How my real estate investing adventure came to an end
This is final article of a three-part series on how he stumbled into real estate investing at age 23. Be sure to read part one and part two.
In the second part of this series, I discussed two mistakes I made when jumping into real estate investing. Despite running a successful property management company and knowing how the business worked:
- I bought a negative cash flow property without an emergency fund
- I got emotionally involved
In the conclusion of this series, I want to share three additional mistakes I made, and give my final thoughts on my experience. Let’s jump right in.
Mistake #3: I had a short-term mentality
I had just purchased an 8-unit apartment building, the value of which would take several years to restore. Despite knowing this, I was operating as if I could solve all the issues in the first four weeks. But it simply wasn’t going to happen. In real-estate slang, I had just bought the quintessential “buy-and-hold” property, but was approaching it as an aggressive “flip“.
On paper, I knew it was a long-term game all along. I had even cited the 2012 Super Bowl (being held in Indy) as having potential to add value to the area when we were pitching our buying plan. Once I signed the dotted line, I allowed my excitement to take control and I tried to inject value into the property as fast as I could. That almost never results in a positive outcome.
In my rush to make my first real estate purchase into a record-setting success story, I was actually doing serious harm. This unrealistic mindset:
- caused me to rush decisions,
- increased the stress of minor setbacks, and
- encouraged more emotional attachment.
In hindsight, ensuring that I had a realistic mindset (on more than just paper) would have made a large, tangible difference. This was one of the few areas that I could have quickly corrected even after the purchase.
Mistake #4: I focused too much on price
As I outlined in part one, we had purchased 8 units for under $80,000. While only three tenants were paying, all units had occupants (meaning they were at least semi-livable). The price was so low, I couldn’t focus on anything else.
One of the main reasons for the low price was the neighborhood: It wasn’t just a low income area — it was one of the lowest income areas in the entire city. The units rented for an average of $450/month, which included all utilities.
Economically depressed neighborhoods bring plenty of unexpected issues for first-time real estate investors. I had factored in a higher vacancy rate and knew the average tenant would be more transient than normal. However, I hadn’t accounted for the emotional impact of dealing with issues like drug addictions or existing racial tensions.
I was especially naive of any racial issues. My race differed from the majority of my new tenants; I didn’t anticipate it, but this caused additional hurdles in many situations. As it turns out, you didn’t have to travel very far to find examples of racist landlords in the area. Whether I liked it or not, this was a real barrier that I had to work to break through.
Focusing too much on price also meant I skipped looking into problems with the paying tenants. One of the three paying tenants when we took over was named…Amber (at least that’s what we’ll call her here).
Amber had at least two, completely opposite personalities. The first was of a stereotypical southern belle. She’d greet me with a warm smile, invite me inside, and offer me something to drink or eat. She’d say things like, “I hope you have a Jesus day,” whenever I’d leave. The first three times we met, I assumed she was the best tenant of the whole building.
Unfortunately, Amber’s second personality was less friendly. It involved ranting, screaming, and at least three explicit words per sentence. She’d call and leave 17 voicemails within a hour, each one more incoherent than the last. At times it was so bizarre I felt like pinching myself to be sure I was conscious.
Despite annoying several of the other tenants and causing numerous problems for us, she paid her rent in full and on time. As I pointed out in part two of the series, our lack of emergency fund put us in a situation where kicking out any paying tenant was a very hard decision.
The final straw came one day when we were having a company install new furnaces in the building. Amber intentionally waited until the crew was almost done with the job and dialed the fire department. She claimed that the HVAC company was trying to kill her by piping gas straight into her apartment through the air ducts. As you would expect (and appreciate), the fire department takes any calls of gas leaks very seriously.
Within ten minutes, there were three fire trucks parked outside of the building. While examining Amber’s unit, she also took the liberty of informing the firemen that the HVAC crew had molested her cat. The biggest problem with her story was…she didn’t even have a cat.
