Buying first Property. having 2nd thoughts... educated myself

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Buying first Property. having 2nd thoughts... educated myself

Brian Sullivan
Member since 2019 · 15 posts · 4 votes

Hello BP community,

Ok, I posted on here 4 months ago asking about my first rental property I was looking at purchasing. I'm back on here to admit that I went into real estate investing with no education about real estate investing and no plan on how where I was going or how to get there. I'm now under contract to purchase said property and I'm having second thoughts. I'm having second thoughts because before I was running on hopium and now I've started to educate myself on real estate investing. I've done this through the bigger pockets podcasts and through a couple of books I've read since then. 

Before I ask my question here are the details. The property wouldn't start to make COCROI until year 5 (1.18%) and year 10 (5.07%) start to make some better cash. The cost to purchase the property (it's a brand new build) is 289,000 w/ 15% down and it's located in Florida close to the beach. My thoughts, before my light and continuing education, were if someone paid the mortgage and insurance I was using the property as a retirement fund that I would sell in 30yrs. I didn't put into account all the CapEx that would later come down the road. Now with both our incomes we wouldn't be stretched thin between the house we live in and this one but it does take away from money we could invest in future properties. Now if we left this deal we'd be leaving 11k on the table but we wouldn't have this property holding us back from future buys. If we bought it we'd have equity in the property and would be able to use that in the future.

My question is should I go through with this purchase or pop smoke and bail? I've been writing and formulating our goals (my fiance and mine) for real estate investing and this doesn't allow for us to maximize our 1 property a year at least every year. We'd have to worry about the possibility of dumping money into this possible purchase. I've come to this forum hoping that I could make sense of my choices from the BP community. Ultimately the choice is mine, but I'd hate to not use guidance from the best real estate forum out there. I know there are probably other details that might be needed and I'll produce those to help paint the investment picture for you. Thank you all in advance.

Respectfully,

Sully

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y
Originally posted by @Brian Sullivan:

@Joe Villeneuve  

This statement puts you miles ahead of many investors. The problem is, in 30 years, can you be sure what the property will be worth?

No, you can't be positive on what anything is going to be worth in the future. Through answering this I see your point or at  least one I came to. Waiting for 30 yrs for a solid profit when other properties could have got me there sooner without having to wait for just appreciation.

How did you arrive at this number?

It's the amount that we'd lose from escrow, granite we upgraded to and the cabinets. Actually, now that I think about this more and reexamine the numbers, They did include an allotment budget. which would put the loss at just under 9k.

Where's the equity?   

Wouldn't there be equity from our down payment and then the monthly payments towards the principle and interest?

How did you come up with "1 property a year" scenario?...and why? 

That's the goal I set out for us to make as a baseline. My mission statement, 5 year and 10 year goals for us has yet to be finalized. I wanted to have ten properties by year ten. I think we can do better but want to keep this manageable too.

Bad, very bad, path to take. What you may not realize, is the visible paper losses you see, are hiding (in plain sight), compounding losses from many things...such as lost opportunities.

I know. I'm just disappointed in myself for getting this far. I have to let some people down for pulling out of this deal which is supposed to close next week. It doesn't match up with what I want to be able for us to cash flow and how I'd like us to grow.

Do you have any advice on how to word that email to all parties involved? Thank you for taking the time to help me realize things from someone else's point of view.

 Don't mistake equity you pay for, as equity you gain.  Equity you pay for is just your money transferred from your bank to the property...where it dies.

"Buying 1 property..etc...." isn't a plan.  At best, it can be described as part of the execution of a small part of the plan.

Your mission statement is the same as above...just an extended version of it.

A plan, is based on specific financial goals (accomplishments).  The development of the plan, is a series of specific events, one leading to and through the next, eventually leading to (and accomplishing) the Specific Financial Goals.  Keep in mind that each step along the way, has a different set of criteria needed to accomplish the specific mini-accomplishments at that time (or timeline) in your plan.  This means, at each step along the way, you would/should be focused on a different series of events, in order to reach the accomplishments at the timeline you are at in your plan.

