My first property - what happened

My first property - what happened

Member since 2019 · 22 posts · 36 votes

I'm 28 years old and I made my first residential property purchase in April 2019. The home is a 3bd/2ba, 2300sqft purchased for $417k. Location is great. This home was purchase originally** as my primary residence. 

A couple of quick takeaways from the purchase. 

  1. 1. Definitely use an experienced realtor/lender. If you're not familiar with real estate or it's your first deal the paperwork alone can be overwhelming. Having someone you trust to give you good advice is important. 
  2. 2. It's going to cost more then you think. Closing costs, any remodel, oh you need the vents cleaned? $500, how about that spicket fixed? $250, the grading on the house needs to be altered? $1000. Bottom line, things come up that you don't anticipate. Make sure you aren't spreading yourself too thin between the mortgage payments and your monthly income to cover things like this. 
  3. 3. Contractors are difficult. Had new doors and windows installed in the house, bid at $3k for the install. Half way through he wanted $2k over what he bid me. Long story short the job that was supposed to take 3 weeks took 3 months and almost ended up in court. Only use a contractor through a good referral. I took that stance that you bid it, it's not my problem that you misjudged. 
     

I run my business from home so I'm lucky enough to be able to work from anywhere. I was spending some time out in San Diego and ended up falling in love with it. Decided to rent my house out 6 months after purchasing it, and just landed in SD last week.

Renting my house out really opened my eyes to the opportunity that real estate gives. All in my monthly expense on the house is around $2100 (mortgage, tax, insurance, HOA), I rented it out in 2 weeks at $3k/mo. I'm in full on learning mode about all aspects of real estate investing.

Here are a few takeaways from the rental experience. 

  1. 1. Staging matters. Since I originally purchased the home as my primary residence I furnished it very nicely. I believe this helped a lot when putting it on the market. The listing pictures turned out amazing and I got top dollar in the neighborhood. Next year when it goes back on the market I will use the same photos to generate interest. I think the house shows a lot better with furniture in it (especially if congruent with photos) but that is an expensive proposition to move everything back in to show it. My gut tells me that would be unnecessary but we will see. I think having nice furniture in an apartment/home (even if only rented for staging purposes) to get professional photos is totally worth it. I'll use them over and over again.
  2. 2. I wouldn't use an agent. The showings we had were approx 50/50 MLS to websites like Zillow. Next time around I will use a service like turbotenant to push the listing to those websites. I ended up showing the house myself mainly so there wasn't value for me there. I can do the contracts myself now so the potential 6% loss on annual revenue isn't worth it to me. Negotiations I would also rather do myself.
  3. 3. A good experience. This was a good experience so far but I know it's only the beginning. There will undoubtedly be challenges but I feel grateful that it's gone smoothly up until this point for the reason it's sparked my curiosity in real estate. 

The rental process looked like this: decided to rent my house out/analyzed pricing, staged for pictures, professional photos, listed on MLS, showed house, potential tenant applications/background/credit checks/verify income, contract, money hand over, move out.

I'm excited to be here at bigger pockets and looking forward to connecting. I hope this helps someone, if you have any questions let me know. Thanks!

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Lender · Philadelphia, PA · Member since 2019 · 96 posts · 124 votes
6y

@Dennis M.

He’s cashflowing 900 a month and the property seems to be in really good shape. He also purchased it as his primary residence and turned it into a rental. Seems like a win to me. Read the whole post and don’t be negative.

See this reply in the discussion

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y
    Originally posted by @Joseph Walsh:

    Ok, as an "investment" property, he didn't do great. However, even as an investment property, he's cash flowing (keep in mind that HOA covers a lot of the "maintenance" part. still as others have pointed out (yet fail to acknowledge this wasn't bought from an investment perspective), at 3k a month rent, you're ideal arv price would of been less than half what you paid. However, let's not dismiss the appreciation on a 400+k property, so even break even would be nice from an "accidental land lord" situation, depending on the market. My outstanding "accidental landlord" property actually LOSES about $100 a month, so I would love to have his problem! However, all that said, I learned the lesson, and when I bought my current PRIMARY residence, I still looked at the purchase price and wait for a "deal", so, you make money on the purchase is the valuable lesson learned here, primary or investment. According to my dad, SD has the best weather anywhere in the world, so congrats on that.