While the fire department quickly realized the problem likely existed in Amber’s head, they weren’t taking any chances. It took almost 90 minutes to allow them to check every unit and for the HVAC company to demonstrate the condition of the new furnaces (which hadn’t been turned on yet). At the end of the day, the HVAC company had done everything 100% correct and there was no trace of even the slightest leak.
I left the property and drove straight to the courthouse to file the eviction. I had a long list of violations and tenant complaints against Amber and the on-time monthly payment was no longer worth the hassle. I had dealt with volatile tenants before, but nothing like what I had inherited in Amber!
Mistake #5: I should have partnered to eliminate my weaknesses
What I wanted to do was buy a property in decent physical condition with existing management issues. After all, management was (supposedly) what I was good at. However, I ended up buying a property with both management and physical issues.
While I had people that I trusted to do repairs and maintenance work, I had absolutely no experience in knowing what it would take to get certain jobs done. I was a relationships guy: I did a great job at acquiring clients, managing tenants, and finding dependable people to execute the repairs. What I couldn’t do was swing a hammer, let alone estimate what it would cost to replace the gutters.
And while I did have a partner, we had similar strengths and similar weaknesses. Looking back, we should have brought on an additional partner whose strength was in repairs and maintenance issues. This would have allowed us to focus on the management without distraction and would have lowered our need for money upfront.
An alternative solution would have been to partner with someone with deeper pockets who could properly fund our needs. It would have cost us more to outsource all the repairs (which we did anyway), but we could have made up the money by focusing more on our own strengths.
Concluding Thoughts
After a volatile year of management and countless hours of effort, I transferred the property for an amount that netted me around $10,000. To be fair, I had also made between $2,000-$4,000 throughout the year. But I’m actually terrified to think of what my hourly rate would be if I factored in the amount of time I spent researching, buying, managing, and eventually selling the units. All things considered, it could have turned out drastically worse. I consider myself very lucky.
Despite my turbulent experience, I’m not against real estate investing. In my experience (with both my own situation and many of my clients), most first-time investors rush into their purchases. My hope is not to discourage people from investing in real estate; instead, I hope that sharing my naive mistakes will help people evaluate whether they have the stability to invest and what type of property best fits their strengths and risk tolerance.
The property I bought was an amazing deal; I still believe that to be true. However, as you can tell from the series, I believe it was a terrible mistake on my part to purchase it. So if you take anything away from my experience, let it be this:
Real estate investing is subjective. A property or purchase can be a fantastic deal for one person and a horrible mistake for another. Crunching the numbers is essential, but you’ve got to take the steps to ensure it fits into your portfolio and life plans. Finally, keeping your emotions out of the process is going to be harder than you think. Prepare extra for this!
Despite everything, Courtney and I still plan to include real estate rentals in our long-term plans. It’ll be at least 5-10 years down the road for us. Once we’ve finished paying off debt and saved heavily for retirement and college, we’ll be ready for round two of real estate investing.
At the very least, we’ll have plenty of first-hand mistakes from which we can build!
J.D.’s note: Wow! As I mentioned when Adam started this series, I find myself drawn to real-estate investing. I have no experience with it, have no handyman skills, and have no spare time, but there’s just something about owning rentals that appeals to me. Unfortunately (or perhaps fortunately, depending on how you look at it), after Adam’s series on being a landlord, I don’t think Kris is ever going to let me own a rental!
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There are 58 comments to "How my real estate investing adventure came to an end".
Great story.
I like the lesson about how the property might have been a good investment for someone else.
Thanks for sharing this story – it’s been a very interesting read. I’d like to get into real estate investment someday and it’s definitely helped bring up some things to take into consideration before we take the plunge. Thanks!
Hello from a fellow naptown-er. Is there a better word for that? I’ve only been here a year. Very interesting series. My coworker has similar issues with her rental properties.
