How I bought an 8-unit apartment building with no money down and walked away with $1000 cash at closing

How I bought an 8-unit apartment building with no money down and walked away with $1000 cash at closing

When I was 23, I bought an eight-unit apartment building with no money down. And I walked away with $1,000 cash at closing! Sounds pretty fancy, right? Wrong.

It was one of the dumbest real estate investing mistakes I've made in my young life.

I escaped without a scratch, but it was due to an over-sized dose of sweat, tears, and luck. None of it was due to savvy investing skills.

The Sound and the Fury

I was 23 years old and had just earned my real-estate license the previous year. My first couple of months were spent buying and selling a few upper-end units for individual homeowners. The commissions were decent, but as a new Realtor, my split with my company was high. To complicate the problem, I had financed my association, training, and union fees to get started. (This was before I had decided to cancel my credit cards.)

After several months, I began to work more in the booming foreclosure and short-sale markets that were plaguing central Indiana. Out-of-state lawyers, doctors, and other high-income earners (mostly from the West Coast) were swarming our local market.

They were buying up $30,000, $40,000, and $50,000 houses like they were toys — albeit over-priced, over-financed, and only half-functioning toys at best. With rents ranging from $400-$1000, they simply couldn't resist what their spreadsheets were telling them the return would be. They bought many of the homes sight unseen and used the first real-estate company that would sell to them.

We represented a lot of the banks that had no idea about the local market prices. They also didn't understand the current condition of their properties (even after we told them several times). Well over half the deals fell through. Either the banks were too unrealistic to negotiate, or a closing would be interrupted by the discovery of a mystery lien, a second mortgage no one knew about, or some other problem with the title that we didn't even know was possible!

It was harder work for lower commission, but there were hundreds upon hundreds of properties, which helped even out the paychecks from month to month. And I was learning a lot about how to avoid real estate investing mistakes.

Property Management Comes Calling

After most of the out-of-town investors closed on their new rentals, they began searching for a company to manage/rent them. After several dozen requests for an affordable and trustworthy property management company (and no clear-cut option), we decided to start offering the service ourselves.

I joined forces with a broker who spent his time focusing on acquiring more leads for buying/selling. I set about figuring out how to actively manage and rent the vacant units (which almost always needed repairs first).

Since many of our clients were repeat customers already, they were ecstatic to have the option of having their properties managed by us in-house. Within just six months or so we had over 125 units under management.

I was working countless hours and answering the most bizarre phone calls you can imagine at all hours of the night. Overall, though, we were turning a profit and looking for ways to scale our system over the next couple of quarters.

A Perfect Storm

As part of our networking and lead-generation work, we regularly attended private meetings where local brokers would pitch each other their current clients wants and needs. In one particular meeting, another broker was pitching one of his own properties for sale. It was two side-by-side four-plexes (eight units total) with each unit being one bedroom. It was in a low-income part of town, but he was only asking $125,000 for both properties.

“$125,000 for eight units?”, I thought. “There has to be a catch.”

There was. Seven of the eight units had tenants, but only three had any history of paying on time. Even after kicking out any non-paying tenants, each unit would need a couple thousand dollars of work to get anything decent in rent. In addition, there were four furnaces in total all of which were probably made in the 40s or 50s.

In other words, it was a project by anyone's terms. It would require some up-front repairs, several months of eviction filings, court visiting, and re-showing the units, but… “$125,000 for eight units!

If Only Someone Would Loan Me the Money…

I dug deeper and deeper into the numbers. I was already managing property, coordinating repairs, negotiating prices on materials, and renting units for dozens of other clients. It made sense that if I could get a loan, I could plug a property right into this current system I was running.

There was a big glaring issue, though. Neither my partner nor I was credit-worthy in any sense of the word. The chance of me getting approved for a mortgage was zilch (let alone a non-owner occupied, low-income commercial loan). With regret, I pushed the property to the back of my mind and continued about the process of building the management business.

At our next networking meeting, though, we caught wind of some additional news on the properties. The broker who owned them was in serious trouble on about a dozen different pieces of real estate. He owed $76,000 on both the buildings, which were financed through a popular investor/hard-money lender.

