Lessons learned from rushing into real-estate investing

This is part two of a three-part series on how he stumbled into real estate investing at age 23. Be sure to read part one here.

When we last left off, I’d just walked away from my first real estate closing with an eight-unit apartment building and $1000 cash in my hand. I was riding high. Unfortunately, the reality of the situation hadn’t sunk in. Over the next year, my low-income, eight-unit apartment building was going to take me on the most wild roller coaster ride of my life.

Instead of providing a chronological list of events (which may be entertaining, but of little use), I want to share the mistakes I made and the biggest lessons I learned throughout the process. In this second installment, I’ll share the first two mistakes (of what could be dozens). Neither of these first took long for me to realize.

Mistake #1: I Bought a Negative Cash Flow Property Without an Emergency Fund

Yes, it was purchased at a great price. Yes, it did have an amazing amount of potential. But all the potential in the world didn’t change the facts:

  • 7 of the 8 units had people living there.
  • Only 3 of them were paying tenants.
  • I needed at least 5.5 tenants paying to break even.
  • All of the units, even the vacant one, needed repairs before they could be rented.

In theory, I knew all this before I bought the property. I had a detailed plan on how I would attack these issues quickly. I would file evictions the next day on those tenants that had gone months without paying. I would immediately hire people to get the vacant unit up to minimal renting standards.

In theory, it was all going to work perfectly. But then it came time to actually execute the plan.

Coordinating quotes for repairs took longer than expected. Eviction filing took money up front and the courts were running an extra week behind (4-5 weeks instead of 3-4 weeks). Tenants became optimistic about the management change and wanted to work out repayment plans.

In the first two weeks, a storm broke a large front window, and a back door was kicked in (probably by the tenant who lived there, although I had no proof). While insurance would eventually cover the window, both had to be fixed immediately, as it was winter and both were security concerns.

Repairs and maintenance were both accounted for in my number crunching, but the emergency fund that could smooth out an early spike in the averages was nowhere to be found. I didn’t have a penny to my name and the $1000 check at closing went much faster than anticipated. The lack of the emergency fund compounded into several other problems in those first few months.

Mistake #2: I Got Emotionally Involved

Back in part one of this story, I outlined my previous success in building up a property management business. With my client’s properties, I was cool and calculated. I treated management as a business. The property owners were clients. The tenants were…just tenants.

When I signed the dotted line on my own property, the idea was to simply plug it into our property management system. It was going to be “just another set of units.” We’d coordinate repairs, screen tenants, and handle issues in the same ways as we had set-up for our clients. I was incredibly naive.

Without an emergency fund, we needed money. Sure, we had plenty of clients who had also needed money at one time or another. It was my job to set expectations and to advise them on the best course of action. I sought to remove emotions from the equation and ensure that they didn’t make a rushed decision.

I was good at this part of my job and we made nearly no exceptions. If a client had a monetary circumstance where they had to make what we thought was a bad decision, they’d usually cease to be our client. It was that simple.

It’s amazing how quickly exceptions are made when you are the one that needs money.

It happened slowly at first. One tenant, whom seemed genuine, wanted to set up a payment plan to get back on track. It was a weekly payment plan, something we would have never agreed to with our normal clients (too much time commitment). We had two choices in our situation. First, we could head through evictions (2-5 weeks), coordinate repairs (1 week minimum), and re-rent (1-4 weeks minimum). Or alternatively, we could try to squeeze money out of the existing tenants.

The former was the smart, long-term, and business-oriented option. It was the only one we would have offered to our clients. I could have listed at least two dozen reasons why it was the best option. Of course, we chose the latter.

This ushered in a four-month period of various weekly payment plans with not just the one tenant, but with 3-4 other tenants as well. It did help bring in the immediate cash we needed, but we paid a hefty price. Juggling these weekly re-payment plans with tenants who had already proven they weren’t reliable:

  • Took additional time.
  • Added large amounts of stress.
  • Caused problems with repairs (easier to fix up a vacant unit).
  • Fostered a “but you made an exception with him” mentality among all of the tenants.
  • Lowered the value of the property (a fresh, consistent tenant would have increased value).

It was a horrible pattern, one that I knew far better than to fall into. I assumed there would be no emotional difference on how I would handle the property…and I was wrong.