I loved these articles by Adam. They were a great mix of his personal story, with good information for anyone thinking about real estate ownership. Thanks for the relevant advice that I can learn from, without making the same mistakes myself.
We had rented our home out to a could that could afford the rent and more. They paid the rent on time, we were living in another state, once they moved out we sold the house “as is”, they had torn doors off the kitchen cabinets, the electrical panel out side, stained the new carpet broke windows, holes in the walls, etc. In our minds we sold the house in the condition we had rented it to the tenant not in the condition they left it. We did repairs before the house closed. The tenant took us to court wanting their deposit back because we had sold it as is. Luckily the judge threw decided in our favor, because we had spent the deposit and more repairing the damage. I do not want to deal in rentals again.
http://bit.ly/cKm3l9
The rental market is definitely a tricky thing. I have a rental, but I got into the biz in a completely different manner. After moving out of a previous home, I started renting it instead of selling. Like Adam, I have hit my share of difficult times with it, but it does seem to be working out. I do agree with him that one absolute key element is making sure that you have enough cash on hand to properly take care of things. I too have learned several things in my experiences, and hope to branch out and buy another rental property in a few years.
Seth @ Boy Meets Food #6 – Maybe you should submit an article about your rental experience to add a different perspective!
Adam and JD, I really enjoyed this series!
Wow – Adam, you’re story intrigues me, makes me wonder about real estate investing (in the way that you cant help checking out an accident scene). Great detail and useful advice here.
From my own experience owning rental property: for a very small investor (almost accidental, in my case), the stress of managing a rental property increases many times, the further away you are located from the property (I suppose if you can afford to use a management company, you may not have this problem). So, if you plan to invest in real estate, I would keep it local.
There is a sense that some sidelines (in your case real estate, in my case book writing) end up paying you less per hour than if you had just gotten a nice low-stress second job somewhere.
My feeling is that unless your first real-estate purchase is big enough to matter, or is part of a long-term plan to acquire many smaller properties and have an economy-of-scale benefit, the small (potential, not assured) profit isn’t worth the inevitable hassles.
Wow, thanks for sharing this, Adam!
While it’s always advisable to do due diligence, sometimes you just don’t know what you’re getting into until you’re in it. Reading about your experience can help the rest of us approach real estate investing a little less naively.
Wow! That is quite a story, and what an experience. I’m glad it turned out somewhat positive for you. I can imagine the owning real estate property in a depressed area would be really difficult, especially attracting good tenants. This has definitely broadened my ideas of what owning a rental property could be.
thanks again for sharing!
I think this story is a great example of how to not start investing in real estate!!! The author had mistaken a liability for an asset. I am not saying it is bad idea to get in the property rental business, but it is a bad idea to jump into any situation without considering most if not all of the factors that will affect your future. I have owned rental properties for 11 years and eventually my hard work will pay off by funding college for my two daughters and a comfortable retirement. To me, owning rental properties is a long term commitment. I look at the income from the rentals as my investment, not my living expenses, which are satisfied by my job as a mortgage lender. My properties do have a positive cash flow of around $1,200 per month, but the real payoff is when the mortgage will be satisfied in 9 more years. I know to some people 9 years may seem like an eternity, especially someone who takes on a 20 or 25 year mortgage, but if you are comitted to your future, then anything is within reach. Your future is farther than the end of your nose!!! If anyone out there thinks owning rental properties is a get rich quick deal, then I suggest that you give me half of your money, I will kick you in the butt, send you home wondering what happened, and then I would call it a day…
Awesome story, thanks so much for sharing Adam.
My husband and I have owned several rental units, and have had varying levels of success with them (we have definitely come out on top).
Our best experience has been with a three-unit rental that we bought cheaply, fixed up very quickly, and rented out. One of our tenants is just amazing and has taken on the responsibility of managing the place for us in exchange for slightly reduced rent and use of the garden and garage. We are making amazing money on this rental, and the value of the property has soared due to gentrification of the area.