The private lender was getting scared that the investor would soon default (giving the lender a property he wanted nothing to do with). The owner was only looking to get out of the property, so he could focus his energy on his salvaging his other properties.

Without much thinking, we pulled the trigger.

A Bold Offer

We called up the private lender (an individual) who was currently financing the properties. Then we pitched him the idea of us taking over the loan and purchasing the property from the current desperate owner.

We offered to both sign onto the loan, giving the investor two names opposed to the one he currently had. Then showed how we would remedy the situation, evict all the tenants, and plug it into our management system.

Neither of us had a penny to our names, so we even had the guts to require that the private lender actually invest more money into the property. In order for us to take it over he'd have to loan us an additional $15,000 to replace the furnaces and repair two of the units after evictions.

It was a bold offer. We'd give nothing but a management plan and our signatures on a $91,000 private mortgage (at 12%) for eight units and a $16,000 cash loan. The lender must have known even more about the current owner's dire circumstances then we did because he took our offer. The current owner was happy to get out for what was owed, and within the week we sat down to close.

After the paperwork was signed on my first-ever real estate purchase I was handed a $1000 check (for prorated rents/deposits for the month). I gave nothing tangible, just my worthless signature, and walked to the bank to deposit the money.

“So this is how real estate works”, I gloated. “I could get used to this.”

I had no idea what was in store…

To be continued…

J.D.'s note: This is a glimpse into a world I've always wondered about. Though Kris keeps trying to dissuade me, I have a fascination with rental properties. I look forward to reading part two of this story. And although GRS is not about to become a real-estate blog, this Sunday's reader story is actually about how one of you folks decided to take the plunge by buying a rental property, so we're going to have a mini-theme here for a week or so…

More about...Investing, Home & Garden, Side Hustles

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others

98
Leave a Reply

avatar
newest oldest most voted
Rob
Rob

ow no, I hate a “To be continued…” just when things are getting interesting. Can’t wait to see how this continues…

Mrs. Money
Mrs. Money

Wow! That is crazy, Baker! It’s a life experience, though. 😉

Writers Coin
Writers Coin

Talk about a cliffhanger…when is part two going up?

yingying
yingying

Its nice to have rental properties as a source of passive income. ^_^
Very risky though if you have to borrow money. As much as possible I try to avoid debt.

honeybee
honeybee

Kris is right! But it is also a really important topic. I almost took a real estate class once in college (but dropped it), and one of the students was actually an artist — he said he was in the class because a lot of his artist friends make their regular income from real estate. It’s a fair game. But Kris is right, it’s really bad news a lot of the time! I had landlords (a husband and wife) last renting round who owned about 4 units around town; they were teachers who counted on it for a more steady… Read more »

TosaJen
TosaJen

Sitting at the edge of my seat. DH and I have 2 rental properties right now that have gone pretty well so far. We’re not profitable, but we’re not bleeding or dealing with deadbeats, either. DH is a member of the local landlord association, which provides some very interesting information, so we’re overcautious, if anything.

I can see a few clues of where Baker’s experiment is going to go off the rails, but I wait for the next installment. 🙂

Hannah
Hannah

I really enjoyed this guest post! Can’t wait for the next installment.

My boyfriend’s family thinks rental properties are THE way to make money on the side. I’m not convinced, so it’s good to read about others’ experiences.

HollyW
HollyW

I’m looking forward to the next post as this is an area I’m interested in. Not so much the landlord part, but perhaps buying condos during the building phase and selling once they’re built.

Lydia
Lydia

Real estate has always intrigued me, as well. I am looking forward to the next installment!

