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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Chett
Chett
10 years ago

Adam,

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.

Baker
Baker
10 years ago

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!

Mrs. Money
Mrs. Money
10 years ago

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

basicmoneytips
basicmoneytips
10 years ago

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.

Alexandra
Alexandra
10 years ago

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.

DreamChaser57
DreamChaser57
10 years ago

@#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.

Meg Flynn
Meg Flynn
10 years ago

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?

Tony
Tony
10 years ago

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.

morrison
morrison
10 years ago

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.

growingrich.net
growingrich.net
10 years ago

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.

Ouida Vincent
Ouida Vincent
10 years ago

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?

Shara
Shara
10 years ago

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.

Jill
Jill
10 years ago

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.

Darcy
Darcy
10 years ago

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.

LiveCheap.com
LiveCheap.com
10 years ago

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… Read more »

Nicole
Nicole
10 years ago

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

erika
erika
10 years ago

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… Read more »

Alexandria
Alexandria
10 years ago

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… Read more »

bethh
bethh
10 years ago

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.

Sharon
Sharon
10 years ago

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… Read more »

Erica Douglass
Erica Douglass
10 years ago

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!

-Erica

Shara
Shara
10 years ago

@ 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.

Dan
Dan
10 years ago

@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.… Read more »

Pat L
Pat L
10 years ago

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.

Maria (WAHM)
Maria (WAHM)
10 years ago

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.

Poultry in Motion
Poultry in Motion
10 years ago

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!

leslie
leslie
10 years ago

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…

Bret
Bret
10 years ago

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.

Budgets are the New Black
Budgets are the New Black
10 years ago

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!

honeybee
honeybee
10 years ago

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

(Just kidding, JD!)

Joe
Joe
10 years ago

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… Read more »

quinsy
quinsy
10 years ago

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… Read more »

LM@Wealth Steps
10 years ago

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… Read more »

Gomez
Gomez
10 years ago

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… Read more »

April C. Harris
April C. Harris
10 years ago

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.

david
david
10 years ago

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… Read more »

Michelle
Michelle
10 years ago

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

Tyler
Tyler
10 years ago

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.

Shae @ GoodFaithInvesting.com
Shae @ GoodFaithInvesting.com
10 years ago

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.

Mark Fradl
Mark Fradl
8 years ago

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

https://www.getrichslowly.org/how-my-real-estate-investing-adventure-came-to-an-end/

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