Our worst experience was with a brand new place that had repeated problems with leaking, electrical problems and bug infestations, coupled with the neediest tenants in the world (they called us in because they couldn’t figure out how to flip a fuse). We ended up cutting our losses, selling the place and losing money on this one.
With each experience we have learned what works and what doesn’t, and have applied those lessons to the next place.
Getting into the rental business requires some knowledge, a good level head for numbers, a decent emergency fund, a lot of luck, and some b*lls. It is not for the faint of heart, but it can be very, very profitable.
I am glad to hear that Adam will consider Real Estate investing as part of his long term plans! I could not agree more with his ultimate conclusions. Partners who are strong where you are weak can save the day. Even after crunching the numbers and doing all due-diligence a property may not turn out as expected. There are situations, like the present economy, that are out of the control of the investor. Therefore any real estate investor has to have funds set aside in anticipation of higher collection losses due to increased vacancy rates or tenant non-payment. I believe it is of utmost importance for investors to pay off all consumer and short-term debt (any debt amortized over 10 years or less) before investing in their first property.
Just adding my thanks, Adam. I appreciate your willingness to detail your thought processes and mistakes. The intel is invaluable.
I already knew how this was going to turn out because Adam’s experience in a low income neighborhood with a problem tenant pool is/was exactly the same as mine. As a landlord, one goes in with all good intentions but sometimes the barriers are insurmountable. Take heart, Adam, it doesn’t sound as though you lost your shirt. Here, in California when the real estate market was at the peak of its craziness, I too bought an 8 unit building in a dangerous part of town with drug addicts/dealers and parolees comprising my tenant pool. I got caught up with investor friends who kept telling me to invest in property and I did not do my homework. I bought a building for around $700K – way, way, way overpriced thanks to the lending practices of the time and the fake ‘bubble’ said practices generated – and I poured $250K of my own money into it. CASH. I was an unprepared and uninformed idiot and I lost it all. Now, THAT hurts. If I ever get into real estate investment again – and I have been approached by a group of friends who are doing very well together in investing in beachside apartment property so I haven’t ruled it out completely despite my losses – it will be with these friends so that I can better spread my risk.
Thanks for the story. Detailing the lessons learned, not just narrating the facts was definitely value added. I’m interested in hearing more rental property owner stories.
Sometimes very important lessons are very costly. It sounds like you made a “soul investment” to get some important knowledge here, and it is important to know some things in this world deeply (even if you never draw on them for your work again). It makes more of a complete life, I think, to do these hard things. Hey… sometimes the best education is the hardest. 🙂
Awesome series…I thoroughly enjoyed it! These are some tough lessons, and I hope to never repeat them. Adam, you’re a brave man, and I hope you’re having better luck with whatever you’re doing currently.
“Have a Jesus day!” 🙂
Very interesting series. The lesson *I’ve* taken is, I wouldn’t consider owning rental property that I wouldn’t be willing to live in myself.
Some friends of ours are in that position: they own a couple of multi-unit rental properties. This turned out to be a very good thing when his income tanked (he’s a real estate agent) and her income tanked (she’s in the movie business on the post-production side) and they decided to sell their house and move into one of their rental units.
They did little better than break even on the house, but being able to move to a small apartment and have their immediate living costs covered by the income generated by the rest of the property really saved their bacon.
Now added #12 to my list of things to consider on real estate investment. Schizophrenics. I did not see that one coming after your initial post. As always Adam I love your transparency.
Great lesson learned from the series: One investment property could be a gem for someone, but nightmare for someone else. It’s very very true. And thank you for pointing that out so others won’t make the same mistake.
I am a landlord of 16 years, owning 3 residential and 2 commercial rentals and I haven’t had much trouble managing them. One residential is paid off. 2 are half paid off. Commerical buildings generates twice as much revenue than the cost. So they are doing great.
