Here’s something interesting, a how NOT to. These are just as important as a how to.
In my journey to find extra income, I tried my hand at real estate investing. I bought a single family home with the intention of renting it out and using the cash flow to help pay off the mortgage.
Real Estate investing is a fantastic wealth tool. You can achieve all your financial goals with real estate. Problem is, it is hard to get started and if you can get started, getting it going is not easy. Let’s go over my first deal that would make most people quit real estate for good.
First off, I was looking for a “cheap” house. I was searching for months and I was losing my patience (mistake number 1) and bought the first house I saw that was under $100,000. It popped up on the MLS and I told my realtor to put in an offer before I go see it. She did, and it was accepted. Great! I still had opportunities to get out of the contract if I wanted to. I still had my inspection contingency and the finance contingency.
Here is where I went wrong: I bought the first house I could afford.
Sounds weird but it was not a smart move. I could afford the house, but the house was not a good deal. It was affordable but getting it rent ready and cash flowing would be another problem.
I visited the home and took a look around. Compared to other houses I was looking at, this looked in decent condition. Minus a couple of problem points I could see right away. (Dry rot is my new number 1 enemy. I’ll explain why later)
We schedule the home inspection and I went to that also. The inspector told me of some problems but nothing major. I read his report later and decided to reduce my offer. They accepted the lower offer.
Next mistake: I didn’t offer low enough.
I read somewhere that if you aren’t embarrassed by your offer, it’s too high. I wasn’t embarrassed at all. I should have lowered my offer much more.
We then moved into the appraisal phase which took a while since the appraiser couldn’t find comparable properties. My realtor was not happy the lender went with this particular appraiser since he had a reputation to go slow. Fast forward to at the closing, I sign the papers, and get the keys to my first rental house. Woo!
Here is where I went wrong again.
I bought this house with the intention to do the rehab work myself. Not all that bad in my opinion, I wanted to get the experience of working on a house without tearing apart my own house I live in. The problem was, I was inexperienced. Weird huh?
The rehab took a few months and I thought it IT SHOULDN’T BE THAT BAD. (more on this expensive and problematic phrase later) I did the work myself, and got the house rent ready in about 4 months working part time with no experience doing house construction.
Next mistake incoming! I didn’t leverage other people’s time and skill.
While it was part of my goal to do the work myself, it would have been much faster if I hired someone who knew what they were doing and it would have turned out so much better. There are things I remember doing that most people wouldn’t notice but it keeps me up at night thinking about it. Door trims can be hard to do if the door isn’t installed correctly. Also, if I had hired the professional contractor to look at the house during the inspection, he would have told me not to buy it. The house was a dry rot nightmare on the exterior. The amount of work to get it fully fixed would be too much for the house’s worth.
I believe the cost would have been more, but my main goal is to have other people do all the work for me so I don’t have to. I didn’t follow my goal.
So now the house it rent ready. Time to look for tenants. It SHOULDN’T BE THAT BAD.
I did some reading and decided to dive in by managing the house myself. (BIG mistake) Where I live, there is a huge shortage of affordable rentals. Which is why I got into real estate investing to solve that problem. I listed my house and I was bombarded with calls and emails. I should have known that was going to happen but I let my self doubt tell me, no one is going to rent this piece of the junk house.
I’m still working full time at my job and now, I have to stay later at work since we are short handed and it only leaves me a couple of hours a day to answer tenant inquiries. I’m getting emails saying they want to see the house, people putting in application requests and phone calls CONSTANTLY. I immediately got overwhelmed.
To make matters worse, the website I was using to track all these request locked my account! Apparently someone thought I was running a scam house that didn’t exist just to get application fees. So my account is locked with all my resources on it and I’m still getting bombarded with offers to see the house and I can’t get in contact with them.
I quickly pulled the plug on my listing. This is too much for me to handle.
Now, I’m looking at hiring a property manager. You know, something that aligns with my original goals?
So let’s recap. This is why I will forever call this the shouldn’t be that bad house.
First, I didn’t run the numbers correctly on it. I thought, it’s cheap the costs SHOULDN’T BE THAT BAD. My margin is getting thinner by the day. There are utilities that I knew I would have to pay and the mortgage itself was higher due to the nature of the loan for an investment house. I did manage to get a low enough price for rent to get interest but read on…
Second, I did the rehab work myself and ran into several problems that could have been avoided. (with the house and in my personal life) During the inspection I thought, IT SHOULDN’T BE THAT BAD I can do all that work myself! I had to replace doors and windows and I’ve never done either. In the end, the windows came out great, the doors are another story. If a professional had done it, it would have been faster and a much better finish.
Third, I forgot my goal of not being involved and got overwhelmed by tenant inquiries and now my house may have a reputation of being a fake house listing. Now I have to go with a property manager and my cash flow is getting smaller. I may not make much at all on this house but I will break even.
Here is what I should have done.
- Be patient during the house hunt! Find a good deal not a cheap house.
- Hire a professional to do the rehab work.
- Hire a property manager.
I said to myself the whole time I was buying the house. Oh, it shouldn’t be that bad I’ll figure it out. Now I know better. If I catch myself saying that, I’m reevaluating the deal. It can and will be “that bad”. Don’t let your self say that when getting into real estate. It will bite you really hard.
In the end, I’m not giving up on real estate. It is the path to my financial goals and while my first deal is pretty sour, I know the next one will be much better with the knowledge I have from my mistakes on this house.