Johnny Utah asked me in a couple of other thread how I got started in RE investing, and I love talking about myself so here is a short (or short for me, you know I'm long winded) version.
I was living in the SF Bay Area for about 1 1/2 years when a job opportunity came up in Houston, TX. Unfortunately I had to be there about a month before the Proposition 13 election in California. Since no one would buy my house I kept it as a rental. I would not have done this if my brother, who owned a couple of rentals at the time, hadn't lived two miles from my house and offered to look after it for me. That became my big cash cow, from '78 to '01, when I did a 1031 exchange for 3 places in the Highland Lakes region of Texas.
A couple of moves later I had two rentals in Houston that (barely) cash flowed, but we had red hot housing inflation. Then the price of oil dropped from about $70/BBL to about $3/BBL and housing prices and wages in Houston and other oil patch states dropped like a rock. The average house in Houston lost 50% of it's value between '83 and '87.
I managed to "zero out" on both of my Houston places and the Calfornia unit kept cooking along. About 1988 I started buying again, first a new house for us, then the banker that financed us told us about an REO by the same builder and he let us into it for about $200, with an 8%, 30 year fixed loan at a time that rates were about 10 1/2%. Then we started bidding on HUD and VA foreclosures. Between the two there were usually 3 PAGES, 10 POINT PRINT, TWO LINE ENTRIES EVERY WEEK IN THE PAPER.
During this time I learned how to do most things a landlord should, including the simple troubleshooting of A/C, can't repair it the "coils" part since have no interest in getting licensed to handle freon. I've done about 10-15 roofs, completely torn out kitchens and baths, re-framed for termite damage, etc.
Most of these I held as long-term rentals, some I sold sooner than I planned because they ended up attracting problem tenants. Some of the things I learned along the way:
Concentrate your efforts. In Houston I wouldn't drive more than about 8 miles to look at a place, unless it was something that might be at about 25% of market. Houston is a densely packed city of suburbs and everything I owned for rental was between my house and my office.
One benefit of concentrating your efforts is that you can be pretty familiar with every neighborhood, builder in an area. I actually faxed two offers on places when I was out of town, subject to interior inspection, because I knew the price was a deal for the neighborhood without having to do so much as a drive-by. Can't do that if you're spread too thin.
Go for quality. Most tract builders are pretty much the same, but there are differences. You couldn't give me a place that was ALL ELECTRIC in Houston, I wanted (or added when the time came) archetectural roof shingles (look better), ceramic tile, decent carpet and pad etc.
Learn to do the work yourself. I always had a job that paid pretty well but I can do a roof, electrical and most other stuff cheaper than hiring it done. Remember, if someone charges you $1,000 to do a job, YOU HAVE TO EARN ABOUT $1400 OR SO TO NET THE $1,000.
Curb appeal, front entry appeal, trim, clean, all amenities. I know the rent is better with lower income neighborhoods, blue collar places. But, with a middle or upper middle income neighborhood, the hassles are less, the income is steadier and the checks seldom bounce. All of my places had garage door openers and all the nice amenities. Everything worked and was in "move-in" condition before I would show it. AND MY RENTS WERE A BIT HIGHER THAN THE PREVAILING RENT IN THE NEIGHBORHOOD. That gets you better tenants.
When I would tell some prospects the monthly rent they would say, "but the place down the street is $50 a month less". Go for it I would tell them, but mine doesn't have dog **** on the floor, mine is freshly painted, has a garage door opener, SOLAR SCREENS ON WINDOWS, HIGH EFFICIENCY A/C, EXTRA INSULATION IN THE ATTIC, so you will probably pay $50/month less for utilities in my place.
Remember, THIS IS A BUSINESS. Operate it as such. If rent is due on the first, IT'S LATE ON THE 2ND. Make sure the tenant knows that you will "nail and mail" on the 2nd, AND THEN DO IT. Tenants will get away with as much as you let them, train them to your way of doing things.
Keep good records on everything, kind of embarrassing to have a tenant prove to a judge that they've paid you more than YOUR records show. This never happened to me but I know people that it did.
Visit your local courthouse on "evictions" day. Watch the way the judge works. Be familiar with your state property code. Know what you can and can't do. Know the drill on evictions. I've heard lots of people say "it takes 6 months in our state". AFAIK that is complete horse puckey. What takes 6 months is for the LANDLORD to stop believing a lying tenant, get up off his butt and start the eviction process.
If the tenant can't pay one month's rent today, HE WILL NOT BE ABLE TO PAY TWO MONTH'S RENT NEXT MONTH. Start the legal process, generally a 3 day or 5 day "notice to cure", TODAY.
Screen people, I don't run credit checks, I don't check with former landlords, I keep my EYES and EARS open and have a long discussion (interview) with my prospects. If their car is junky/dirty, so is their house, that doesn't mean an old car in good repair that's clean. Junky, trashy car equals junky trashy people, I don't want them.
If they seem to know WAY MORE THAN AVERAGE ABOUT YOUR STATE'S LANDLORD/TENANT LAWS, you don't want them. Where do you think they learned that stuff? Generally people will tip you off if you give them a chance. Lots of times I've looked back and said "I should have realized"!