These first two major mistakes arose in the first few weeks and months. We haven’t even touched on the issues that came up when we replaced three furnaces and four water heaters. Nor have we revisited the most bizarre moment of the entire year, which involved a split-personality tenant, no less than three fire trucks, and fraudulent accusations of animal cruelty.

For that, you’ll have to wait until next week!

J.D.’s note: Adam doesn’t realize it (because he’s a young pup), but this post makes a New Wave geek like me think of this Culture Club song…

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There are 40 comments to "Lessons learned from rushing into real-estate investing".

  1. Chett says 02 February 2010 at 05:15


    Your bi-weekly fragmented blips are interesting but are somewhat akin to your experience with tenants who wanted to pay weekly instead of monthly. The story works, but would be a lot more effective if you paid up in one installment. Just my opinion.

  2. Adam Baker says 02 February 2010 at 05:20

    Sorry, Chet!

    We had to make the decision on whether to run one 3500+ word post or break it into a small series. 🙂 Some people won’t take the time to read a post that large, but unfortunately some prefer it all in one spot!

    I will definitely note the input for next time, though. I appreciate it!

  3. Mrs. Money says 02 February 2010 at 05:27

    Adam, you know one thing: at least you have guts to do things like this! I give you lots of credit for that. 🙂

  4. basicmoneytips says 02 February 2010 at 05:39

    I agree, you have some guts.

    I must admit, I love watching the shows Flip This House and The Property Ladder. I would love to take a shot at doing something like this rather than my day job. So far I have not taken the leap.

    I think you really have to do your research on property before buying it. Know what things cost to fix, and know your market.

  5. DreamChaser57 says 02 February 2010 at 06:47

    @#4 (basicmoneytips) – why think of your job and real estate investing as mutually exclusive? you could do them both at the same time, you might feel more comfortable with the safety net of your job.

  6. Alexandra says 02 February 2010 at 06:48

    Adam, love the story – can’t wait for the finale. Your story is entertaining and provides great lessons to learn from. Thank-you.

    J.D. – wow you are a New Wave geek – you had to actually own that Culture Club tape to know that song, because it definitely wasn’t one of their hits.

  7. Meg Flynn says 02 February 2010 at 06:51

    I wish this had been around for my boss to read before she bought a multi-unit building and subsequently spent every. day. since then updating us all on the latest drama.! Valuable lessons learned, Adam. Has this experience changed the way you approach your clients?

  8. Tony says 02 February 2010 at 07:10

    More stories like this should be published so that people that have the naive concept that Real Estate is a “great investment” realize it requires lots of work and headaches.

  9. morrison says 02 February 2010 at 07:41

    Enjoyed the video of Boy George. He was the best part of this article. I don’t enjoy reading about stupidity. I’d prefer an article of someone who’s intelligent and then makes a mistake, corrects it and moves onward.

  10. growingrich.net says 02 February 2010 at 08:14

    Real state was seen as the safest investment in Spain a couple of years ago, now the prices are rapidly falling. I’ll wait about 6 months more and then, once the prices are at their absolutely bottom, I may invest.

  11. Ouida Vincent says 02 February 2010 at 08:26

    Adam, I understand, I have an 8 plex too and have made several mistakes in my investing career. This is a great post because it outlines exactly why people don’t survive the real estate game. My personal philosophy is that you have to “survive” your first property, learn from it and go on to acquire and trade into other properties to create wealth. We could trade war stories and mistakes are part of the game, but where is Adam Baker NOW. Is he still and investor?

  12. Shara says 02 February 2010 at 09:26

    Contrary to morrison I DO enjoy reading about stupidity as long as it’s with a lessons learned mentality of “Boy, was I stupid!” It’s nice to know likely mistakes before you make them yourself, and if it’s too late for that it’s nice to know that others are just as human. When I started with our rental I was like Baker. I wound up doing things I KNEW were bad moves, but when it’s you it can be a lot harder to see until later.

  13. Jill says 02 February 2010 at 09:46

    I also love reading about the mistakes of others — we all make them, and sometimes I can avoid a few from taking others’ experiences into account. I would love to see more stories of people’s real life experiences, especially with real estate, on the blog.

  14. Darcy says 02 February 2010 at 10:03

    This brings back bad memories of the culture of real estate investing in Baltimore and a hard money lender/seller who thankfully returned half our down payment money when we backed out on a deal that was beyond our capacity to deal with. Thanks for sharing, it makes me glad we took a different path.

