How I Made 12 Deadly Mistakes & Still Broke Even on my First Deal
My First Deal and the 12 Deadly Mistakes I Made
The quick and dirty numbers:
Purchase Price: $17,307
Purchase Closing Costs: $2000
Rehab Costs: $80,748
- Roof: $6538
- Foundation: $3000
- Handyman Labor: $19,284
- Dumpster: $4378
- Electrical: $4790
- Plumbing: $6720
- HVAC: $6200
- Materials: $23,700
- Granite (Materials & Install): $1363
- Landscaping: $605
- Project Management: $4000
- Miscellaneous: $170
Loan Interest Costs: $4435
- Friend 1: $1500
- Friend 2: $1500
- Unsecured Bank Loan: $667
- Aunt: $500
- Parents: $263
Holding Costs: $300
- Water Bill: $41
- Electricity Bill: $54
- Electricity Bill: $64
- Water Bill: $39
- Water Bill: $58
- Water Bill: $44
Total Costs: $104,787
Appraised Value: $131,000
Cash Out Refinance Amount (80% LTV): $104,800
Closing Costs: $5547
- Property Taxes: $838
- Appraisal Fee: $625
- Survey: $595
- Credit Report: $17
- Flood Certification: $14
- Bank Points (1 point): $1048
- Business Checking Account: $30
- Title Closing Fees: $1352
- Title Tax Certificate: $44
- Texas Policy Guaranty Fee: $3
- Attorney Doc Prep Fee: $755
- Government Recording Charges: $196
- Government Record UCC: $30
Total Cash Invested: $5534
Rent: $1305 per month
Mortgage: $597 per month
Taxes: $142 per month
Insurance: $124 per month
Vacancy: 8% = $105 per month
Repairs & Capex: 15% = $195 per month
Property Management (Self-managing but wanted to account for it): 10% = $130 per month
Cash Flow: A whopping $12
Exit Strategy?: I’m basically breaking even with this deal if I keep it as a buy and hold. I’m not sure what my exit strategy should be at this point.
I'm considering holding for 5 years and then selling it. This way, it is before CapEx or any serious repair costs would come into play as everything is brand new right now. If I can end up pocketing the CapEx and Property Management costs, even if it doesn't appreciate in the next 5 years, I can still walk away with a decent gain if I can sell it for the current appraised value.
It’s located in a desirable school district, but the area isn’t one to see massive appreciation or depreciation swings. I currently have it rented out on a 1.5 year lease.
What do you guys think I should do for a solid exit strategy?
Before:
After:
The detailed story:
I joined BiggerPockets at the beginning of this year, and have finally just finished up my first deal.
I had almost no money saved up, but started working a well-paying day job when I came across the deal.
From January until June, I was constantly listening to the podcasts, going to local REIA meetups, networking as much as I could, and analyzing deals and trying some direct mail.
I was connected to a wholesaler from a realtor I was with when looking at a foreclosure. I got a property under contract at the end of June for $17,500. At closing that number somehow turned out to be $17,276.81
It was currently a 1244 sq ft, 3 bed 1 bath house that I planned on turning into a 3/2
Mistake #1: Not negotiating with the wholesaler.
- I fell for the oldest trick in the book. He told me there were other buyers that had offered more, but I had approached him “first”. Looking back I should’ve negotiated down to around $13,000.
- I saw the land itself was valued for $20,000 and thought I was still getting a good deal.
- What I Learned: Always negotiate the price.
I assumed $2000 for closing costs, and he had told me it was a big rehab that basically needed to be gutted to the studs. He told me $50,000 was needed in repairs. I used $60,000 for my analysis.
My initial plan was to move in and rent out the other 2 rooms as this was the location I had been looking at moving to personally.
I had a rough idea of the area, and estimated the ARV at $105,000. A cash out re-fi of 80% LTV would put it at $84,000. I threw in an extra $10,000 for unexpected costs + holding costs + refi closing costs.
Mistake #2: Underestimating Rehab Costs
- I read J. Scott’s book on Estimating Rehab costs, but that still didn’t help me.
- I simply didn’t know going rates in my area for electrical, plumbing, roofing, etc.
- What I Learned: A pretty accurate retail cost of literally every part of a rehab since this houses needed EVERYTHING changed.
So in a perfect world, I would’ve gotten a house for free + $6500.
My backup plan was to turn it into a rental if I couldn’t rent it out on individual rooms, as it is located in a very desirable school district that families want to live in.
If I couldn’t get it rented, I would just flip it.
Mistake #3: Overestimating the ARV
- A common mistake for beginners, I overestimated the ARV.
- I didn't have someone with access to the MLS to run accurate comps.
- A huge number of sales in my area are done privately without any agents.
- The county appraisal website undervalues all the properties by a huge margin.
- I assumed the garage would be fixed up, but it had to be torn down because it had been built illegally.
- What I Learned: Ask multiple realtors for comps. I have learned the areas and their values a lot more since then.
