I have teased in the past about my experiences with Real Estate Investing. This has played a large role in my financial life and seems to be the topic about which most readers send questions. This post is my attempt to give background and details of what led to my first real estate investment.
As a child, we rented our home and that is all that I knew. My first eye opening moment came when my older sister got married and began looking for her first home. Her and her husband found a modest 3-bedroom, 1-bathroom Ranch in a good neighborhood. The house had a nice yard and was perfect for their new family. However, what caught my attention were the financials. They were able to only put 3% down and their mortgage payments came to approximately $1500 per month. At the time I was living with my parents but several of my friends were renting apartments or renting homes with roommates. On average they were each paying between $500 and $800 per month. I quickly realized that if I were to buy a house and recruit two fiends to live with me, I could minimize or even eliminate my own housings costs. This idea seemed like a no-brainer and I quickly followed up the realization by doing… NOTHING. I simply acknowledged it as a smart idea but didn’t take action.
Fast forward a few years and I moved to the Midwest. I bought a home and did not consider getting roommates or house-hacking in any way. I bought the biggest house that I could afford and started on my path of “adulting.” However, I stayed engaged with our Realtor who helped us find our home. She was a real estate investor and I had shared with her my interest in this topic. I picked her brain at every opportunity and would often call her to take me to see potential investment properties. After many of these jaunts, I called her one day with a property to view. She quickly responded with a “NO.” I was shocked. I asked, “what do you mean, NO?” She said that she didn’t believe I was ever going to buy an investment property and that I simply enjoyed looking at them. This was a punch in the gut, and I had to analyze my behavior and realize that she was right. I was looking but not taking any action. I was over-analyzing ever potential deal to the point of analysis-paralysis.
With this realization in the back of my mind, I was visiting a friend’s parents in a nearby city. They lived on a quaint private road that led to a large lake. The houses were cute little bungalows. Their parents lived at the end of the street and on the way to their driveway, we encountered a small house with a for sale sign in the front yard. Our friend’s mom was involved in real estate and during conversation we quickly asked her thoughts on the house we passed. She gave us some background that the owner moved into assisted living and her two young sons stayed behind. They let bills get behind and eventually the bank foreclosed on the property. We had her make a few phone calls and we learned that the house had an asking price of $35,000. I looked at my friend and snorted at that price. At the time both he and I were driving cars that cost more than that amount. We sort of shrugged and said, “wanna be landlords?” We agreed to investigate it. We decided that I would handle the financing and I quickly called a friend who was a mortgage broker. The approval process moved very quickly, and we were all set to close on our first investment property. As the days leading up to the scheduled closing approached, I was chasing the bank to get us the final documentation and confirm that we were on track to close. This was a frustrating experience as their follow up was not what I was used to. Finally, the night before closing, I was panic-calling every contact I had at the bank. I finally connected with someone in underwriting and they flippantly informed me that the bank decided not to fund the transaction. This had never once come up in discussion that this was even a possibility, so I was completely caught off guard. When I pressed, I learned that the deal was so small that there was very limited upside for the bank, and they viewed the deal as being too risky for their tastes. This was a very large bank that I had done business with for several years, so this line of thinking came as a shock to me. (NOTE: What I did not know at the time was that this was in 2008 and the real estate market was in a severe bubble that was on the brink of popping.)
I had a decision to make. Do I back out of the deal and lose the money I had put down or do I figure out a way to push through? With my previous realtors’ words bouncing around my head, I decided to push through. I had a Home Equity Line of Credit on my home and decided to use that to purchase the rental property in full. I had to be careful since that line of credit was how I planned on funding the necessary repairs on the house as well. My quick calculations showed that I would be able to cover both, but just barely.
So, when the time came, I purchased the house for $25,000. We then worked very hard to get the property rehabbed and ready to rent out. As first-time real estate investors we may have over-improved a house that we projected as a rental but most of the repairs and improvements were necessary. The overall bill on repairs and improvements came to approximately $30,000. We had been carrying the house during the rehab period and incurred costs there as well but for the sake of easy math, I consider my all-in costs to be $55,000. At that point, I reengaged with a lender and we agreed to a mortgage of $55,000. This was well below market value and presented a situation where the bank no longer felt the property was a risk. Upon closing, we received all our initial funding back and were able to rent the property quickly for a monthly amount that paid the mortgage and other necessary costs while leaving just a little extra as a cushion.
I have now owned that property for over 10 years, and I have learned quite a few lessons. Based on this transaction, I have learned that I need to leave myself a larger cushion in my calculations. I did not account for vacancies and other normal costs that creep up on any property. The real estate market in that city has been stagnant during this time and the home’s value has decreased somewhat, limiting our options and exit strategies. It is regularly rented but there always seem to be things that pop up that skew the financials into negative territory. Another lesson learned is that I am not best suited to manage a rental property from a distance. This house is approximately 2 hours away from my home and this does not allow for fast reaction times when self-managing. I have since added a property manager for this property and that has further eroded the financials.
Overall, I would consider this investment as a negative. However, at the time, it stoked my interest in real estate investing so even though it was a bad experience, I did not allow it to sour me on the idea. The low investment cost also allowed me to make mistakes and learn lessons at a reduced cost. At present, this house is rented and running fairly smoothly. I would still love to unload this house and continue to watch the market closely to determine the right exit strategy. The main reason I would like to unload this is that I am at a point where I am trying to simplify my holdings and this property does not fit the overall investment strategy that I would like for my future.
As several readers has specifically asked for stories about my real estate investing, I am sure there will be many questions in response to this post. Feel free to leave them in the comments and I will do my best to get those answers to you.