  15. LiveCheap.com says 02 February 2010 at 10:07

    I’m beginning to think I should start breaking up my articles like this on LiveCheap with the cliffhangers! I totally understand the issue of having too long of an article and having people not read it and likely not having the entire thing written, but this one seems short for the middle act.

    I think the only fallacy of the argument is the grass is greener with new tenants logic. Not sure how long ago this was, but you have tons of risk in this economy with new tenants too. You can credit check them but likely where the property is isn’t going to be stellar renters. And people who had great history when times are good still stop paying their rent when they lose their job. Working with your tenants isn’t a bad idea but you need to keep them on a tight leash and be very clear that if they miss a workout payment, you move forward with eviction. Given that you had no emergency fund (the real problem as you identify it), you couldn’t afford to evict them and rehab the units. With the lost rental income and the work on each unit, I am sure you were looking at the need for at least $10,000.

    I like the fact that you realized you weren’t being tough enough and got emotionally involved.

    Looking forward to Part 3.

  16. Nicole says 02 February 2010 at 10:20

    I agree with previous posters– the first installment was a great length, but this one is a bit too short.

  17. erika says 02 February 2010 at 10:21

    On the wise advice of a former boss, my husband and I purchased a 2-unit rental property as our first home. This was a GREAT way to learn the ins and outs of being a landlord, while having a safety net because a) we were on-site and could easily deal with problems as they arose; b) we only had one tenant to worry about; and c) our mortgage was almost completely covered by the rental income. This meant we had enough money to handle renovations at first, and then to save for a down payment on a “real” house. A nice and easy baby step into the world of rental properties!

  18. Alexandria says 02 February 2010 at 10:39

    It’s funny to read this on the heels of the article, does it make sense to rent. LOL. As a renter, I find both extremes for landlord, ones who want everything including a DNA sample to get into their unit just to see it and others who don’t ask questions as long as you look decent and talk the talk. LOL. We are good people, have steady incomes, but we move every 2 years because of the military. We have 3 dogs, 2 small, 1 large. We learned early on to only talk to people who have an equitable interest in the transaction. Private landlords looked at us as salvation to their problems (our past landlords were military families as well, not able to afford a vacant house), and property management companies looked at us as a major liability, another pain in the neck to deal with because we don’t want to buy one of their homes. One of the articles on here about building a tenant resume was something we always did (and there were a few helpful hints in that article that we weren’t doing but do now!). We present printed copies of cancelled checks, we get a letter of recommendation from a current landlord, we bring copies of bank statements to show we have X amount of months of reserves of rent, copy of my husband’s order to prove we have a job in the area, and we often carry a copy of our own credit reports with us to a showing in case they ask questions and want to see something. We want to project a level of responsibility and professionalism that the property management company just turns up their nose at because we have 3 dogs. So while I like this article, I don’t necessarily advocate the extreme screening process many property management companies do because they often do screen out very good tenants.

  19. bethh says 02 February 2010 at 10:52

    I’m glad you broke this up into bits – I really can’t digest the long long long posts that are jammed full of information. And although some say this section seems short, I’m fine with it. So there you go, you’ve pleased at least some of the people this time 🙂

    OMG that video. OMG Boy George. OMG the 80s.

  20. Sharon says 02 February 2010 at 11:10

    It does make for an interesting story doesn’t it? I allowed a man to catch up what he owed me–after we went to court! He would have been out within the month. I reinforced the fact that he also had to start paying the next week, after that catch up payment or he would be out. Of course, he didn’t pay and he was furious that he had given me that money and was about to be put out again. I had false assault charges placed against me. I had to pay a lawyer to represent that in court. I had to go back to court with him again. And he still asked for an extra weekend to get his things out!
    Of course, after he finally left, we had to fix the entire place because he destroyed it when he left.
    It amazes me how some people think that you are the bad guy for expecting them to pay to live there.

  21. Erica Douglass says 02 February 2010 at 11:33

    Gah, I feel like I’m reading the blog equivalent of “24”. There’s a reason why I watch that show a season at a time instead of an episode at a time. 😉

    Enjoying the story…just don’t like the cliffhangers!


  22. Shara says 02 February 2010 at 11:39

    @ Sharon

    Amen. The warped logic some people use to make themselves the wounded party can simply astound. People who have never dealt with it sometimes think you’re making it up, or it’s a lone crazy person. But you learn a lot about human nature as a landlord. As I have said before, everyone wants to do the right thing, but it’s amazing how often ‘the right thing’ is exactly what they want to happen, and the logic they use to get there.