Mistake #4: Overestimating the Rents
- I knew it was in a very desirable school district, but I failed to realize the importance of fenced in yards and garages around my area.
- I initially thought I could get $1500 for it, and used that for my BRRRR Calculator calculations for CoC return
- What I learned: Look for houses with already fenced in yards and garages, and offer appropriately if they don’t have those.
I was familiar with the street and neighborhood it was on, and drove by the property and saw there was still a bunch of junk everywhere.
I signed the contract and sent it back to him.
Mistake #5: Signing the contract before inspecting the property
- I knew I was supposed to walk through and inspect everything with a contractor to get an accurate rehab cost.
- I was too rushed in getting my first deal and seeing the property value below land value gave me a false sense of security.
- Honestly, even if I did do a walk through by myself, I wouldn’t have the slightest clue of what needed to be repaired and how much it would cost. I should’ve called another local investor or an inspector out to walk it with me if I did.
- What I Learned: Do a thorough inspection with a professional inspector or contractor
I was scared out of my mind and nervous to the point where I couldn’t sleep for the next few days after signing the contract. I was committed at this point and I felt like I didn’t know what to do despite all the podcasts and articles I’ve read.
Closing costs were $2000 to begin the title research. So I needed $20,000 cash when I had around $1500.
I called up my two best friends, and convinced them to each put in $10,000, while promising them $1500 each in profit.
I had applied for an unsecured, personal loan at a bank nearby, and was expecting to get around $60,000 as they loan up to $100,000.
I was surprised when they came back only approving me for $20,000. I was worried and stressed on how I would come up with the rest of the funds as the rehab had already began. At the time my parents had nothing they could lend me, but they had mentioned what I was doing when they visited my Aunt, and she wanted to loan me $30,000 interest free. I ended up convincing her to take a 5% interest.
Mistake #6: Not having the funds ready
- Although I had no money, I could’ve found a hard money lender or looked at line of credits or loans ahead of time.
- I always heard, as long as you have a killer deal, the money will come. I see where they are coming from, but definitely don’t believe it 100%
- What I Learned: Definitely figure out funding first, before finding a rehab project.
Mistake #7: Promising a fixed amount of return instead of an annualized rate.
- I ended up giving my friends an awesome deal. Having no experience, no money, and needing cash for a quick close, I offered to give them $1500 each if they loaned me $10,000 each.
- I had their money for 5 months, so although it was a fixed return of 15%, they ended up getting an annualized return of 36%!
- However, the good thing is that I didn’t pay any interest or loan payments during the entire rehab process. They trusted me and I will be paying them back $11500 whenever it finished, thereby reducing my holding costs during the rehab.
- What I Learned: Don’t borrow from friends! Just kidding, but if I do again, only offer annualized returns, not fixed.
I met up with the wholesaler and walked through the property with him before closing and he had told the owners that they had to clean out the house, but of course, they didn’t.
The house has literally been a crack house for years until I purchased it. he owner used to have it as a rent house, and eventually gave it to their daughter to live in, who was unfortunately a drug addict and the place became trashed beyond belief.
Maintenance was never kept up with on the property. There was crap everywhere and the smell that hit you the moment you walked in was enough to make my contractor walk right back out, almost about to throw up.
I know you’re supposed to buy properties in bad shape, but this was REAL bad.
Mistake #8: Not accounting for tossing out the junk in my costs
- Extra labor and three pulls on a 40 yard roll-off dumpster was needed to haul off all the junk that was left behind in the house.
- What I Learned – Account for hoarder houses in rehab costs
I connected with my local REIA, and there was another investor who owns his own rentals and was helping manage a rehab for someone else. We met up and he offered to be the property manager for my rehab since I had a full time job.
He brought over his contractors that he uses and did a walk through to get estimates. He had showed me the work that they had done on his houses and it was nice work. The handyman gave me a labor only bid for all the interior and exterior repairs including plumbing. The electrician gave me a quote for a complete re-wire of the house, and the foundation guy gave me a leveling quote.
Mistake #9: Not getting bids from multiple contractors
- I didn’t get multiple bids for the handyman, leveling, roofing, and electrical contractors.
- I did, however, shop around for HVAC and granite installation and for materials.
- What I Learned: Always shop around.
Work began July 5th and all was going relatively smoothly.
I decided to stick with the current wiring to save costs, but eventually the electrician said he didn’t feel comfortable leaving the current wiring in, and really suggested that I rewire the whole house, which I did.
However, this change came after the handyman had already began putting up the new sheetrock. This resulted in extra labor cost to re-sheetrock and delayed my project 2 weeks as they claimed they had to wait until the electrical was done to continue sheetrocking.
Mistake #10: Not fixing things right the first time.
- Not only did I end up paying the original bid amount for the rewire, I ended up paying more for the extra handyman labor and delayed the rehab by 2 weeks.