JKC
JKC

I expect that the comments will soon be filled with anecdotal stories about ‘Good Tenants vs. Bad Landlords’ with the occasional ‘Bad Tenants vs. Good Landlords’ thrown in from the other side. This is what people like to talk about when the subject of Rental Property comes up. I would like to suggest that although people like to relate the ‘horror stories’ first (because they make more interesting stories) – real estate can be a very good way to ‘get rich slowly’ – despite the recent volatile market, the fundamentals still hold. 1) It is a business. Don’t get involved… Read more »

Steven
Steven

I like this, since so many tout the virtues of property ownership and the ease that the money will roll in. It takes hard work to learn the ropes, and get to the point where it becomes second nature. Yes, years later, after much blood, sweat, and tears, it can pay off, but I don’t have the patience or discipline to wait that long.

That and making my taxes much more complicated.

David
David

I love the rental game. I learned by watching my parents that there is no short cuts though. You have to put at least 10% down, screen potential tenants hard and be consistent with everyone. If you give to one the others will find out. You also need to keep the maintenance current on it. Go to a lawyer or friend in the business for a contract its a must have item. Over all though it’s a wealth building machine if done right. I would never buy into the low income areas though because people just are not dependable with… Read more »

fantasma
fantasma

i can’t beleive you that! i can’t wait for part two! my parents were landlords….not fun!

Mike
Mike

“To be continued…”

I can’t wait!

Four Pillars
Four Pillars

To be continued…

Boo-urns…!

This post was more exciting than an episode of “24”. 🙂

Alexandra
Alexandra

Great story – I can’t wait to hear more. My husband and I have been in the real estate game for about 7 years now. We have had some properties make us a lot of money, and had one that lost us money (though not a lot, thankfully). It takes a lot of time and effort, and we ended up selling most of them because of changes in our job and life situation that required more time at home. We are still the owners of two tenanted homes, including our own (we have a basement renter). It’s really the tenants… Read more »

Little House
Little House

Can’t wait to hear the rest. At first read, it sounds like a good investment. But, based on your tone, I’m guessing that it doesn’t end good.

JS
JS

Looking forward to part two. After hearing how easy it is on commercials, I enjoy hearing the more realistic side of the story.

Leah
Leah

Looking forward to the next installment. I agree with JKC — you need to know your stuff. This is a business just like any other. My older brother owns 3 rental properties, and he makes just enough from them to pay his mortgages and put a little away for emergencies. He’s still glad he bought them, tho, as they’ll make profit eventually for him and don’t cost him anything (he has a management company, although he did manage them when he lived in the local area). On the other hand, my parents delved into renting their house with no prior… Read more »

jh
jh

If you just take the highlights of this it is a great lesson.

Business + Inexperience + Debt = Problem

Taylor
Taylor

I am with JKC, commenter #10. And I am willing to bet that this story comes out ahead – the price is good, and the author, though cash poor, has the knack for it. Rental property is the ultimate in get rich slowly techniques. I was surprised when I first found this blog that rental property wasn’t what it was about – the saying in real estate (apart from “location, location, location”) is “Don’t wait to buy real estate, buy real estate and wait”. And everything takes work. How much effort does it take for a person to get up… Read more »

Moneyblogga
Moneyblogga

I lived this same nightmare myself for three years: an apartment building in a low income neighborhood. The worst mistake one can make in real estate is to become emotionally vested with the people you think you are going to ‘help’. Let me tell you that there is a large swath of the low income community who does not want to be ‘helped’ and instead will continue their pattern of destroying anything good that may come their way. I already know where your story is going and how it ends. All I can say is that it will take you… Read more »

Shara
Shara

One fallacy about owning a rental unit is that it is a great “passive” investment. Unless you are going to immediately turn it over to a property manager it is a business, not an investment. You don’t buy a house like a stock and just wait for the dividends/rent to roll in. And if you ARE working with a management company there are ongoing costs and other pitfalls you have to be aware of or you could wind up in a deep hole. People who try to pitch the idea of being a landlord often tout the fact of leverage:… Read more »

dave
dave

so he just kicked out poor residents who were already having a hard time making rent payments??

sounds kind of mean… Just my $.02

BooHoo
BooHoo

Dave,

You’re right! He’s a meanie for throwing those poor people out!

How utterly heartless of him not to take care of them and cover their rent with his own money!!

What’s your address?
I’ll send them right over!