Now, to design this plan, you reverse engineer it.  Start at the end (your specific financial goals), and work you way backwards through the prerequisites (much like going through college) until you arrive at where you are at now.  Then turn around, and follow the breadcrumbs back to where you started...at the end.

It appears as though you already have the mindset for this...you just don't realize this...yet.

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  • Laura Casillas
    Rental Property Investor · Austin, TX · Member since 2018 · 24 posts · 8 votes
    7y

    Hi Brian! Congrats for taking action. I wish I could give you a good advise based on my experience but I´m just starting my journey on real estate investment. One idea that came to me while reading your situation is that in order to not loose your 11K probably you could invite someone else to be your partner that way you could save your 11k and not compromise all your resources for future investments. Since is a new construction you shouldn't have a lot cap ex for a while (but again I´m not experienced) and you could try to airbnb or maybe rentals that are a little bit longer (vrbo) and have better rents on your property.

    Hope everything works out the best way for you.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y

    "My thoughts, before my light and continuing education, were if someone paid the mortgage and insurance I was using the property as a retirement fund that I would sell in 30yrs. I didn't put into account all the CapEx that would later come down the road. Now with both our incomes we wouldn't be stretched thin between the house we live in and this one but it does take away from money we could invest in future properties."

    This statement puts you miles ahead of many investors.  The problem is, in 30 years, can you be sure what the property will be worth?


    "Now if we left this deal we'd be leaving 11k on the table..."

    How did you arrive at this number?

    "...but we wouldn't have this property holding us back from future buys. If we bought it we'd have equity in the property and would be able to use that in the future".

    Where's the equity?

    "My question is should I go through with this purchase or pop smoke and bail?"

    One of the hardest things for most REI to understand is what a loss is...and when it occurs.  This statement tells me either you do understand it...or don't realize that you do.  AS long as you are still in the game, you can always recover those losses with future profitable properties.  Stay with a property that continues to lose money, and you are distancing yourself further from profitability, and reducing your ability to get there...which one of your later statements says you already know this.

    "I've been writing and formulating our goals (my fiance and mine) for real estate investing and this doesn't allow for us to maximize our 1 property a year at least every year."

    How did you come up with "1 property a year" scenario?...and why?

    "We'd have to worry about the possibility of dumping money into this possible purchase".

    Bad, very bad, path to take.  What you may not realize, is the visible paper losses you see, are hiding (in plain sight), compounding losses from many things...such as lost opportunities.

    2Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Brian Sullivan, better late than never, I guess. A few things to think about:

    1. Are you absolutely sure there's no way for you to get out of the purchase? What contingencies do you have in the contract? What does your agent think? I'm certainly not for snaking out of agreements, but it's good to at least know what all your potential options are.
    2. $11k is a lot of money to throw away. The real question is how much do you think you'll be losing every month? If it's $100 bucks, that means you "break even," i.e. lose the $11k, in 9 years. So might be less expensive to hold for little while.
    3. Have you considered using this as a Short Term Rental (STR), i.e. AirBnB, instead of a regular rental. This may generate enough income to turn a profit. Then reassess in a year or two.
    4. Lastly, as @Joe Villeneuve points out, there are opportunity costs here. Will buying this at a monthly loss impede your momentum MORE THAN losing the $11k, if you pull out? What path gets you to your next (hopefully profitable) deal faster?
    1Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Joe Villeneuve  

    This statement puts you miles ahead of many investors. The problem is, in 30 years, can you be sure what the property will be worth?

    No, you can't be positive on what anything is going to be worth in the future. Through answering this I see your point or at  least one I came to. Waiting for 30 yrs for a solid profit when other properties could have got me there sooner without having to wait for just appreciation.

    How did you arrive at this number?

    It's the amount that we'd lose from escrow, granite we upgraded to and the cabinets. Actually, now that I think about this more and reexamine the numbers, They did include an allotment budget. which would put the loss at just under 9k.

