My first investment
Over the course of the last couple of years I have learned a tremendous amount right here on BP and I've realised that I haven't been particularly active on the forums. I guess that's partly because I don't feel I have a whole lot to offer, but having reflected on that idea a little bit, I decided I'd start contributing in whichever small ways I can in an effort to give back something to this online community to whom I owe so much.
With that in mind I thought I'd start off by telling the story of my first investment property and hopefully there's someone out there that gets a little inspiration in some way from this story and it helps them get going. Here goes...
At the end of 2013, after 2 years of reading everything I could get my hands on and spending lots of time studying the methods of successful investors, I finally felt I was ready to take the plunge. My journey started a lot earlier than that and I had worked extremely hard in the preceding 6 years to go from being deep in debt, unemployed, with no prospects, to having a stable income, close to zero debt and a sufficiently strong credit score to successfully apply for finance. But that's another story for another day.
I started my search by contacting a whole bunch of real estate agents - I would literally call to make appointments, dress up in business attire and go out to meet them, explaining who I am, what my plans are, what I'm looking for and how they fit into the picture. It was like running into a stone wall. Time after time I received good natured, well intended, slightly sarcastic answers that basically came down to the same thing: what you are looking for doesn't exist in the current market. What I was looking for was of course properties that I could purchase and rent for immediate positive cash flow. To be clear, my criteria were much more defined than that, so much so that more than one agent expressed their amusement that I had spent so much time defining that which "does not exist".
Fortunately I was well prepared for this, as I'd read a lot about people in various business ventures getting tons of "no's" before inevitably getting the "yes" that set the wheels in motion. I forced myself to remain positive and focus on the fact that every "no" brings me closer to the inevitable "yes". A slightly naive notion, I admit, but somehow it kept me going and ultimately I did get what I wanted.
To widen my search I also contacted private sellers and scoured the internet MLS sites. One morning, after looking at about 400 different listings on a national MLS, I came across a listing in a nearby town - a town which I had not spent much time searching in, because property prices are among the top 20 in the country in this particular location. It was a little bachelor apartment in a 30 unit complex, according to the add it was currently rented and the tenant was willing to stay on and the ad proudly proclaimed: "Rental covers monthly bond!" I contacted the agent, arranged a viewing and off I went.
At this point I must note, as this all took place in my home country, South Africa, in the interest of simplicity I will state all numbers in US$, with an exchange of 1 US$ = 10 ZAR, which is no longer near accurate (the Rand is a lot weaker now), but will hopefully give you a better sense of the deal.
The apartment was on offer for $ 32k and through my investigations I discovered it had been on the market for 6 months already, with the owner recently dropping the price from $ 35k. I saw this as an opportunity to negotiate an even lower price, as the owner seemed quite keen to sell, but at the same time I worried that I was missing something obvious (the usual beginner's nerves I guess). By chance I met the owner at the building during the viewing and in a short chat managed to find out that he was a property developer, he owned 3 units in the particular building and he was selling off all his rental units to focus purely on property development, which was his core business. I did a little detective work and it all checked out - the owner had sold 4 other units in various buildings during the past 12 months and from what I could discern he was left only with the 3 in this building. I also discovered that he'd previously had the unit under contract 3 times, with all 3 buyers pulling out at the last minute for unclear reasons. This I found alarming and I literally spent hours inspecting every possible lead to figure out what I was missing, as the deal looked to good to be true. To wit:
The current tenant was the manager of a nearby fast food store, the owner of which rented the unit and offered accommodation as a perk for his store manager. This arrangement had been in place for more than 4 years and there had never been a missed payment. The monthly rental was US$ 380 per month and monthly bond repayment would come to US$ 198 per month. I must note at this point that I was ultimately forced to put down a 25% deposit, due to being married to a non-SA citizen - the lender insisted on this due to some rather restrictive immigration laws in SA.
After a long, drawn out negotiation, including a friendly fall-out with the estate agent over some terms in the offer to purchase (ex. one line gave the agent full authorization to apply for an accept finance on my behalf in the event that I failed to secure the same myself - this was obviously totally unacceptable to me), I finally purchased the property for US$ 30, putting 25% (US$ 7,500) down and getting an interest rate of 8,0%. The interest probably seems exorbitant, but it was in fact quite the opposite, as prime interest at the time was 9,0%.
We closed in March 2014, by December last year we raised the rent to US$ 430 per month and after all expenses, including a marginal interest rate hike that took place late last year, the unit puts US$ 110 in my pocket every month. As an added bonus, the location of the unit is in one of the most desirable parts of the country and we've seen capital appreciation of 8% in the last calendar year.
In closing, I want to relate a little story on the pre-purchase inspection that taught me a valuable lesson. We (my wife and I) went into the apartment and we were totally underwhelmed - the apartment was small, which we already knew, but it appeared even smaller than it really was because of the way the tenant had cramped an unnecessary amount of furniture and decorations into the place. The apartment was structurally sound, which was confirmed by a close friend who's an architect, but the interior looked messy, unkept and generally not well maintained. The floor had the most awful carpet and I had to remind my wife to "fall in love with the numbers, not the property".
Long story short, while walking through I heard a slight creaking noise, found a small corner of carpet that wasn't well attached to the floor, lifted it to check what caused the noise and discovered pristine hardwood flooring under that awful carpet. It was a real light bulb moment that made us forget about the paintwork and general cleaning up the place needed and we realised the unit was probably well undervalued.
The lesson: don't judge a unit by it's immediate appearance, just the same way you don't judge the numbers at face value.
Well, that's a pretty long, drawn out and boring story, but that's my success story on how I got started in REI and I truly hope it inspires someone somewhere to take the plunge - it's definitely worth it!
Happy investing - Eugene