One rule I lived by for all these years: Buy what you know and know intimately. You have to know the area and type of residents in the area so well that you can just “feel it”… You need to know exactly what type of renters you are going to attract, how to interact with them, what their behavors are, rental prices in other buildings, etc.. Know everything!
Eeeek! Owning a home to rent out just sounds like too much can go wrong to me. I had a condo that I could have rented out, but I decided to sell it rather than deal with landlord-type things. I’m still not sure I made the right decision, but I think so.
That said, my stepson owns a house that he rents out, and he seems to be doing well.
These were spaced way too far apart. I found myself not caring too much how it ended, though I was really interested when I started reading a week or more ago.
I really enjoyed this series. Real estate investment is something that my husband and I have considered, but we are cautious.
I’m really glad that most of the commenters here got the message: real estate can be great for one person and awful for another.
When I finished this story, JDs note at the end really scared me. The idea isn’t to say how awful real estate is or scare people off, but to point out real world issues that CAN happen if you aren’t careful. My husband and I are on the path to investing in real estate, but we see it as a Get Rich Slowly plan. We are both working in jobs that will teach us how to manage properties and investments(I’m accounting, he’s storage management), as well as taking classes at the local college (intro to real estate law, basic building maintenance, some intro contracting classes) so we will be able to know enough to hire the right people to help us later.
We know real estate is not a simple investment, but a career choice (even if its only a side career), so we’re hopeful that in 5-10 years, our time/money investments will pay off.
I appreciate Baker sharing his story, and even his counter points to say that Real Estate is not bad for everyone, he just had a bad experience…but it would be nice to get some positive stories in on it. I am completely pleased with my family’s real estate investment and we bought two no money down properties that have worked out extremely well for 7 years going. I consider it to be a crucial part of my planned exodus from the corporate world. We have six units in a not-so-great area of the city that cashflow very well and have had 100% capacity except for one 45 day period where we had considered not renting out the unit above us and instead turning the two family home into a single for our family.
I’d like to write a counter-point story, or have somebody provide a counter-point story but it’s an awful lot to include in the comments here. I’d hate to think that your wife, JD, will shut the door on the idea of real estate investment based on the admitted mistakes that Baker made.
The only real scary part is the crazy tenant. You can’t control that off the bat until the tenant starts to show a pattern of “craziness.”
Looks like Kittyboarder had some real good experiences too.
Alexandra has had some mixed experiences. It really is situational and dependent on multiple variables.
Thanks for sharing, Baker. Good stuff.
– Charley
I liked the series and the spacing just fine, to give my two cents.
My father-in-law purchased, renovated, and ‘flipped’ houses for a living long before it was recently popular. He bought a small house with enough room on it to build a duplex on the same lot, and now has three income-generating rentals that will provide for him into retirement. But he has the skills to do most all the repairs needed.
My cousin and her husband, however, decided that rentals would be a good idea. They bought three duplexes: one in an okay part of town, the other two in a low income area. Their income on these is negative (they thought it was worth it to build equity). The husband spends all his spare time doing repairs on the not-so-great properties, and they seem to be perpetually chasing tenants who don’t pay. It’s emotionally very difficult because they realize they are trying to run a business, but it’s hard to evict people; they always have a convincing sob story. They recently put the properties up for sale with an asking price for more than $50K less than the purchase price (not to mention repairs, time and effort) and still can’t sell them.
I find myself agreeing with poster #24. This is a good and very useful series. But the first part left readers with an intentional suspense – and then the rest were spaced way too far apart.
By the time the 2nd part of it was posted, I almost felt resentful – coming to this site to see a continuation every day and not finding it. As the result, not only did my excitement about this story diminish – I also did not care for some of the other contributors in between.
I know it is silly to feel this way about something useful, but I have just discovered that I was not alone.
Great story Adam, thanks for sharing it.
“The units rented for an average of $450/month, which included all utilities.” The fact that ALL utilities are included in the rent is actually a very big deal which can be easy to overlook. Heat and electricity bills for 8 homes can add up to a LOT. Yet its easy to just get too focused on rent vs purchase price and overlook the impact of such expenses.