    Where's the equity?   

    Wouldn't there be equity from our down payment and then the monthly payments towards the principle and interest?

    How did you come up with "1 property a year" scenario?...and why? 

    That's the goal I set out for us to make as a baseline. My mission statement, 5 year and 10 year goals for us has yet to be finalized. I wanted to have ten properties by year ten. I think we can do better but want to keep this manageable too.

    Bad, very bad, path to take. What you may not realize, is the visible paper losses you see, are hiding (in plain sight), compounding losses from many things...such as lost opportunities.

    I know. I'm just disappointed in myself for getting this far. I have to let some people down for pulling out of this deal which is supposed to close next week. It doesn't match up with what I want to be able for us to cash flow and how I'd like us to grow.

    Do you have any advice on how to word that email to all parties involved? Thank you for taking the time to help me realize things from someone else's point of view.

    0Reply
  • Drew McCrory
    Member since 2019 · 18 posts · 3 votes
    7y

    @Brian Sullivan Has the inspection period already passed? If you find something during inspection that was not disclosed on the home disclosure statement, you can backout of the deal without losing your escrow. 

    0Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Jaysen Medhurst ,

    1. There may be a way out or at least a possible deal that can be made. Waiting on paperwork to be filed. No counting on this though with my decision.

    2. So you're saying that it'd be smarter to hold it if I wouldn't lose over 11k over the life of having it? However short or long that would be.

    3. It would take us dumping more money into it to make it Airbnb ready. Thing is we're on the other side of the intercoastal waterway and it doesn't plot us when people search the beach city. So it might not get the first few page selections. I know Airbnb is changing some things so this could be a possibility to examine again.

    4. No, the 11k would impede my momentum more than $100 a month loss. 

    I must say this is incredible what this forum brings. It's done exactly what I thought it would and helping my brain listen to other thoughts and knowledge, and mix it with what I have. Thank you Jaysen.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Jaysen Medhurst:

    @Brian Sullivan, better late than never, I guess. A few things to think about:

    1. Are you absolutely sure there's no way for you to get out of the purchase? What contingencies do you have in the contract? What does your agent think? I'm certainly not for snaking out of agreements, but it's good to at least know what all your potential options are.
    2. $11k is a lot of money to throw away. The real question is how much do you think you'll be losing every month? If it's $100 bucks, that means you "break even," i.e. lose the $11k, in 9 years. So might be less expensive to hold for little while.
    3. Have you considered using this as a Short Term Rental (STR), i.e. AirBnB, instead of a regular rental. This may generate enough income to turn a profit. Then reassess in a year or two.
    4. Lastly, as @Joe Villeneuve points out, there are opportunity costs here. Will buying this at a monthly loss impede your momentum MORE THAN losing the $11k, if you pull out? What path gets you to your next (hopefully profitable) deal faster?

     1 - If he can get out...get out!

    2 - $11,000 is a lot of money to lose.  Staying in the deal, just because you don't want to lose $11,000 is stupid...because you would be adding to the lose of $11,000.

    3 - "May Generate enough income..." and waiting a few years , just to see IF you can turn a profit is not a plan...it's a guess, and and unknown, including the unknown of how much more money you will lose, before you do what should have been done in the first place.  It's an example of being emotionally attached to that first $11k.  Let it go.  You can always get it back.

    4 - Take the $11k loss now...recover it, and make more profit in the next deal.  Staying with a sinking ship just leads to a drowning.  Getting off that sinking ship just makes you a little wet.  That's what towels are for.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Brian Sullivan:

    @Joe Villeneuve  

    This statement puts you miles ahead of many investors. The problem is, in 30 years, can you be sure what the property will be worth?

    No, you can't be positive on what anything is going to be worth in the future. Through answering this I see your point or at  least one I came to. Waiting for 30 yrs for a solid profit when other properties could have got me there sooner without having to wait for just appreciation.