……crickets chirping………

Socialism is great until you run out of other peoples’ money
– Maggie Thatcher

leotta
leotta

Can’t wait to read part two! This has sooo lifted my spirits!

John Bardos - JetSetCitizen
John Bardos - JetSetCitizen

Great story Baker! I can’t wait to read the second part.

These kinds of real estate deals seem to be a US only phenomenon. It is much harder to assume mortgages in the rest of the world.

I am always amazed at what a free-for-all the American economy is. I guess that is why Silicon Valley is so successful. It is probably also why Wall Street is such a mess.

Nicole
Nicole

Ugh… we just rented our house for a year while we’re away and it was a nightmare, even though so far our tenants (who are paying less than our mortgage) and management company have been fine so far. We avoided a lot of nightmarish people along the way and I understand why we, as good tenants, were able to get a good deal on the place we’re currently renting. I would not want to deal with this hassle on any sort of long term basis. Not my favorite way to make “passive” income. I know someone has to do it,… Read more »

Matt
Matt

@Dave

I had to sound cruel and heartless, but it sounds like he was trying to start a business and not a charity. Should he have kept tenants who were having a hard time making payments that would help cover his loan and maintenance costs and help him make some money? Should low income renting be a non-profit?

David/Yourfinances101
David/Yourfinances101

Can’t wait for Part II.

However, I sense impending doom.

D. Harkins
D. Harkins

Great Post! I’ve just recently become aware of the investment potential of rental property, as well as the tax benefits if you take the time and effort to set-up a proper business. Please keep more posts like this coming and let’s all continue to explore the vast investment potential rental properties offer! Thanks!

mga
mga

Nice writing style. Can’t wait for the rest.

Shara
Shara

Hey dave, can I borrow some money? I won’t pay it back because things are really tight, but it would be mean for you to ask for it back when I’m so hard up. I mean I’m going to be evicted if you don’t give me money, so if I wind up on the street it’s all your fault for not paying my bills. That is the same logic as saying someone shouldn’t be evicted. They/you are insisting that the landlord pay their housing costs. It’s no different from asking anyone else to pay for their housing. If you want… Read more »

Nate
Nate

I bought my first house @ 22. I had 2 roommates who paid the mortgage, utilities and a monthly house cleaning service (literally – they wrote the checks every month in exchange for a small discount on the rent). I would say it was one of the best financial decisions I have ever made. I did NOT know the roommates before living together — but I screened 5 different potential roommates before finding the right pair. Oddly enough (I don’t know why), many of my friends made fun of me for this move (don’t know why). I am now married… Read more »

jd
jd

Real-Estate investing using leverage (borrowed money) is insanity. It would be like maxing out all your credit cards to buy shares of only one stock.
The only case where it makes sense is if the investment is a small part of your portfolio.
Buying a house as opposed to renting is different, since in that case, the move is to reduce the cost of having to live somewhere, i.e. with a small chance of turning the cost stream into a mediocre return.

Jim
Jim

Good story. I’m looking forward to the conclusion.

Seems like they took on way too much risk.

Rentals can be a good investment. But you don’t want to bite off more than you can chew and its risky. You really have to be aware that its more of a part time business than an investment.

Storch Money
Storch Money

I think the best advice for potential landlords is to really crunch the numbers and make sure you end up with positive monthly cash flow. Sure, you MIGHT profit handsomely upon sale because the rental property appreciated in value over time, but you might not. I say that as someone who owns rental property purchased pre-housing crash that is worth dramatically less than it was at the time of purchase.

Jim
Jim

JKC comment #10 makes very good points.

Jenzer
Jenzer

Shara (#23) wrote, “One fallacy about owning a rental unit is that it is a great ‘passive’ investment. Unless you are going to immediately turn it over to a property manager it is a business, not an investment.”

AMEN!

My husband owns a three-unit rental in a university town, and we do our own property management. Yes, it is a business and it is work — much less work than a 40-hour-a-week salaried job, but work nonetheless.