I love these blog posts… as a Realtor who started selling properties within one year of graduating from college, I have seen a lifetime of “real estate investing” stories(really, only 22 years of it, but it seems like a lifetime!)…many of them just the same as Adam’s. However, I have also had some really great stories from clients too… A really great client who had a goal of buying one little property per year, for 3 years, one for each of his children. When the kids got old enough for college, the property could either be sold to pay for college or kept for income to subsidize college! Great plan!
Another fun story was that of my former neighbors, well into their retirement, with 6 rental properties that had been purchased very early on in their 50+ years of marriage! The income properties had long been paid off, and had enabled these people to have an amazing retirement income with a tiny condo in Florida and a darling lake home in Michigan, all as a result of income property they had purchased and held on to!If anyone needs help or advice, don’t be afraid to email me! Love to share!!
Note to self: Real estate is not worth the risk.
I’ve though about doing this before. And perhaps one day my wife and I will. First, we need to get some student loans paid down and get a handle on our finances. (Not in major debt but we could do better by ourselves.)
At the end of college, I spent a semester working for a small remodeler who also owned several rental properties. The best piece of advice he gave me was not to go into it to make a profit. You won’t turn a profit for years possibly. But with some luck and some good tenents, eventually you can make some money. I remember at the time not understanding what he meant, however the more I read about it, the more it makes complete sense.
I like the idea of having some additional income in retirement by have paid off rentals with positive cash flow. And I like being able to provide tangible service to people looking for a place to live. I just have to remember that it is still a business and hope I don’t have tenents with multiple personalities.
Investing in real estate / becoming a land lord is often hyped as “THE” way to invest and create passive income.
I am not so convinced.
Stories like Adam’s and the comments above make it clear that there is nothing “passive” about being a landlord. No lounging in the hammock while the checks come flying in.
Also the economics are not all that great and highly speculative. I was recently offered a rental duplex. On the face – after mortgage, taxes, insurance etc. the property is cash flow positive but not greatly so. In the area I live, housing prices are still quite high, so something cash flow positive is very rare. But the IRR of the investment sucks. First off, the IRR declines, the longer you hold the property. I.e. holding it for 5 years is more lucrative than holding it for 30 years. Secondly, the IRR is HIGHLY dependent on rent inflation and property value appreciation. If the market stays flat for the next 5 years and I sell then, I make a piddly 1% a year. If the market grows 5% per year, I do slightly better than what I would hope to make in the stock market. Anywhere up from 5% growth gets exciting. But given all that is happening and continues to happen, do you believe in 5% real estate value growth? I sure don’t (not unless we get some real serious inflation). Thirdly, your IRR goes to hell in a hand-basket if you have any major expense in the 1st few years (new roof, furnace, etc?).
So in all, I am not convinced that real estate is such a great opportunity. It may or may not do as well as the stock market, and is a real pain to manage. If the couple who held on to the properties for 50 yrs in Poster 31’s story had invested in the stock market instead of real estate they would be living the high life just as well.
For me, real estate is time-consuming inflation hedge.
It sounds to me like you did all the hard work in getting a distressed property turned around, and then instead of reaping the rewards you bailed on it.
Now you’ve got me thinking that I should offer my services as a potential investment partner-slash-social worker! (sounds like your tenant may have had a psychotic or personality disorder, that can be very difficult to deal with without a LOT of training) What a relief that you came out of that one without losing it all.
Timing appears to be an indispensable and essential element of any investment strategy, with real estate or equities. Informed decisions are the best decisions. Great stuff, Adam, thanks for sharing!
I’m sorry to hear about your bad experience…but I am so glad I read it, because this helps me out to make sure I cover all my steps. I also picked up a book that has a real smart method for investors program. It’s a book called “The Best Real Estate Investing Method…Ever!” and it’s written by N. Xavier Arnold.