A couple of things that I did differently from others (because I learned from my mistakes):
Minimum of two year lease
Security deposit NOT THE SAME AMOUNT (more than) a month's rent.
Tenant can MAKE NO CHANGES INCLUDING NAIL HOLES IN WALL.
Tenant can not WORK ON CARS, including oil changes
No unregistered, unlicensed vehicles, only as many vehicles as garage spaces.
Name and SSAN of all tenants on the lease.
No keys, no access, no nothing to the tenant UNTIL I'VE RECEIVED FIRST MONTH'S RENT AND SECURITY DEPOSIT, in cash or cashiers check!
Never renew a lease without some INCREASE in the rent. Each one you miss makes it harder the next time as it will have to be bigger, and they're used to getting renewals without increases. And you could find yourself 8 or 10 years down the road so far behind the 8 ball it's ridiculous. It also forces you to check market rents.
You need professionals on your team, accountant and lawyer at minimum.
Tell everyone that you're buying
Do it NOW. If you have a lead on a property, GET AFTER IT. Don't think about it over lunch, don't go get a haircut, go do it. This means always carrying offer/contracts with you.
Be ready to buy. Make sure you have sufficient funds and forms to secure a deal. Always leave a "weasel" clause in your offer, subject to inspection, etc.
Watch an inspector do his work and learn what the big deal killers are. Not being familiar enough with spotting termites once cost me $1500. After negotiating a price, oddly enough the guy took an immediate 20% off for cash, but wouldn't budge another nickel for anything. OK I said I"ve already got the offer filled out, just sign and I'll have a termite guy here within 24 hours. All of a sudden he offered another $1500 off if I would do it without a termite inspection! Suddenly I wanted it more than anything. Turned out it was clean but if I had been more prepared on that I could've made an extra $1500!
Be the "early bird". In the case listed above I got the place because I drove 6 miles to get the early edition of the "Greensheet". Neighborhood was advertised and a phone number, no name. I did a "reverse directory" phone number search, looked at online property tax records for the name on the phone number and came up with the address. I drove and looked at it, it was vacant and the back window "happened to be unlucked". I phoned the guy, met him at the property two hours later and signed the contract. That evening I was at the RE office (I had my license for a coouple of years) and another agent who was an investor saw the ad in the Greensheet. Hey he said, I think I might call this guy later this evening or tomorrow. D'oh.
It may not take money to make money, but it can't hurt. Three of my best deals ever were because I had cash on hand to buy notes. One from another agent who had carried a second, one from a seller who had carried a second (I'm not sure that both weren't putting the cash up their noses) and one from a work colleague who had carried a first on an inherited property. When you buy a note at a 50% discount your returns are pretty darn nice and by having the funds available I was able to make and close the deals within a few days to prevent any "seller's remorse".
It's not been roaring successes. I once paid some cash to a guy to assume my VA loan, subject to full release from VA. The funny thing was within 18 months I was buying again in that neighborhood. I once had a tenant's kid "graffitti" some interior walls. I literally had to "kilz" and then use sheetrock mud to retexture over it. I had a tenant take a ball bat to a toilet, then purchase a new one that didn't fit, set it on the bathroom floor AND CONTINUE TO USE IT! I've been called lots of ugly names, but never had a weapon pulled on me or suffered any other kind of physical assault.
I've cried some tears, made some money, had some fun, helped others and learned a lot over the past 27 years. One of the things that my brother (who I've partnered with on about 6 properties) like to do when we're painting, or replacing a roof is look at each other, smile a big ****-eating grin and repeat what our (non-real estate investor) friends always tell us; "YOU'RE SURE LUCKY TO HAVE THOSE RENT HOUSES'!
As most Viet Nam veterans like to say; "I wouldn't do it again for a million bucks, but I wouldn't take a million bucks to not have done it".
Hope this helps
I'll give some more thought to "horror stories" and post them some time.
Thanks for sharing your experiences. It is really useful to see how others got their start.
After researching real estate investments for a high school business class, I have learned more in the past 10 minutes reading your entry, than I have in the countless hours of research I previously completed. Your post offered real-life advice, and as an aspiring real estate investor, I thank you. I have three questions for you: 1) You said that with each lease renewal, the rental price is increased. Generally, how much (or what percent) does the price go up? 2) You said that the minimum lease agreement is two years. Is two years the typical lease, or is it longer? and how does this pertain to how often the rent is increased? 3) This question may or may not seem obvious, but how do you market your homes? Is there any specific marketing technique which seems to be the most successful? Thank your very much, you're EXTREMELY helpful.
Great post Cash! This is really helpful. Thanks for taking the time to write it all down for us.
All Cash - What a post. Great stuff. Please keep posting your experiences like this. It is a real benefit to the rest of the community. Kudos!
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wow, thankyou, you sent that right on time. its 12:36 AM right now and i have my entire DECA presentation for this thing in 9 hours. Your post was helpful-and yes i am a male.
I've already taken your advice into consideration; I plan to travel the unbeaten path, but i always have advertising to fall back on.
time to throw back some coffee and get this project done :shock:
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