Hello BiggerPockets family!
I just officially finished my first year as a real estate investor and I wanted to share a summary of what I did, what I experienced, and the lessons I learned. I hope this will be helpful for new investors to see what investing might really be like for you, the good and the bad. I'll skip the year before that I spent preparing, studying and saving and jump right to when I made my first purchase, which is what I believe makes someone a true real estate investor.
In December of 2017 I bought a 3/2 SFR in Lubbock, TX. I bought it with a conventional loan and a 20% down payment. The house was built in 2000 and didn't require a lot of work, less than $5000. We knew it wasn't a great time to buy and knew we might have trouble renting during the slow season but we were willing to take the risk because we thought if we didn't buy right away we wouldn't take action would be stuck in analysis mode. Our predictions were right and it didn't rent until March, so we lost a few months of rent due to vacancy. It was a bit stressful during those months but we ended up with fantastic tenants and they were worth the wait. The rent ended up exceeding the 1% rule so it was a good deal for us.
In March of 2018 I nearly bought an off-market fourplex in Midland, TX. It was pretty much the unicorn deal real estate investors look for and would have provided great cash flow, but the sellers not only would not come down on price when I asked, they raised the price then put it on the MLS, and my unicorn was no more. I vividly remember the owner calling me while I was in an auto parts store to tell me smugly that he didn't need to lower his price because it was just "mailbox money" for him. Okâ¦â¦then why are you selling?! LOL
In April I bought a 4/2 SFR in Lubbock, TX. I somewhat regret buying this one (I say somewhat because you have to learn to look at these things as learnings rather than mistakes) because I was just in overdrive mode and very hungry for another deal. Again I bought it using 20% down payment and a conventional loan, however this one required quite a bit more work because it was built in the 1960's. Again we had issues with vacancy due to a slump in the Lubbock rental market and the house didn't rent until June. This tenant unfortunately was difficult initially and has given us indications that she may break her lease before the term is up. More about this tenant later.
In May I put a house in Midland under contract that I thought was a fantastic deal (my hunger for a deal got the best of me yet again). It was listed as a two bedroom house, but was actually a three bedroom house with the potential to be a four bedroom house. I say potential to be a four bedroom because the owner had started building an addition to the house to add a fourth bedroom, and my plan was to bring a contractor in and finish the work that he started. I was patting myself on the back for finding such a good deal on the MLS until I found out that the work the owner had done was unpermitted, and then a contractor came out to the house and pointed out that the addition had actually been built on top of cinder blocks and not actual concrete. Then we found that the doors inside the addition didn't open properly because the sink and shower inside were installed in such a way that they were blocked. It turns out that the owner worked at a home improvement store and thought he could do a house addition himself. To make matters worse, the realtor representing the seller was awful at communication. It took her weeks to get our original contract accepted, and then took her weeks to get it cancelled. At one point due to her general slowness I was told by the title company that I had no way to get out of the contract and would not only lose my earnest money, but I would be forced to buy the house. After a stressful couple of days I was able to get out of the contract and only lose my option fee, thanks to my very thorough realtor.
At this point I made up my mind to pursue the BRRRR strategy and not put 20% down on properties any more. So we opened a HELOC against our primary residence to be able to buy properties cash. The process to open the HELOC was mind numbingly slow, and we constantly had to provide paperwork over a 6 week period until it finally closed.
In June I bought another SFR in Lubbock, TX, however this time I bought it with cash from the HELOC. The house was in good condition but was very old and hadn't been updated since the 1960's. My plan was for this to be my first BRRRR house. I got a bid from our contractor for a total of $27,000. My all in cost was going to be right at 75% of ARV so I figured I was going to be in great shape. After 4 months of rehab due to finding more issues than we originally assumed, I ended up at $37,000 for the rehab and was $10,000 over budget. Now the house was not a good candidate for BRRRR and so I decided to sell it as a flip. I put it on the market in November and it did not sell for the price I needed, so I decided to refinance it as a BRRRR after all. I won't get all my money back but I won't have 20% into it like the first two.