    How did you arrive at this number?

    It's the amount that we'd lose from escrow, granite we upgraded to and the cabinets. Actually, now that I think about this more and reexamine the numbers, They did include an allotment budget. which would put the loss at just under 9k.

    Where's the equity?   

    Wouldn't there be equity from our down payment and then the monthly payments towards the principle and interest?

    How did you come up with "1 property a year" scenario?...and why? 

    That's the goal I set out for us to make as a baseline. My mission statement, 5 year and 10 year goals for us has yet to be finalized. I wanted to have ten properties by year ten. I think we can do better but want to keep this manageable too.

    Bad, very bad, path to take. What you may not realize, is the visible paper losses you see, are hiding (in plain sight), compounding losses from many things...such as lost opportunities.

    I know. I'm just disappointed in myself for getting this far. I have to let some people down for pulling out of this deal which is supposed to close next week. It doesn't match up with what I want to be able for us to cash flow and how I'd like us to grow.

    Do you have any advice on how to word that email to all parties involved? Thank you for taking the time to help me realize things from someone else's point of view.

     Don't mistake equity you pay for, as equity you gain.  Equity you pay for is just your money transferred from your bank to the property...where it dies.

    "Buying 1 property..etc...." isn't a plan.  At best, it can be described as part of the execution of a small part of the plan.

    Your mission statement is the same as above...just an extended version of it.

    A plan, is based on specific financial goals (accomplishments).  The development of the plan, is a series of specific events, one leading to and through the next, eventually leading to (and accomplishing) the Specific Financial Goals.  Keep in mind that each step along the way, has a different set of criteria needed to accomplish the specific mini-accomplishments at that time (or timeline) in your plan.  This means, at each step along the way, you would/should be focused on a different series of events, in order to reach the accomplishments at the timeline you are at in your plan.

    Now, to design this plan, you reverse engineer it.  Start at the end (your specific financial goals), and work you way backwards through the prerequisites (much like going through college) until you arrive at where you are at now.  Then turn around, and follow the breadcrumbs back to where you started...at the end.

    It appears as though you already have the mindset for this...you just don't realize this...yet.

    3Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Brian Sullivan, no, I'm not saying it's smarter to hold if the loss won't be over $11k, no matter the time frame. It may make sense in the short run, IF you're not in the red too much each month and IF you reasonably expect to see decent appreciation. Remember, between commission and transfer tax you "lose" ~6% of your value on day one. I.e. were you to sell it at the exact same price, you only see ~94% of the price.

    Not trying to make this more confusing, I swear! It's worth running the numbers, if only to get clear on what each choice may or may not cost you.

    2Reply
  • Ryan Jopson
    Real Estate Investor · Hamden County, MA · Member since 2017 · 75 posts · 31 votes
    7y

    @Brian Sullivan

    Can you post the financial evaluation you did for the property? Maybe we can see something that has been overlooked or not considered.

    Having the numbers would help

    Ryan

    1Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Joe Villeneuve  

    I understand what you mean by equity now. 

    So what I need to do is mission plan just as I would for ops in the military. Just do it with how I want to execute my real estate and financial goals. I need to work on this and I will focus on this through the rest of my current deployment. Thank you.

    0Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Ryan Jopson

    0Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    I know this is a bad deal for me to have done. I went into it with no plan and no knowledge. I want to take the next few months to keep calculating, reading and listening till I'm ready to get back in the rental property game. Come back even stronger and learn from this.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Brian Sullivan:

    @Joe Villeneuve  

    I understand what you mean by equity now. 

    So what I need to do is mission plan just as I would for ops in the military. Just do it with how I want to execute my real estate and financial goals. I need to work on this and I will focus on this through the rest of my current deployment. Thank you.

     That my friend, is the best analogy for this I have ever heard.  If you have any specific questions, feel free to PM me direct.