- This mistake would be made again for Plumbing later on.
- What I Learned: Always fix things right the first time.
I never knew how much design planning goes into rehabs! I’m a dude, come on, do I really need to spend hours figuring out what color grout would be the most aesthetically pleasing with my charcoal tiles?!? Do I have to get satin nickel cabinet pulls or stainless to match the appliances? I never would’ve thought I would spend so much time on Pinterest. My ex-girlfriend would’ve been proud.
Fast forward to late August, the progress was not anywhere near where I expected it to be. The handyman was working multiple projects and this was showing with the lack of progress on my home.
My project manager, handyman, and I got together for a little pow-wow and set a deadline of 3 weeks to finish everything.If he didn’t finish, I would deduct $50 a day from his pay.
This was all a verbal agreement, and the handy man left pretty angrily.
So the three weeks pass by, and the house is nowhere near complete. I’m losing my patience at this point, as summer has just ended and kids are already back in school, and the rental market is dropping off.
I told the handyman he was losing money every day now. He objected and gave me plenty of excuses.
At this point, I just wanted the house done. We came up with a new agreement, that he would finish in two weeks. If not, I would dock him $700.
There was also minor things such as adding an attic drop down ladder that he wanted to charge extra because it wasn’t part of the scope of work.
Mistake #11: Always have written scope of work contracts:
- I never specified the exact details of what was to be done. I just had a bid to “fix up everything”. Clearly, my handy man and I had different ideas of what that meant
- What I Learned: Write down every detailed piece of work I want done and include a deadline and consequences for not meeting that deadline
After lots of headache and yelling, I finally parted ways with a “finished product” and $12000 over budget. The only issue was, there was no water pressure for the hot water in all the faucets and shower heads, except the guest bathroom shower.
The handyman guaranteed me once the hot water heater was turned on, the pressure would come, and if not, he would come fix it.
Guess what happened next?
Yep, the hot water heater was turned on and still no pressure. And the handyman stopped answering all my calls and texts. Should’ve seen it coming a mile away.
Mistake #12: Paying all the money before everything is double checked.
- He begged and gave excuses why he needed the money and I felt sympathetic.
- What I Learned: Triple check their work and always withhold some payment until everything is good.
Oh, and did I mention he was didn’t have a plumbing license? Mistake #10 just happened AGAIN.
The extent of my plumbing knowledge was to look under the sinks and turn the valves in hopes it just wasn’t opened all the way. My wishful thinking was just that, as that didn’t change the water pressure at all. I eventually had to call in licensed plumbers to re-plumb the entire house including adding in all the proper waste vent systems for the sinks and washer connects to the tune of $3000.
While all the plumbing issues were going on, I had been showing the house and screening tenants. I know people are flaky, but it was bad. God, that was a pain. That's the first thing I'm going to hire out when I grow the business.
I finally got the house rented, and everything finally seemed to be over. I can stop stressing out finally right?!
Nope. 11PM of Day 3 of being a landlord, I get a call from my tenant saying all the drains are backed up, and feces was coming up into the shower. Are you freaking kidding me?!?!
I had to scramble and made a bunch of calls before a 24 hour plumber picked up and he said he would be there in an hour.The house was built in 1962, so the original sewage line was probably a clay line and it’s life cycle was coming to an end, as it took the plumber 2 hours just to clean out all the roots that were causing the backup.
I didn’t get home until 2AM.The condition of the sewage line was so bad, that I had to get it re-piped for ANOTHER $3000. At this point, I just felt defeated and that this bad deal was going to put me in the hole so far that it would kill my real estate career before it even got started.
I was way over my budget, I was worrying on how I was going to pay back my friends and family. I could only hope and pray for a miracle appraisal, so that I wouldn’t be too deep in the hole.
I had estimated the ARV to be around $105,000, and assumed I could have everything fixed up at $80,000 all in. Now I was $104,800 all in. I was thinking I would be set back $24,000 which would kill any momentum to start picking up more deals.
On a Tuesday night, I got an email saying the appraisal was done. I apprehensively opened it, expecting the worst, but my jaw dropped when I saw the final ARV. The appraiser had put it at $131,000! 80% LTV was exactly $104,800! Talk about prayers being answered huh. Now I was only out of pocket for closing costs!
I just closed today, but was in for a shock to see the closing costs much higher than I had expected!
Final Thoughts:
It’s currently rented out on a 1.5 year lease at $1310 a month. After mortgage, taxes, insurance, budgeting for vacancy, repairs, capex, and property management, I am only cash flowing $12 a month. I'm basically breaking even, until I can sell the property.
I made so many mistakes on this first deal that it could’ve easily ended my real estate investing career had I not gotten a lucky break from the appraisal. The thing is, however, I wouldn’t have changed a single thing about this deal. You have to just get started and fail forward before the ball gets rolling. I learned so many things from this first deal, that it’s given me the courage and inspiration that this real estate thing works!