  23. Dan says 02 February 2010 at 11:42

    @18 (Alexandria):

    I’ve been a career renter, and truth be told, the worst landlords are the mom-and-pops. I’ve much, much preferred renting from property management companies than dealing with someone who does this stuff on the side.

    With one landlady, we actually got into a disagreement on whether or not the air conditioner was broken! (This was in the San Fernando Valley of Los Angeles, where AC is a necessity in the summer.) To bad for that landlady, I found out the property she had was zoned improperly (illegal addition) and therefore legally owed no rent whatsoever on that unit.

    That chapter from the “how not to be a landlord” book is an interesting read.

  24. Pat L says 02 February 2010 at 11:52

    I love the story like this since I could related my own experiences as a part-time landlord. I started out a few years ago and bought my first 2-family house. I lived in one unit and rented out the other unit. I have encountered all the newbie “mistakes”. Before I always listened to the sob stories from tenants and tended to believe them. I ended up with back-to-back evictions. Lesson learned.

    Emergency fund is absolutely critical for landlord business. Life is quite unpredictable.

    Keep on landlording Adam. Write more about your experience. Love to read things like this.

  25. Maria (WAHM) says 02 February 2010 at 12:01

    So good to read this series! We are landlords now, but will be much smarter about real estate investing the next time around, when we’re debt free.

  26. Poultry in Motion says 02 February 2010 at 12:11

    I really enjoy articles like this. I learn alot more when I hear about (or make) mistakes than anything else. I hate that the author had to go through this experience, but I have to admit, the recap is pretty funny and very informative. I can’t help but imagine what some of his tenants’ stories were 🙂

    I’m looking forward to reading more about the bipolar tenant.

    Great article!

  27. leslie says 02 February 2010 at 12:15

    From another New Wave Geek – thanks for the Culture Club link. I had totally forgotten about that song. Of course, now I have it stuck in my head.

    Enjoying this series of posts too…

  28. Bret says 02 February 2010 at 15:27

    Almost dove into real estate as you did, but realized I was underestimating the time it would require to manage the property. Decided to go the REIT route instead. Gives you the investment exposure to real estate, with more diversity (less risk) and none of the hassle. More specifically, an exchange traded fund, owning pieces of many REITS. I use VNQ.

  29. Budgets are the New Black says 02 February 2010 at 17:29

    You learned a lifetime-worth of financial lessons all at the ripe old age of 23! Wow, and I thought we had it bad stuck with this property of ours in Las Vegas… 😉 Can’t wait to read the next segment!

  30. honeybee says 02 February 2010 at 19:58

    I think the Culture Club song just soured everyone on the article. Don’t worry about it 🙂

    (Just kidding, JD!)

  31. Joe says 02 February 2010 at 22:20

    Excellent article and discussion.

    I agree that real estate investments should be carefully weighed and evaluated, just like any other investment. Investors need to take the time to perform their own due diligence, and whole-heartedly understand the risks involved. I look forward to seeing the grand finale of your story.

    @Bret regarding REIT’s:

    On the surface, I agree that REITs or REIT ETF’s may sound like an attractive alternative to a single multi-unit dwelling. REIT’s may appear to have “less risk” by offering risk-hedging & diversification in exchange for a favorable return.

    But, this is not always the case. Just like any other investment, you need to take the time to meticulously dig through the provisions of the REIT (including the management fees and other conditions) to make sure that it meets your risk tolerance levels, and to determine if it will earn you a return commensurate with its risk compared to other investment alternatives.

    For example: is it better to own a an REIT whose investment is broad-based (including “investment” properties in highly volatile markets like Phoenix, Vegas, Miami, etc), or is it better to own a small niche building in an area like Central Austin near UT campus that has higher rent stability due to a comparative lack of real estate supply and consistent demand from undergraduates in the West Campus area? (Even weighing in the cost of hiring a management company to handle the investment, maintenance, and rent collection…)

    It depends on the investor. There are too many factors to make a apples-to-apples comparison of REIT vs a rental building in one city, of which are an individual’s appetite for risk and one’s required rate of return.

    Our team works with real estate investors on a regular basis in the Austin, TX area. We have always made sure that our clients understand the risks associated with their decisions, even before the recent real estate turmoil.

    Just my $.02. Good luck everyone.