    1Reply
  • Dan Schweit
    Lender · Santa Clarita, CA · Member since 2018 · 110 posts · 48 votes
    7y

    @Brian Sullivan

    Can you elaborate on “brand new build”? Is this a custom one off home from a local builder? A planned community or tract home from a developer?

    0Reply
  • Michael Hakes
    Fort Myers, FL · Member since 2019 · 19 posts · 6 votes
    7y

    @Brian Sullivan have you thought about trying to sell the contract? I am also in Florida and have heard a few times people selling the contract or house before its finished. If you are in a new community and got in on an early phase you could get out of it, reducing your 11k loss and may even see a profit.

    Hope it works out and always have multiple exit strategies.

    0Reply
  • Tim Herman
    Member since 2018 · 2k+ posts · 1k+ votes
    7y

    @Brian Sullivan Have you considered a lease option. I've read enough of @Joe Villeneuve post to know he is an expert. It would minimize your losses through commissions if they would exercise the option part Most likely still end up losing money each month.

    1Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Dan Schweit  

    It's a custom one-off build from a local builder.

    0Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Michael Hakes

    I haven't thought of this yet. I'll bring this up to my realtor though.

    0Reply
  • Brian Sullivan
    OP
    Member since 2019 · 15 posts · 4 votes
    7y

    @Tim Herman

     This isn't an option I'm familiar with, but will look into it to get myself familiar with it. I like how Joe's straight an to the point and definitely a wealth of knowledge.

    1Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    7y

    A new build on the coast.... Airbnb the thing and make yourself some cash.

    1Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    7y

    Another thing to point out is that you’re using this is a retirement plan. No different than a 401/457. Guess what...? People put money into those every single month and see no return. And no guaranteed return. So if this property ends up costing you 110k out of your own pocket but you end up selling it for 350k 30 years from now.... is that so bad.

    I’m not saying this is the worlds greatest deal or that it’s going to make you money in the short term but done forget that investing is personal. Make decisions that are in alignment with your goals. Don’t get distracted by what you see on hear or hear on the podcasts. Good luck.

    1Reply
  • Tim Houzenga
    Morrison, IL · Member since 2016 · 48 posts · 68 votes
    7y

    Not all markets are cash flow Kings. If it is a new build you should not have to worry about capes for awhile? If the market is known to appreciate you could be alright.

    You talked about a significant amount of household income..... I’m no accountant, but can’t you use depreciation and minor losses to significantly decrease your tax bill while waiting for appreciation? You may have low cash on cash, but what happens when you add in principle pay down, tax reductions, etc...? Real estate is multi-faceted. Just curious.

    I’m from the Midwest so my main focus is cash flow since most markets are linear. We can never bank on appreciation here.

    Best of luck figuring it out

    0Reply
  • Nate Bell
    Member since 2018 · 150 posts · 140 votes
    7y

    @Brian Sullivan

    Don’t walk away from your $9K at this point. You’ve got a new house in what seems like a desirable location- not a terrible situation to be in. Joe V hammers on the cash flow approach and has a tendency to make people feel foolish for doing anything other than what he does. Yeah, you’re not crushing it on this one, but you’re still going to have someone paying a mortgage for you on a nice place that should need little maintenance. I’d keep it and just try to do a little better next time. You’ll look back on this as a success overall and a minor blip right now.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Nate Bell:

    @Brian Sullivan

    Don’t walk away from your $9K at this point. You’ve got a new house in what seems like a desirable location- not a terrible situation to be in. Joe V hammers on the cash flow approach and has a tendency to make people feel foolish for doing anything other than what he does. Yeah, you’re not crushing it on this one, but you’re still going to have someone paying a mortgage for you on a nice place that should need little maintenance. I’d keep it and just try to do a little better next time. You’ll look back on this as a success overall and a minor blip right now.

    THis has nothing specifically to do with the Cash Flow Approach. This has everything to do with basic math. Negative signs don't belong in REI...if you can get rid of them. Staying with a losing deal is an example of an emotional attachment to the money.

    0Reply
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