    I am already on record as indicating this could be an OK RE investment, but I question how you figure this is positive cash flowing?  This is going to be cash flow negative until the rent appreciation is enough to make cash flow neutral and eventually cash flow positive.  The vacancy, cap ex, maintenance, prop taxes, insurance, tenant turn over, mortgage service will consume on average more than the current rent.  1% rule, 50% rule, whatever method used for rough cash flow show this is going to start with negative cash flow.  A few years from now, maybe things will be very different in that regard. 

    This not to indicate I am negative on the RE.  I started with my ex-home.  It has returned a lot of profit.  However, it has returned less profit for its equity than every RE purchase that I have made with the intent of it being an investment (versus being my home).

  • Brookfield, WI · Member since 2016 · 191 posts · 108 votes
    6y
    Originally posted by @Dan H.:
    Originally posted by @Joseph Walsh:

    Ok, as an "investment" property, he didn't do great. However, even as an investment property, he's cash flowing (keep in mind that HOA covers a lot of the "maintenance" part. still as others have pointed out (yet fail to acknowledge this wasn't bought from an investment perspective), at 3k a month rent, you're ideal arv price would of been less than half what you paid. However, let's not dismiss the appreciation on a 400+k property, so even break even would be nice from an "accidental land lord" situation, depending on the market. My outstanding "accidental landlord" property actually LOSES about $100 a month, so I would love to have his problem! However, all that said, I learned the lesson, and when I bought my current PRIMARY residence, I still looked at the purchase price and wait for a "deal", so, you make money on the purchase is the valuable lesson learned here, primary or investment. According to my dad, SD has the best weather anywhere in the world, so congrats on that.

    I am already on record as indicating this could be an OK RE investment, but I question how you figure this is positive cash flowing?  This is going to be cash flow negative until the rent appreciation is enough to make cash flow neutral and eventually cash flow positive.  The vacancy, cap ex, maintenance, prop taxes, insurance, tenant turn over, mortgage service will consume on average more than the current rent.  1% rule, 50% rule, whatever method used for rough cash flow show this is going to start with negative cash flow.  A few years from now, maybe things will be very different in that regard. 

    This not to indicate I am negative on the RE.  I started with my ex-home.  It has returned a lot of profit.  However, it has returned less profit for its equity than every RE purchase that I have made with the intent of it being an investment (versus being my home).

    The OP posted that after mortgage and HOA he was +900/ month. I also assume that said mortgage includes prop taxes and insurance (which may be an invalid assumption) actually what he states was "all in" all his expenses add up to $2100 a month, and it rents for $3k. and assuming the HOA takes care of a large portion of the maintenance fees. and it's not vacant, so he could stash that $900 a month for a year and bank $10k+ into a maintenance fund. subtracting 1 month vacancy contingency at $250 a month, he's still $650/month positive. lets put half of that away on top of the 1 year reserve for unexpected costs, , and he's still at $325. anyway, like I said, for an "accidental" landlord situation, it works out. but yes, as an investement property, he over paid, as many have noted.

  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y
    Originally posted by @Joseph Walsh:
    Originally posted by @Dan H.:
    Originally posted by @Joseph Walsh:

    Ok, as an "investment" property, he didn't do great. However, even as an investment property, he's cash flowing (keep in mind that HOA covers a lot of the "maintenance" part. still as others have pointed out (yet fail to acknowledge this wasn't bought from an investment perspective), at 3k a month rent, you're ideal arv price would of been less than half what you paid. However, let's not dismiss the appreciation on a 400+k property, so even break even would be nice from an "accidental land lord" situation, depending on the market. My outstanding "accidental landlord" property actually LOSES about $100 a month, so I would love to have his problem! However, all that said, I learned the lesson, and when I bought my current PRIMARY residence, I still looked at the purchase price and wait for a "deal", so, you make money on the purchase is the valuable lesson learned here, primary or investment. According to my dad, SD has the best weather anywhere in the world, so congrats on that.

    I am already on record as indicating this could be an OK RE investment, but I question how you figure this is positive cash flowing?  This is going to be cash flow negative until the rent appreciation is enough to make cash flow neutral and eventually cash flow positive.  The vacancy, cap ex, maintenance, prop taxes, insurance, tenant turn over, mortgage service will consume on average more than the current rent.  1% rule, 50% rule, whatever method used for rough cash flow show this is going to start with negative cash flow.  A few years from now, maybe things will be very different in that regard. 

