Trying to buy my first income property
My partner and I have been talking about becoming landlords for well over a year now. It was always sort of an “idea” in the back of our minds but then sometime in April we became really serious about it. We started listening the BP, Landlord University, and even read Rich Dad, Poor Dad (omg.) He has worked two jobs for almost 6 months now, and I briefly picked up a second job until we felt ready. We have saved up 15k so far, and have started putting in offers. I am beginning to wonder if we are not ready, despite what feels like (to us) an enormous savings. Or am I just overanalyzing?
I have walked away on two properties so far.
The first property was a single family home with a basement apartment about 10 mins from where we live now. Our goal was to move into the bottom unit and rent out the top, which was currently occupied by a severely handicapped Section 8 tenant. There was a tenant in the bottom unit but they were behind on their utilities and on a month to month, so it made sense for us to move into that unit. The offer on the place was accepted at 140k, which would have put our mortgage at 850 a month, meaning we would be living very cheaply with the Section 8 tenant covering most of the mortgage payment. Upon inspection, however, we noticed a crack in the drywall upstairs and in the basement, during the conversion to a duplex, the plumbers had chopped through THREE floor joists, which was causing the building to sag ever so slightly (and the cracks). The basement did not have egress windows. There was no ventilation in the entire downstairs kitchen. It was basically a disaster waiting to happen, and we were no longer comfortable living downstairs. Since the other option would force a handicapped woman to find a home capable of suiting her needs, I felt we had to walk away from this home. It pained me and I had to take a personal day after the decision to walk away, but that property was not for me.
There was a lot of weirdness that went down during our inspection that has left a sour taste in my mouth. For some reason, the listing agent was at the inspection to let us into the downstairs unit. He had an appointment that forced us to rush the inspection, though my inspector did not make it seem as though it were a problem. My partner was in the downstairs for a brief time and noticed the floor joists (in the laundry room) and tried to point it out to me. I didn’t really understand so I figured the inspector would (oops). He did not find any structural damage, and after the inspection told me the house looked pretty solid as far as he could tell. After getting home and learning more about the floor joist thing on YouTube, I could not sleep. There was a pretty significant repair that may have actually been impossible that needed done on that house. I called the inspector and had them return to the home. I brought my dad’s friend, a contractor that has worked on homes his entire life along this time. Before we got there he was talking about the electrical panel and how most homes in that area in that year were built with a Union Pacific electrical panel that infamously would start fires. No problem cause my inspection report said I had an ITE electrical panel. When we got out of the car the inspector start talking about how a bunch of his stuff “didn’t save” and “this was a weird one.” I was kind of not buying it since I had to call him back but we proceeded to find the above mentioned damages, and then the electrical panel was in fact a Union Pacific and I terminated the contract. I never received a finalized report from the inspector and got a call about selling my inspection half price to the next buyer but was forced to refuse. I spoke to the owner about getting my money back for what I thought was a bogus inspection. He refused. I considered taking them to small claims court but decided it was better to take it as a very valuable learning experience and move on.
I have not yet found an inspector I can trust other than my partner and my dad’s friend. (Any recommendations are greatly appreciated in the Colorado Springs and Pueblo area.)
This was about the 10th 2-unit property that we had looked at in our price range that had major structural damage. I should have guessed this property would have as well. We are currently living in an apartment on a yearly lease that is supposed to renew Aug 1. While we were under contract, we were right on track to move out in line with this deadline, but after walking away, decided that were would probably not find one in our price range that did not need significant work. We decided that renewing our lease is probably the smartest option because a month to month is $100 more per month. Plus one more year would make us in this unit for 3 years making it tougher for the landlord to come after us for the normal wear and tear of the apartment (not actually sure if that’s true, but as a soon-to-be landlord I plan to leave this place slightly better than I found it anyway).