This book and your post is going to help me invest in a home and make a profit off it. I did with my first house, now I would like to take my earnings and keep investing. We put in about $10,000 into our current house, and they are selling in my area around $30,000 more than we bought it for. So i have made some…not a whole lot. I think they might go up next year so I’m going to wait and see. One next to me exactly like mine sold for about $1,000 more than I bought mine for…so now is not the time.
Jesus =/= adjective. Crazy and bad grammar to boot. Ay yay.
Looks like this was a big case of “lesson learned”.
Excellent post!
I find the people who talk up real estate investing with minimal or no real world experience have an idea of rents coming in and living easily off that income with little to no time investment. They’re also the ones who typically get screwed by making poor choices in properties, tenants, and over leveraging and then do nothing but trash it as an investment down the road.
Yet the few people I personally know who have made money in real estate, from good to wealthy, all put in plenty of effort in picking properties, picking tenants, managing the properties, and treating it like a business which needs to be grown for the long haul. So like any business you’re going to start or do on the side, you’ve got to put your time into it to get your value out of it.
Most of what I’m seeing in this story and the comments seems to reflect that. Sometimes dabblers get lucky, most times they don’t, those that work it like a business typically make something of value out of it.
@DreamChaser57 (#37):
“Timing appears to be an indispensable and essential element of any investment strategy, with real estate or equities.”
Huh?!? I didn’t get that from Adam’s story at all. And I certainly don’t agree with it. Trying to time the market is sheer gambling, and the odds are against you. I’m firmly against trying to time the equities markets, and I think the majority of educated and experienced investors here at GRS would agree.
JD, I loved this series, and I’d love to hear more “war stories” from people who’ve walked the talk. Though I agree with Taz that I found myself getting a little impatient for each successive chapter. Maybe spacing them a little closer together would be a bit more satisfying?
Great series, thanks JD and Adam!
I agree with posters #24 & #29. I also lost interest in the article because they were spaced WAY too far apart. By the time I was reading the third article, I couldn’t remember the details of the first one from a couple weeks back.
Thanks for making my day. I had a good laugh about the not having a cat part. What a nut job.
Adam,
Great conclusion and worth the wait. The part about Amber is worth the read alone!
Amber is the part of real estate that you never can model in your spreadsheet. There is no discount factor for what someone like her can do to you as you think about how the heck you are going to get rid of her or what she is going to do next every night before you go to sleep.
Great series and J.D. this is the kind of stuff that teaches people more about real estate than any lecture!
She didn’t even have a cat!!!
@ #31 Teresa:
Great stories shared Teresa!
It is so true this is a long haul kind of game… When the rent goes up and mortgage statys the same, eventually the property becomes income property. When everything is paid, the income can be very significant.
For anyone who thinks real estate is risky. It’s only risky when you try to do short term flip. Then, yes, I agree it’s very risky and certainly won’t work too well in today’s market…
I have held lots of different types of investments in my investing career, and am now early-retired, and reaping the joys of these investments. However, I will NEVER invest in real estate. Nothing has even given me such giant headaches as real estate. You are dealing with nutcases like “Amber” (I once had a seemingly nice young lady threaten me on the phone that she worked in a hospital and thus, “knew things to do to people”), dealing with town inspectors (arbitary, sometimes downright crooked), dealing with laws being changed right underneath you. No thank you! I had a bad experience early on, and then just a few years ago, was forced to take a piece of property and – voila – fiasco number two. Give me muni bonds, the stock market, foreign currencies, anything you want to throw at me. I have great fun with all of it. And it doesn’t matter to me a darn how much money someone else makes in real estate – I am talking personal experience, the best school in the world.
Currently rents are dropping in most markets, not increasing.
Relatively high unemployment worldwide means landlords will not be raising rents anytime soon.
Even in the commercial market tenants are demanding rent reductions.
How’s that cash-flow projection look when rental income drops 20%?