    This not to indicate I am negative on the RE.  I started with my ex-home.  It has returned a lot of profit.  However, it has returned less profit for its equity than every RE purchase that I have made with the intent of it being an investment (versus being my home).

    The OP posted that after mortgage and HOA he was +900/ month. I also assume that said mortgage includes prop taxes and insurance (which may be an invalid assumption) actually what he states was "all in" all his expenses add up to $2100 a month, and it rents for $3k. and assuming the HOA takes care of a large portion of the maintenance fees. and it's not vacant, so he could stash that $900 a month for a year and bank $10k+ into a maintenance fund. subtracting 1 month vacancy contingency at $250 a month, he's still $650/month positive. lets put half of that away on top of the 1 year reserve for unexpected costs, , and he's still at $325. anyway, like I said, for an "accidental" landlord situation, it works out. but yes, as an investement property, he over paid, as many have noted.

    If we assume the mortgage also has escrow holding (prop tax and insurance), it does not matter.  Cap ex, maintenance, vacancy, tenant turn over, legal, on that priced unit is likely to consume more than $900.  

    Here is 2 different perspectives:

    His cost is ~$450K ($417K purchase + work he indicated) for a rent of $3K is a ratio is 0.66%. Without HOA and having done this many years my conservative calculations would project negative cash flow. Add in the HOA … I think for conservative positive cash flow with HOA he likely needs at least 0.75%. This is basically the 1% rule applied to higher rent RE.

    50% rule that seeing he is self managed we will use 40% (subtract 10% for PM). I believe 50% rule is a bit conservative in higher rent areas but not when there is an HOA. This implies $1.2K ($3K * 0.4) on expenses. That leaves $1.8K for mortgage service. If I assume 80% LTV, even a 0% loan would not achieve that payment.

    This RE is likely initially cash flow negative at moderate LTV. If he is at low LTV then he has a different issue. Cash flow is only one aspect that determines the ROI (and in his market, it is not likely to be the primary component of the ROI).

    As I indicated, I am not against this investment in large part because he already has it.  He is taking a path of ease to start his RE investing.  It is the same path I initially took.  My initial RE that was our house has produced a good return for us.  However, its return is lower for its equity position than every RE that we purchased as an investment RE.

  • Member since 2019 · 22 posts · 36 votes
    6y
    Originally posted by @Mark Allen:

    @Schuyler G. This was super helpful and pushed me over the edge to try the same thing. Thanks very much for posting.

    That's great. Good luck and keep us posted!

  • Member since 2019 · 22 posts · 36 votes
    6y
    Originally posted by @Mario Am:

    @Schuyler G. Congrats abd Goodluck.

    I’m 26 and already own 2, now looking into the 3rd and 4th it is very addicting.

     That's bad ***. Multi-family or single residences? 

  • Specialist · Nashville, TN · Member since 2019 · 187 posts · 83 votes
    6y

    @Schuyler G. Just purchased a 3rd yesterday.

    Single, I wish I could invest in multi, apartment building are the best but the markets I invest in are not good markets for it.

  • Member since 2019 · 22 posts · 36 votes
    6y
    Originally posted by @Noah Mccurley:

    @Schuyler G.

    All seems to have gone very smoothly.

    What would you do differently in your next deal?

    I'll be looking at it from an investment standpoint. I'll need to digest all the advice in the responses on this post and further understand what makes a good deal. Continuing my education is my #1 right now.

  • Member since 2019 · 22 posts · 36 votes
    6y
    Originally posted by @Mario Am:

    @Schuyler G. Just purchased a 3rd yesterday.

    Single, I wish I could invest in multi, apartment building are the best but the markets I invest in are not good markets for it.

    Are you investing in CA?

  • Specialist · Nashville, TN · Member since 2019 · 187 posts · 83 votes
    6y

    @Schuyler G.

    Hell no. Mid-west.

    CA is not worth it in my opinion.

  • Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    6y

    @Schuyler G.

  • Chicago, IL · Member since 2019 · 20 posts · 7 votes
    6y
    Originally posted by @Schuyler G.:
    Originally posted by @Henry Paul Trinidad:

    Looks like you're good! Nice to see people starting up here also.  I'm 24 and just recently joined the industry, let's connect! 

    Request sent!

    Accepted! Goodluck man, hoping we can share more knowledge to each other.  There are a lot of forums on Reddit that are also very helpful.  Youtube videos are also helpful!! Check out websites also (realtor, zillow and zumbly). 

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