This is lengthy, but I've been enamored with the BP podcast and blog for about a year, so I've built up a few things to talk about. Well, let's get to with how I got started in real estate investing...
Before I discovered BP, I had a friend who bought some houses in Lansing, Michigan. He had read Rich Dad, Poor Dad, which was possibly the only RE book he read before he jumped into investing. So, when I read it, I understood why he started investing. I told a few people my plan to invest; then I was off to start an empire. However, the bank disagreed with a college student who thought he could be a real estate investor: they had no vision.
Two years later, and my first year out of undergrad, I had a down payment saved and was ready to jump in (Rich Dad, Poor Dad was still all that my RE education consisted of). I had no network: real estate agent, bank, or deals. I didn't know what a pro forma was. Did I need an LLC?
Enter my first mentor. He had eight houses and the likes of Donald Trump wanted him to work with them. He opened my eyes to an umbrella policy and a pro forma. Cash-on-cash became the answer to the question I never asked: how much should the offer be. Since I had all of the answers, it was time to go shopping.
I did some analysis, and Washington D.C. and the surrounding metro areas were too pricey and didn’t seem to cash flow. I decided to buy in Northeastern Pennsylvania because it was my hometown where I knew people and the properties were affordable. Next, we contacted a realtor who was a family friend of my wife’s. I started by looking at some houses that were in the $35-45k range, before quickly and reluctantly moving to the 80-100k range. I found a duplex near a small college next to a family run grocery store. It was a great location for a rural area; one half of the building paid the note and escrow; and it was already tenant occupied. All I had to do was adjust the price to match my desired cash-on-cash return. I also simply moved the rents up to what they could be in order to find the price I could pay.
Next, it was time to start operating the property. I found a lease off of the internet (don’t do this), which was promptly signed by one tenant; the other tenant didn’t seem to exist. Now I knew when I viewed the property that a mattress on the floor of the one unit probably didn’t bode well for prompt rent payment or lease signing, but the previous owner had to have been getting rent, right? Once we tracked the people down, they said they didn’t want the unit anymore. I was fine with this if they simply packed their stuff and left. Well, I must’ve asked too much because they left the bathtub running. They put a circular piece of plastic over the drain and a wash cloth on top of that. The water thankfully managed to drain through and didn’t flood the apartment, which I imagine was their intention. The water bill was split and in their name. The good news: we immediately got another sub-par tenant in there because we didn’t do any sort of a background check.
What is this bill? Sewer. I saw on each lease that there was contact information for heat, electric, and water, but I can’t remember if I even called the utility companies as it’s been over a year since we bought the property. I certainly never thought of the sewer bill. I’m not really sure how I overlooked this, but regardless, I did. The cash-on-cash return just went from about 25% to about 20%. Still, not a bad return. I would later find a few other critical pieces of information that needed to be added to the pro forma I started with, bringing my return to somewhere in the neighborhood of 13%. But, I’ll stop there since this article is meant to show the good and the bad of jumping in with minimal education on real estate investing. This is how the first six months went until I stumbled upon the BiggerPockets podcast while I was looking for something more mentally stimulating than Bill Burr’s podcast. I was also bored because I was only halfway to saving for my next property because W2 income is how you invest in real estate.
welcome aboard Kyle. BP is an amazing resource, forums, calculators, and of course the podcast. Even podcasts that are no in the area I am interested in, still have great tips/tricks that can apply to your area of interest.
good luck in your endeavors!
@Kyle Thomas but the important part is that you got started! If you househack one a year (until they stop Owner Occupant lending to you) you can build a pretty nice start and then leverage the cash-flow into more properties!
Right now I am on my third duplex from househacking and it's allowed me to have some options to buy non-owner occupied places and reduced my expenses tremendously.
Great job man! You can read everything under the sun, but every house is different and you learn best by doing.
Best of luck moving forward!
I appreciate your humor. How did you improve your screening process? Any tips?
@Anthony Angotti Thanks! House hacking is definitely a great way to get investing for low money down. It sounds like we're buying the same kind of properties. I'm currently under contract on my third duplex in Pennsylvania.
@Amanda G. We read @Brandon Turner 's book on managing rental properties. The main thing that we do is to screen people with a credit, income, and background check. Seeing this on the application weeds people out pretty quickly. Our current challenge is that people will view a unit thinking that we're going to change our requirements even when we tell them before they view it what the requirements are and that we aren't flexible.
congrats @Kyle Thomas #SchruteFarms !!