They don’t know that the closing on one of the Jersey flips has been pushed back once and will probably be pushed back again, and that the carrying costs are straining our budget. Or that the other one went way over budget with the remodel and we’re having a hard time getting a decent offer.
They don’t realize that after eight years we’re still having the same problems finding reliable maintenance people – those who actually show up when they say they’re going to and perform quality work when they do. Why is this so hard? I already agreed to pay you $xxx for this job and you agreed to the price, so what gives?
Frustration is a big part of the reality of real estate investing. Successful investors have learned to work through it. My husband and I intend to be successful investors!
Two weeks ago, I began a blog series about The Reality of Rentals. I’ve posted Lessons 1 & 2, which we have learned the hard way through the School of Hard Knocks. Link to them here:
So you’re probably asking yourself the same question I’m asking myself as I write this:
Who the Hell am I to be giving anybody any kind of advice?
Here’s who I am: a pretty average Jane from the lower rungs of the economic ladder who has somehow managed to acquire a small real estate empire. I didn’t do it alone – my husband and I built it together out of a sheer desire for Something More out of life besides the insecurity of a paycheck-to-paycheck job. My husband has done the bulk of the work – he was the one who left the paycheck-to-paycheck workforce to do this full-time while I continued to work. Technically this is his business. But I’m the better writer. And he’s, um, kinda busy.
My co-worker at the radio station was right – I am just like the rest of the world in that I’m struggling, trying to make it, waking up every day thinking this is another chance to get it right. But I’m at it every day. My philosophy is that if I’m still breathing, if I woke up on the right side of the dirt, it’s not too late. For the last eight years my husband and I have been learning our lessons from the School of Hard Knocks. It is these lessons that I am passing on to you.
Lesson #3: You’re not Donald Trump. At least not yet.
This is a newbie mistake I’m hoping to help you avoid. Back in 2008 we were just getting started. It took us about a year after we made the decision to go for it that we acquired our first building, an operational , fully-rented six unit on Barney St in South Wilkes-Barre. We paid $140,000 for it – a pretty good price for a building like that. To the untrained eye – we’d never pay that much for it now! But even though we overpaid due to inexperience, the building still cash flowed, and we learned a lot about rentals managing and maintaining those six units and all those tenants.
The tenants truly put me through the paces. I had my first move-out not two months in, when the couple on the third floor had a bad break-up. A few months later one of the second floor tenants moved back to Puerto Rico, leaving her daughter in the apartment. Her daughter blasted reggeaton at high volume and paid her rent in small increments until she finally stopped paying at all and I had to evict her. We got through these crises and more, renovating the units after each tenant left allowing us to raise the rent and our cash flow. Yeah. We were moguls now!
Which is probably why we paid way too much for our next property.
Steve found this Grove St double-block on Craig’s List. Another investor had purchased the property for pennies, did a quick cosmetic flip, and rented both units out. A turn-key investment. I was excited – we were growing our empire! And with a double-block, the cash cow H. Roger Neal exemplified in his book about streetwise investing in rental properties!
Well, it wasn’t exactly the Neal ideal. He likes 3 bedroom side-by-side doubles. This one was cut up kind of weird. It was obviously a single house converted into a two-unit. Unit 1 was a two story, three bedroom, two bath. Unit 2 occupied the rear of the second floor and a third story that was obviously a converted attic. That unit has a really weird lay-out: You climb steps to a deck and there’s your entrance. You walk into the living room, and there’s also a bedroom and a bathroom on the first level. You go upstairs to the kitchen! And there are two bedrooms off the kitchen on the second level.
But both units were spacious, and fully rented! The numbers worked. Even at $75,000 it cash flowed nicely, better than Barney St because all utilities were separate. The bank must have thought it was an OK deal, they wrote us a mortgage. We deal mostly with small community banks (HNB in this case) and those banks don’t let you do bad deals. Besides, in 2008 before the crash everybody was overpaying for properties. Right?
That investor who flipped the house showed Steve & I around for our final walkthrough. I remember that day so vividly – it was a beautiful sunny day in mid-May. Steve was on his cell phone the whole time – we were in negotiations to buy a six unit on West River St from some California-based bank that had foreclosed. We thought we were a couple of hot shots. The investor who sold the place to us must have been laughing till he peed his pants after we left. The place still isn’t worth $75k. More like $64,500 based on our standard of 15% cash-on-cash return. But we still have it, it is fully rented, and it cash flows nicely.
A rental property is worth whatever some dipstick will pay for it. We were a couple of dipsticks in 2008! I’m happy to say we never overpaid for a property again. The next double-block we bought was the H. Roger Neal three bedroom side-by-side, and we got it for $15k from a family who inherited it from a deceased aunt and just didn’t want it. It required quite a bit of renovation, but today it’s a serious cash cow for us. Now that’s how you buy a property!
But we’re still not Donald Trump. Not yet.
Lesson #3 is a tough one to teach because it’s a tough one to learn. I have no regrets buying Barney St, even though we overpaid according to what we know now. I consider Barney St our membership dues into this exclusive club of rental real estate investors. It turned us from dreamers into doers. We did our due diligence with the knowledge we had at the time and came to the conclusion that Barney St was a good deal.
Grove St was a different story. I don’t think we looked into that as closely as we could have. A lot of that was inexperience – at that time we didn’t know what serious investors were really paying for properties like that, even when they were fixed up and rented. But we probably should have made an effort to find out. Even though it’s a good cash flowing property I kick myself a little for paying about $15,000 more than we should have. A quick search on Zillow’s public records page shows the investor who sold it to us paid just over $30k for it in November of 2007. He put maybe $10k of work into the place. Then we came along thinking we were Donald & Ivana and bought it for $75k six months later. Now that guy knew how to invest in real estate!
The takeaway from this is – don’t let a little success get you thinking you know it all. Always be in learning mode. Ask questions. Don’t be embarrassed. The real estate investment community is very welcoming, and you can always just lurk in the corner of your local REIA meeting and listen to everyone else talk until you feel comfortable. Investors Network NEPA meets the 2nd Wednesday of the month, 7pm in the backroom of the Iron Skillet, Petro Truck Stop, Rt 315 Dupont, PA.
The flip side of this lesson – don’t let failure derail your dream of financial freedom. Steve and I have experienced a lot of failure in our eight year journey. I went to a Buddhist meditation class at a Scranton art gallery a couple years ago, when I was fighting with a long-term tenant who had once been friendly with us. (She had mice and roaches in her place, we paid for an exterminator who told us the problem was her garbage bags in the kitchen and all the laundry on the basement floor. So I wrote a note asking her to correct the problem. Then it was war. ) The Buddhist monk advised me that my tenant was my Buddha. She was teaching me lessons I needed to learn about patience and compassion. Yes I wanted to smack him initially, but I can’t do that to a monk, so I stayed for the meditation and I realized he was right. Every bad tenant is a teacher. And when the flip fails to sell, there’s a lesson to be learned there, too.
Don’t waste time feeling sorry for yourself. Look for the lesson.