Experiences of a "Relatively" New R.E. Investor, Part One

I was fortunate enough to find BiggerPockets about a year ago, and it has opened my eyes tremendously in that short time.In fact, it’s a constant source of sadness that I didn’t have this resource ten years ago.  Nevertheless, after obsessively scouring information over the last year or so, I’ve finally decided to start the process of documenting my experiences as I journey down the path towards financial freedom.

If you are a fan of the BiggerPockets’ Podcasts, you know that many of the successful R.E. investors got their “push” from the book “Rich Dad, Poor Dad” by Robert Kiyosaki.I, too, was motivated by this inspiring book back in about 2003.  At the time, I was a freshly minted Second Lieutenant stationed at the Pentagon in Washington, D.C.  Though I was itching to start utilizing the lessons learned from the book recently finished, the market prices at the time were very prohibitive.  Combine that with the lure of taking advantage of the opportunity to enjoy the company of family, which happened to live about 20 minutes away, not accounting for traffic of course, from my office (i.e., living free…well, I gave them some money, but nothing near market rents).

I spent the next four years saving the extra income in the hopes of one day being able to purchase my first property.  The idea at the time was simply to purchase a place after each PCS (i.e, permanent change of station, essentially a forced military move to a new duty station).  I had the foresight to place those funds into both a Roth IRA and the government-sponsored 401k known as the Thrift Savings Plan.  If you can recall, from 2003 – 2007, the period I lived in D.C., if you were “in the market,” you could essentially do no wrong in both the stock market or real estate.  Everyone was a genius. So, though I “missed” out on the gains in real estate, I was able to capture quite a bit in index funds (I dabbled in individual stocks as well, but that is a story for another site).

From there, I moved on to Dayton, Ohio to pursue and Master's degree on the military's dime.  It would be an 18 month tour, and I would finally be able to purchase my first property!  It’s late 2007.  The market is beginning to show signs of stress.  Real Estate prices have fallen ~10%.  I’m thinking, “wow, I’m one lucky guy.  I am getting such a great deal on this new construction condo!”  Ugh, a condo?  Anyway, I purchased this property, a 2 bed, 2 bath, 1350 sqft condo for $115k.  I used conventional financing with a 30 year fixed loan at 6.12% after paying points (Hey, historically this was a great rate…).  It was structured as an 80-10-10, where the first loan is at 80% of the purchase price, the second loan is at 10% with PMI (private mortgage insurance), and it is followed with a 10% down payment.  This brought my payments for PITI (Loan Principal, Interest, Taxes, & Insurance) to $765/month on the first loan, $85/month on the second loan.  It also had condo fees at $160/month and homeowners association fees of $72/month.

So, to sum up this “deal”, I was in for $12k (at the time, I didn’t want to waste my VA loan, not knowing that you could take out multiple VA loans as long as you were below the threshold of about $415k), with payments totaling $1082/month.  I was in a great location!  As I'd read, "it's all about Location, Location, Location!"  I had that down, so the rest (appreciation, rents, etc.) would all magically fall into line.  Little did I know, rents for a similar property where going for about $750/month...  

Being in the military and having to move for the second time, I was essentially forced to use a property management (PM) company. Now I will say, I've had a pretty good experience with them. They tend to keep my unit occupied and don’t charge an arm and a leg to do repairs. But, adding on a 15% PM fee on top of a bleeding rental is torturous.

Here are the numbers:

- Purchase Price: $115k (I broke rule number one, you make money when you buy. I paid market value in a declining market. I’m still shaking my head.)

- Down payment: 12k

- Rent: $825/month (I allow pets)

- PM fee: $123

- MX: $82/month (10%)

- Vacancies: $82/month (10%...It’s actually been closer to 7% the last 5 years)

- Reserves: $41/month (5%...I probably can drop this due to this property being a condo. The condo/association fees generally will cover this)

- PITI (Loan Princial, Interest, Taxes, Insurance): $850/Month

- Condo/Association Fees: $232 (in the last four years, these fees have increased to 264 or 14%)

- Cash Flow: -$585 / Return on investment: Let’s not talk about this.  

And so it follows, this was the first mistake that I made in the real estate game.  This property continues to be a thorn in my side.  I know many of you are probably thinking, “sell, sell, sell”, but I like Brandon Turner's approach: just do twice as better next time.  Unfortunately, I still hadn’t found BiggerPockets during my next purchase….to the bane of my existence.  I have managed to do some things recently, again thanks to BP, to make the number presented look a little bit better.  Nevertheless, this is a terrible investment.  I even broke most of the Rich Dad, Poor Dad rules.  Luckily, as I travel down this exciting journey, the story starts to improve.  It's a slow, but steady process.

Thanks to all of you who took the time to read my first post.  Until next time, where I'll detail my second purchase in "Part Two", I bid you farewell!