  32. quinsy says 02 February 2010 at 22:27

    When I was in graduate school, I was able to own a townhouse because my parents helped me buy it in this low cost of living area in the country.

    I thought I could rent it out rather informally because I knew all the people renting it personally, and they were other grad students. I was naive and didn’t realize that one of the three had credit problems and was going bankrupt. I didn’t even get a deposit from them, or have them sign a rental agreement. When the one with the financial problems moved out, her final rent check bounced and I got charged a fee, she had not paid the rent for the last month, or her share of the utility bills. She left a whole bunch of stuff that I had to clean up, though at least I was able to sell some of it on Craigslist. She didn’t answer the phone or emails, and had moved far away. I finally had to use an internet service to send her notice that I was going to send the amount to collections if she did not pay and it would ruin her credit report (which was not true, actually, but such fake letters can be purchased on the internet for about $20, much cheaper than actually taking real action).

    That got her attention, she called and gave me a sob story about how she just hadn’t had the time or money to get back to me (even though I was in school living on loans, and she had a highly paying job!). So that is my little cautionary tale about how to deal with renters when you don’t have a good rental agreement or a collections agency at your disposal. And a reminder that even supposedly solid renters like graduate students may cause problems.

  33. LM@Wealth Steps says 03 February 2010 at 04:07

    I am thankful for this story because it corroborates what I thought about multi-unit investment property.

    I have been a landlord for 2 years and have honestly enjoyed the experience. The difference is I got started with a foreclosure property which I bought at a good price and was $200 per month cashflow positive from the start. But it was a single family home and I think that was more forgiving in terms of learning curve.

    The multi-units can be more lucrative but as we can see from the story also require to be run like a business. And like any business it requires capital. Of course that is easy to see now in hindsight from your story but at least we can learn from you.

    I would really hate for this series to be used to put a negative spin on real estate investing…

  34. Gomez says 03 February 2010 at 11:58

    Everyone posting a response needs to remember that this is a newbie investment property owner and he got caught up in the promise of no money out of pocket and walking away with $1,000 at close. I think this led him to not focus of the long term goals and expenses of investing in real estate. Does anyone remember that “too good to be true”. actually means what it says. If you do any investing in anything and you do not exercise due dilligance you will end up getting burned. There are plenty of people out there that will gladly dump a property on you if you are willing to sign on the dotted line…

  35. April C. Harris says 03 February 2010 at 15:49

    In real estate every stat is needed to endeavor the analytical reasonings. Never invest in a field you have little expertise on because the outcome will be far much worst and lost time isn’t re-negotiated.

  36. david says 04 February 2010 at 05:55

    RE: deadbeat tenants. Here in Australia, I heard landlords rave when our welfare department (Centrelink) provided an easy facility for a percentage of welfare payments to be made directly into the account of someone other than the recipient- in most cases, this meant that welfare recipients had their rent paid into their landlord’s accounts before they even saw the money.
    Bad debts to many community housing providers pretty much disappeared overnight- no more chasing rent, no more excuses, no more temptation by the tenants to spend rent money on other things.They could opt out at any time, but that clearly showed the landlord that the tenants were acting in bad faith.
    Does anyone else have experience of this sort of thing? It seems like a win- win for tenants and landlords.

  37. Michelle says 04 February 2010 at 08:42

    Please label the next installment part 3.. I almost missed this one.

  38. Tyler says 07 February 2010 at 12:14

    As you stated, small multifamily real estate investments in low income real estate markets are often very challenging and only advisable to the seasoned real estate investor. These investments inherently have many obstacles to overcome: reputation and creating an environment of respectable neighbors not to mention the huge turnover, maintenance, bad debt, and vacancy costs… Many see that cheap price per unit cost compared to their normal investments and jump without researching what a real value is.

    Great article.

  39. Shae @ GoodFaithInvesting.com says 08 February 2010 at 08:49

    This is a great post – thanks for sharing your experiences! I have only purchased single family residences as rental properties so far, but I can tell you that having reserves for emergencies, vacancies, etc. is one of the most important yet still overlooked needs with new investors. I’ll look forward to the next article.

  40. Mark Fradl says 12 April 2012 at 19:51

    Really? You chop a short article into weekly installments AND don’t bother to link from one part to the next? no wonder no one has commented/read this thing since it was first published.

    A pity, because it’s a great article – oh, for anyone looking, here’s Part 3


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