Diary of A New Real Estate Investor

The following is a true story written by one of my investor-clients about her experience as a new real estate investor. Moral of the story: Yes, real estate is rewarding and it comes with risks. If you act promptly, however, every problem has a solution and you’ll be better off in the long-run from having taken action.

WHERE DO I START?

I first thought about investing in rental property in 2004. My sister and her husband had been aggressively buying rental property in Virginia and I was inspired to give it try. After reading every book I could get my hands on, including Rich Dad Poor Dad, I was motivated but was still nervous about investing and did not know where to start. At that time, I didn’t have a lot of money saved up to fall back on. My brother-in-law finally said to me “Stop reading, and just do it!”

BUILD A TEAM AND FIND A PROPERTY

I decided to join TREIA and saw Tiffany Elder’s article which mentioned that she worked with new investors. I thought, “Maybe this is someone who is really willing to walk someone new through the process”. I was right. Using money that I obtained from the equity in my home, Tiffany guided me through the process of buying my first 2 properties. These were 2 side-by side-duplexes in Durham (4 rental units in total). I purchased each duplex for only $45,000; the properties were priced below their market value because the owner was a widow who had inherited the properties from her husband, and was overwhelmed with managing the tenants. At the time of my purchase, there was 1 tenant in each duplex, so I had 2 vacancies to fill.

THE CHALLENGES BEGIN

A week after I purchased the properties, 1 tenant moved out. This was Challenge #1. But, after obtaining a property manager and fixing up the properties a bit, I had 3 of the 4 units rented and was enjoying a nice monthly cash-flow. The rents totalled $1300 and my mortgage payment was only $876. I enjoyed this rental income for a few months. Challenge #2, the biggest challenge, occurred down the line when 2 of the tenants decided to move out at the same time. Ah, the joys of being a landlord…I couldn’t believe it; at the SAME TIME!!! While the units were empty, I had multiple break-ins. The cost of repairs ran steep, not to mention the fact that my monthly cash-flow took a nose dive. The properties were in an ‘OK’ area but new homes were being built and I thought the area was starting to get better. I put pressure on my property manager, but given the market, they struggled to find new tenants. Challenge #3 Finally, I suffered a break-in where the damage was extensive. This was during a time when the economy was just starting to tank, and multiple investors were facing break-ins where copper wiring and copper plumbing were stolen from the walls and plumbing fixtures. After the break-in the walls in my duplexes had huge holes in them and the electrical wiring was stolen. All of my HVAC units were vandalized. Appliances and bathroom fixtures were stolen. Altogether, it would have cost me over $30,000 to fix the units to a point where they could be occupied again. Upon calling my insurance company, I learned that they would only cover damage for 1 of the units because there was a tiny clause in my insurance policy that stated that if a building had been vacant for more than a certain amount of time, they would not be responsible for any damage or vandalism.

That was a huge lesson for me to read my insurance policies in detail from then on, and to make sure to purchase additional coverage during times of extended vacancy. Needless to say I was very disappointed. I am a busy professional and these constant problems were really becoming a hassle.

BUILDING A PORTFOLIO

Fortunately, several months prior to the vandalism, I’d spoken with Tiffany and she suggested that I refinance the properties to pull out money for other investments. Since I had purchased the properties at a great price, I was able to pull out just over $15,000 each. I used part of the money as a down-payment to purchase 2 additional properties in Virginia. I also had money available to invest in a group home that my family had decided to open. So, in the span of 18 months, I went from just reading about investing in real estate to owning/participating in 5 investment properties! And, all of this with minimal out of pocket investment! I was fortunate to learn the value of using the equity in my properties to fund subsequent investments, so long as I didn’t over-leverage them.

Given the challenges facing the original duplexes, the money that I took on out in the refinance provided a buffer to help me cover my costs during the vacancies. Due to the monthly drain and expensive repairs needed, I decided that I just wanted to unload the duplexes, but my timing was not the best based on the current state of the market. Mortgage insurance for rental properties had just disappeared and financing for investment properties was much more difficult to find. This limited the pool of potential buyers for my properties. Plus, I wanted an as-is sale, so I had to find someone who would be willing to buy the properties in their current vandalized condition.

I called Tiffany again and with her help was able to get a short sale approved on both properties. A short sale is when a lender allows a seller to sell a property for less than what is owed on the mortgage. Given the condition of the duplexes and the fact that the insurance company would not cover the loss, my mortgage company was willing to help. We sold both properties to the same buyer and closed on the same day. Although the process took some time, this was a miracle for me because, not only were we able to find a buyer who wanted to buy both properties, but we were able to negotiate a price that both the lender and buyer agreed to. I was able to walk away from both properties and only bring $1800 to the closing table, which was taken from money I had pulled from the properties in the refinance.

MAKING LEMONADE OUT OF LEMONS

In summary, at the end of the day, I walked away with 2 strong cashflow rental properties, a nice amount of money in savings, and an additional investment in a group home business. Not to mention the amount of savings that I gained during tax time. (Tax benefits for investment property owners are great!) Would I do it again? Absolutely! Even though there were challenges, having a solid team in place, making a few good decisions up front, and acting quickly when it counted most, provided a buffer. Plus, there were other benefits which led me to come of the situation with much more than I had when I started with the first investment. So, what is the moral of the story you ask? Yes, bad things can and will happen. Real estate involves some level of risk. But, in my experiences thus far, every problem has a solution and there are options available if you act fast. By leveraging my initial investment as a stepping stone into real estate, I still came out on top!