero Development
Strategy: Renovating and flipping distressed homes
Returns: 40% and up per project
After studying materials sciences and engineering at Carnegie Mellon, Brian Mendelssohn took a job as a metals commodity trader in Pittsburgh. On his daily bus ride to work, he'd look at empty, run-down buildings and imagine what he'd do if he owned them. So at 26, he bought a dilapidated house in the edgy Lawrenceville neighborhood for $95,000 and spent two years turning it into two condos, doing all the work himself. He turned a profit of $75,000.
At 31, just before the economy crashed, Mendelssohn took the plunge: He quit his day job to start his then one-man Botero Development. In the summer of 2008, for his first project, he picked up a pair of derelict town homes for $75,000 after they lost their Section 8 voucher (a federal subsidy that helps poor folks rent). Running out of cash, he borrowed $50,000 from friends, got a bank loan for $121,000, and renovated the town homes, renting them out for enough to cover his debt service. In 2010, he snapped up three row houses for a total of $170,000, renovated them and flipped them, netting about $70,000. He used a so-called 1031 exchange to roll those profits, tax deferred, into two condo buildings.
Then he got a lead on six town homes in poor shape--several lacking roofs--that had been condemned. "There was a whole raccoon family living in one," he says. Working with a community group he snagged all six for $25,000. For that project, his biggest yet, friends invested as silent partners; in early 2012 five of the renovated town homes (one was beyond repair) sold for $250,000 to $300,000, producing a $400,000 profit for Mendelssohn and friends. Last summer, he finally sold the two former Section 8 houses for a $200,000 profit. Today, he owns apartments, an office building, retail space and the movie theater and beer store in that space. But he's still cash poor. "It makes it hard to do Christmas shopping."
Strategy: Mendelssohn specializes in the now hip Lawrenceville neighborhood and keeps his eyes open for properties that he can buy on the cheap. "Most of the buildings I buy are not ones that go on the market," he says.
Best advice: Get to know a neighborhood by talking to the people who live there. Mendelssohn heard about those Section 8 houses through a neighbor, then approached the seller. "I call it keeping my ear to the job."