Leverage cuts both ways.
Fantastic series! Learning collectively from one another’s mistakes is one of my favourite things about GRS.
this is a marvelous post!!! educational! this post is a concrete substantiation from the common saying, “We learn from the mistakes of the others”…Indeed, I am learning a lot from yours…And, next time I plan on real estate investing, I shall take note of these things you posted. thanks again! Kudos!
I really enjoyed the series as well. As a landlord there are many ups and downs and you can definitely get sucked into the tenants stories. Again, for new tenants do a full background check. When you are stuck with tenants in a place you are buying it’s definitely difficult. My husband wants really badly to own a four-plex (or bigger) as well as what we have but I’m begging him to wait until our kids are older (ages 3, 2 and 1) because it’s a lot of freaking work. Once they are older and in school I could focus more on tenants. Four tenants are more then enough right now. We have one property in a good neighbourhood and one in a bad and the bad one definitely has some turn-over issues. You can claim that as a loss on your taxes but if you have properties and get any kind of tax return you should put that money on your mortgage to pay it down and then you should try not to refinance with money back because you can claim the interest only if you put it directly towards the property. Not on your own debt.
I’d love to read some tax stuff from landlords if possible. I find accountants have a tough time doing our taxes (our first year they only put half the loss on DH’s taxes and none on mine). I almost wish I could get audited and just have them deal with everything LOL I’m fairly sure it would be in our favour. But with accountants screwing everything up and me not knowing about taxes it’s the toughest part of being a landlord.
Also, just FYI for everyone, that $10,000 he made is taxable for Adam. Maybe he had enough loss from the tenants not paying but I wouldn’t bet on it. And I don’t suggest buggering with the numbers. You never want them to look too closely whereas I’ve done everything legally and would welcome an audit. Look, now I’ll get one 😉
Adam, Great article on the pitfalls of real estate investing. I totally agree when you say
“Crunching the numbers is essential, but you’ve got to take the steps to ensure it fits into your portfolio and life plans. Finally, keeping your emotions out of the process is going to be harder than you think”
After you revealed more of the numbers, I realized they dont really make sense.
You paid 76000 for the 8 unit building and they were renting for around 450 each including bills. If your monthly revenue is approx 3600, the gross yield is only a measly 4.7%. Im not sure what the terms of your loan were but im guessing it was abit harsh. Firstly the gross yield is terrible for a lowcost property, secondly how could you have made 2-4k cashflow given your private loan and all the additional repair costs. The article, although its a nice read falls abit short when you start analysing the numbers.
Wrong, check your math.
3600x 12 = $43,200
$43,200 / $76,000 = 56.8% gross yield. Not too shabby at all.
Great article..!!! Investment in real estate is good option for the monthly Income… Thanks…!!!
@Natasha #52
I understand where you’re coming from in wanting your husband to wait until your children are older; I’m actually too young to remember buy my parents were “part-time” (as in he at least had a full-time job) on-site property managers of large apartment complexes in a big city for the free rent (as opposed to doing like his brothers and just going ahead and buy houses and planning to stay up there like also his sister; he wanted to save his money to move back “home”) with my mom I believe doing most of the basic management. I just grew up hearing the stories of her having to “tote” me up and down the stairs having to deal with the units and people and how hard it was having to do all of that with a little one, fwiw. I have a friend who started doing something similar but not until her youngest was five and she tells amazing stories about the acumen he had even at that age and what a help he was; my parents put their toe back in, in a sense, when I was around 10 and I was definitely old enough then to help them, so just my 2 cents. 🙂
Damn, too bad you didn’t evict all those nonpaying tenants upfront and let them sucker you with weekly payment plans, as you stated it would’ve only taken you 2-3 months to evict them and you might have had a chance at holding on to that property and turning the cashflow positive. They played you for a fool! Oh well, I’m glad you got something out of it, and I’m glad you got out with your shirt at least 🙂