In June I also bought a house in Andrews, TX with two other partners I met through a local meetup. Our plan was to flip the house and sell it. We split up the money to buy and rehab the house and agreed to split the profit three ways from the final sale. My responsibility was to manage the rehab, while the other two handled the financing and purchasing of the property (one of the partners is a wholesaler). My thinking on this was that I wanted to get experience managing contractors and rehab projects and this was a lower risk way to do it then going out on my own. This project ended up being one of the most difficult things I've ever done. The partner in charge of the financing got a hard money loan to help with paying for the rehab, but significantly underbid the project by about $15,000. In addition the hard money lender he chose was extremely hard to work with and would only give us a small fraction of the draws we requested. We ended up having to spend $8000 to rewire the entire house to make it able to have HVAC and modern ceiling fixtures. This unplanned electrical work put us way over budget and delayed the project by a month while we scrambled to find a licensed contractor willing to do the work. The reason it was so hard to find someone is because this is an oilfield driven market and there aren't many service people around who can do licensed work (the City of Andrews required licensed electricians to do the work or they would not turn your power back on). If I had not had some extra savings put aside this project would have put me underwater financially. The house was finally completed in late October. The bright side in all this is it immediately went under contract before even hitting the market. It was a well done rehab in a desirable area near a golf course. After many many weeks of closing delays the house finally sold and I ended up making a reasonable profit on the sale.
In September we nearly lost our tenant in our second house because her mother passed away unexpectedly. Between the emotions and confusion there she told us she wanted to move somewhere else, and we had only had her in the house for three months. It became stressful enough that I almost handed the property over to a third party property management company, but decided against it when things calm down. Despite her mentioning wanting to move out, she has continued to pay on time and hasn't left yet. Time will tell.
In conclusion, it's been a wild year with ups and downs. There were days I thought I was incredibly smart for getting into real estate, and there were days that I felt like a complete idiot and wished I never had wasted time and money on real estate and wanted to walk away from it all. But I always made the decision to keep moving forward and kept telling myself "Win or Learn". When contractors would call me and tell me bad news and I felt like throwing my phone out the window and running away, I would visualize my goals. Monetarily I did not achieve much this first year, but I was prepared for that and was more focused on learning, which has been extremely valuable to me.
Here are some lessons I learned:
-Don't be too hungry for deals or you will miss the warning signs that are telling you to stay away. Slow down and focus on finding deals you will be proud to own when the work is done.
-Understand your market and the general availability of contractors before buying a rehab. I wish I had known there were no electricians in my town before I took on a major electrical project.
-Network with people like crazy and get out of your comfort zone
-Develop grit and keep your goal of financial independence in mind.
-When contractors call with bad news, don't take it too hard. In fact, you should always get a second opinion when getting bad news on a rehab. I once had a high strung electrician tell me I was going to have to re-frame a portion of a house because the person who wired the house previously had damaged the structural integrity of the house. After my stress level went through the roof I forced myself to calm down and called another electrician out. He fixed the issue very quickly for low cost and it didn't require any re-framing.
-Cultivate relationships with people you like to work with, and be quick to get rid of ones you don't. Don't work with people that only bring problems and not solutions. On one of my rehabs I had a contractor come bid the project and all he kept doing was calling me and telling me how horrible the house was and how the cost of the project had gone up again. At first I was really stressed out and felt like I had made a terrible decision buying the house, then I called another contractor out who bid it for almost half the price and had all kinds of ideas of how to fix the problems and assured me it would be no issue. I immediately released the first contractor and never called him again.
The things I have learned this year have already put me in a different tier among real estate investors, and are going to make 2019 an awesome year for investing. I took the last month or so to gather my learnings, thoughts, and goals together then I am going to hit it hard again in the new year. I hope this has been helpful to you and I hope you crush it in 2019!
By the way, if there are any naysayers or doubters out there that say they don't have time to be a real estate investor, I did all this while working full time at a demanding job, being a husband and parent for two children, attending night school for a masters program, and starting a separate business unrelated to real estate. Go for your goals and dreams!
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