CB
CB

@dave, I don’t know details about evictions and what not, but it seems that they could be kicked out but then reapply imediately. yes you have to scrounge for a temporary place to live but they have to do that anyway. Sometimes it’s best to start with a clean slate.

E
E

@ Nate, my uncle did exactly that. He had 2 roommates for a while, then 1, then he got married, and eventually the 1 roommate moved out and he lived there with just his wife for a while. (they’ve since sold it and bought one they could raise kids in.) It seemed like a brilliant idea to me; cut the costs of home ownership without giving up any of the benefits. At least one of the roommates was previously and is still a good friend. My neighbor tried it, but she must have personality problems as she has gone through… Read more »

Shara
Shara

@ Jenzer

We decided to turn our rental over to a manager in large part because of the hours involved even more than the headache or even the work. There are many things that can only be taken care of during business hours. After taking a lot of vacation in order to show up in court repeatedly for a difficult eviction we decided it was worth a cut to allow us to concentrate on our primary jobs.

Adrian
Adrian

I believe that ANYONE pining to get into the real-estate business, or to simply enter the business world in general for that matter should read COMMENTARY #10.

It was excellently deailed and accurate, a very effective template to be utilized to gauge your risk, guide your desires and future endeavours.

Looking forward to part 2 Adam.

priscilla
priscilla

We want part 2!

Kenny
Kenny

My wife and I did our homework but we failed to adequately assess our emotional tolerance for being landlords. We bought a 4-plex in SE Portland 5 years ago and it was the worst experience of our lives. Luckily we got out in 2006 before the crash. You better have an extremely strong stomach to be a landlord. Hiring a good property manager was a life-saver. If you’re interested in getting into this I suggest you go down to the local courthouse and sit in on a morning of landlord/tenant trials. As I remember, they have a separate room for… Read more »

LiveCheap.com
LiveCheap.com

Adam, can’t wait for part 2. Real estate rentals are definitely not passive. The closest thing to passive is when you have a management firm handle things for you. We do this with a short term beach rental and its as easy as talking to the manager about once a year. Good cash flow but they take 30% off the top, but we would never be able to fill it at the rate that they do and it’s worth not having to deal with out of state people issues. We just did a Stocks vs. Real Estate on LiveCheap and… Read more »

Thad
Thad

@ 26 – John,

Depends on what part of the world you are talking about … in the UK, this is wide-spread and it is regular for people to declare bankruptcy because they are unable to pay the mortgage using the rent.

Evidently, it was starting to happen across the Channel in mainland Europe. Plus, don’t forget that this is what happened in Dubai and much earlier (a decade ago) in parts of Asia.

Cheers!

JKC
JKC

Thanks for all the props. I love your comments Kenny (#44) and I think LiveCheap (#45) is right on. I like to think that most days I am smiling, but I agree that nobody looks good when they are in landlord/tenant court. 🙁 When you do have the opportunity to take a real estate investor out to lunch, ask a few things like: “What do you like best about the job, what do you like least, and what is your ‘typical day’ like?” You will find that most people who have a small number of units spend very little time… Read more »

corey
corey

This is great…thank you for posting. It isn’t just about real estate. This is a great post about the emotional thought process we go through when making big financial decisions. I’m a a bit schizophrenic on this topic. I’m a real estate agent in California (and about to get my Oregon real estate license ahead of a move), yet I have no interest in home ownership myself. On the other hand, I’m very tempted to invest in rental income properties at some point. I think a good way to enter this arena is to maybe buy a triplex or fourplex… Read more »

Debtheaven
Debtheaven

This is a timely post for us. We live in France. It took us 18 months to get an eviction order for a tenant who stopped paying rent. (Insurance covered the rent, thankfully). She left before she was evicted and SMASHED THE PLACE TO BITS. A 33K reno later, we are still waiting for our insurance settlement after which we should be about 12K out of pocket, just for the reno. We should get the money next week (fingers crossed). It has been five months of stress and sleepless nights. But the apt has more than doubled in value since… Read more »

Debtheaven
Debtheaven

JKC

I think your posts are spot-on!

shares