We decided after that near-burn to begin looking in Pueblo, about 50 mins from where we live now. We both have jobs that would potentially allow us to transfer to this area if we decided to move there later on. We started looking at single family rentals in the 50k range. Pueblo is known as… pretty much the toilet of Colorado to all non-Puebloians. We were pretty aware of that fact going in. However, Pueblo is also in the middle of a massive revitalization movement, and is paying certain commercial landlords to reface their properties in an Urban Development Project. We are primarily interested in Buy-and-Hold investing and the areas we were looking in have an estimated 37% percentage of households that rent, meaning that there is a pretty heavy supply of renters. There is also a pretty heavy crime rate, and we looked at 9 tenant occupied units, all nine of which had pit bulls (no lie). That is not to say that all nine tenants were bad people. Call me an idealist, but I kind of think the opposite usually true. I think the section 8, single mom of three kinds has a giant dog not because she’s a gang-banger, but for protection (though I really have no idea). I am only 22 years old. There is something in me telling me this is where I should be looking, because I have the time to see it come to fruition (maybe). I have not committed yet, but am remaining open-minded.
I currently work for a credit union and have learned a lot of credit worthiness as well as tenant screening/neighborhood renewal from all the podcasts. We have also learned a lot about the 3% rule, the 50% rule, and cap rate. After walking away on the first house, I had already learned a lot about section 8, and rental property insurance.
After running the numbers on all nine properties, came up with 9 really low-ball offers in an already pretty low market. All nine were listed at 50k, but varied in their bed/bath numbers. The house that had the lease work we determined would make sense at about 24k. Similar houses were selling for 26k so we wanted to offer 19. They would not take less than 40. PSHHHHHH okay. Next house was supposedly rented for $850 a month and was a 3:1:1. Our math told us 40 would actually cash flow and they accepted. The rent turned out to be $750 instead of $850. We were running numbers to cash flow $100 a month so this literally took all the profit away. After the listing agent explained what cap rate was to me as if I did not understand, I terminated and resubmitted for 35, fully intending for them to refuse, which they did. However, that was what the math told us to offer. I am a real estate investor. Cap Rate is only one factor.
Two houses. Terminated.
Trying not to feel like I’m flighty cause I’m actually the opposite. I do not want to buy a crap deal and will do my due diligence. Am I looking too much into it?
The next house we are looking at is actually two units in Pueblo that we are not going to move into. After all my experience up to now, this is the current scenario I am faced with, and I’m just as willing to walk away and wait for the next one if I need to. I am also just as willing to do what it takes if this deal makes sense.
There are two units listed for 47k. I have called and spoken to a property manager in the area that told me she felt as is the units should be renting for about $950 together. The listing makes this home seem awesome.
It has been on the market 275 days and we cannot get in to see it. The seller apparently really wants to sell. We tried two weekends in a row and were unsuccessful. The second time the listing agent told us to go knock on the door to see if the tenant answers. Apparently she does not want to move. We could hear her talking just inside the window and she got quiet and refused to answer when we knocked. By the décor and sound of her voice, it is an older woman. There was not a key to the back unit and after the awkward non-exchange we decided not to creep into the back yard to get to the other unit. After driving through the back alley, the back unit has been tagged and needs a paint job, as well as security lighting and maybe a spray-paint-resistant coating? We planned to install a security system into the units we buy in Pueblo in our cash flow analysis.
I typed a letter for the seller asking for verification of rent and information about the utilities of each unit before I will submit an offer. Since we were not able to get into the units, I hoped he would be willing to cooperate in other ways. After the misinformation from the last agent(s), I was not prepared to believe any verbal information about the property. Since we could not get into see the home I was hoping this “very motivated seller” would be willing to cooperate. I submitted this request Saturday and we have not heard from either the listing agent or the seller (48 hours). I am not ready to make a decision, but I am also not going to just wait around on a house that is sketchy to begin with.
Should I move on to negotiating with another seller or give him more time? Should I wait a year and try to repair structural damage and buy in Colorado Springs, or deal with potentially bad tenants and a better cash flow in Pueblo?
I’m trying to learn how to be patient… while not just expecting things to fall into my lap. With experience this will get easier, but for now, I’m still having a ton of fun… I just hope I can actually make money. J
I <3 BP