Regret on First Property?

41 Replies

I'm kind of thinking out loud on this post, and have shared it with some people in real life, but none with real estate experience.

My duplex was supposed to close on the 9th, but as of this morning, is still delayed (why, I don't know, but I gave that bank one huge mulligan for a previous mishap and it probably won't be granted another). But it got me thinking about what I want to do moving forward.

I started reading about real estate in the fall, learned A LOT, but eventually needing to get into the game to move forward as everything started going in one ear and out the other from being overwhelmed.

I chose a duplex for the cash flow. Which, since, I've learned I(severely) overestimated. This duplex has good long term tenants, but that's really where the gravy train ends, unless you want to count equity (which I'm not so sure how much I do, because that's money I could use elsewhere to build a business). Cash flow is very low; I traded higher rent for better tenants.

As I've learned more, I've thought more about rehabbing. It takes a higher REI-IQ, but you will earn larger chunks of cash (I have a job, so a rental's cash flow isn't hugely consequential to me anymore). Plus, it seems much more scalable, at least toward the beginning, than buying-and-holding SFHs and multi-units. Scalability is HUGE for me; I view myself more as an entrepreneur than a real estate investor. I would like to branch out into other industries in the future.

Which leads me to regretting my first property already. I know that will probably come off as negative already, but if I could do it over again I wouldn't. I do gain renting, tenant, and landlording experience, but I'd rather hold off until I can afford apartment complexes than small duplexes than won't net any discerning income. However, a huge chunk of my savings will go away into a property that doesn't serve any purpose other than being a learning tool, which I suppose it already has.

I guess you live and learn.

Sometimes it's good to get your feet wet. Instead of jumping into a lake and learning how to swim, you're jumping into the shallow end of a pool. You can learn a lot from landlording in the beginning especially from easier tenants. It could be worse, at least you'll know you'll have cash flow when you acquire the property. Good luck!

@Brandon C.

Thanks. I will have some cash flow, but it feels like I'm limited what I can do.

Hi @Christian Lautenschleger

I'm kind of in the same boat. I bought a foreclosure off the mls last August and while I got a decent deal for a good house, I had to put all of my savings into it. So I often wonder if I should have bought two cheaper houses instead of the one newer bigger house.

Like you said though, you live and learn. It has helped mold my goals and future expectations so at least I got that education for my cash being tied up.

If the bank is flailing you can probably back out of the deal if you're really regretting this deal already. I feel a little regret about my one rental but I wouldn't change what I did, it will be a good investment in the long term and I'm working to build capital and looking for owner financing to get the next one with less cash outlay!

@Brandon Cao makes a good point, a duplex is a good practice run for a larger appt.

-Mike

Regarding rehabbing...where do the current rents stack up against the current market rents ? If your close to market rents, you'll have a hard time getting more on rent and the return your looking for after spending more on rehab.

@Michael Olesky

I don't know if I'd call it flailing; rather an "underwriting issue". Today's saga is getting the seller and myself on the same page to close. I want Tuesday morning, they want Monday afternoon. Maybe they'll call the deal off.

@George S

Below, perhaps well below. I (perhaps naively) put good tenants higher than higher paying rent. I viewed this as a learning experience first and foremost. (I didn't say earlier than the mortgage changed to a traditional investment one late in the process; I know that investment properties get 25% down, but that was never mentioned until late in the process. That cost be five-figures, which is more than what I would have agreed to when I went into contract as that ties up waaay too much money for a low-earner.)

What do you mean about the last part -- more on your return after rehab. I'm not talking about rehabbing this property but other ones. This property, even if fully rehabbed, wouldn't go for much more than for what I bought it.

I have slowly acquired several properties over the past three years focusing on single family to quads, and my first purchase (a quad) was a lemon. Despite that I have learned and continue to learn from that experience. It may sound goofy, but if your soon to be property is 1) rented (to good tenants), and I am hoping 2) able to at least cover PITI and maintenance (plus estimated vacancy, etc) then you are ahead of the game and should be proud!

And always count equity!

@Christian Lautenschleger

I agree that I think you've made a great move in either case because you made a move. Analysis paralysis is out of the picture. I am a beginner too and presented with this situation I would begin to think of ways to improve my position. Is there anything in the lease that allows you to raise rents based on market changes? Perhaps talk with the tenants and get a feel of their situation. Would they be willing to do a keys for cash type deal and let you buy them out of the lease? You could then pursue higher rents. Those are a few of my beginner thoughts out loud.

Originally posted by @Christian Lautenschleger :
@Michael Olesky
I don't know if I'd call it flailing; rather an "underwriting issue". Today's saga is getting the seller and myself on the same page to close. I want Tuesday morning, they want Monday afternoon. Maybe they'll call the deal off.

@George S

Below, perhaps well below. I (perhaps naively) put good tenants higher than higher paying rent. I viewed this as a learning experience first and foremost. (I didn't say earlier than the mortgage changed to a traditional investment one late in the process; I know that investment properties get 25% down, but that was never mentioned until late in the process. That cost be five-figures, which is more than what I would have agreed to when I went into contract as that ties up waaay too much money for a low-earner.)

What do you mean about the last part -- more on your return after rehab. I'm not talking about rehabbing this property but other ones. This property, even if fully rehabbed, wouldn't go for much more than for what I bought it.

That last sentence sums it all up. It says you paid full market price for a non performing property. But the first sentence to George S. says there is a chance to turn it around. If you can raise the rents to get them to full market rates, how much difference would that be?

Sounds like you may have an "out" becuase of the underwriting issues?

Also, keep in mind you can write that mortgage interest off against your W2 income. If your not married or have any dependents or own your own personal resident, this is going to give you a little bump on your tax returns.

Alos, if you bought right, you can advertise to other investors in your area that you have a "turn key" property ready for them to buy!

@Tim C.

The thing with the rent is that they're long term tenants that really can't afford a higher rent. Because, from what I've been told and have experienced a little of, they are good so I'd take less. However, from learning, I wouldn't have purchased in the first place knowing what I know now (and is probably a contributing factor to why it was on the market for so long.

@Walt Payne

Probably more than what I'd want to mention now. Not egregious, but I'm not going to be making much on it, more like bonus money. I'd use money from my day job to further my REI career, notwithstanding the equity. My concern, now, is that although the building is in pretty solid shape, it's not something I want to repair.

@Chuck Holland

I could probably find an out or two, if I wanted. The biggest thing with that is I don't want to burn bridges before I ever close, or come off as flaky. I suppose that it may be acceptable, given the circumstances, but I'm stuck between a rock and a hard place. Apparently the sellers are being feisty as well with their agent, so I could use that to my own advantage if I really want, I suppose.

This brings a couple things to mind for me. One, real estate is a pretty slow game, for the most part. People love to tell stories about their amazing, quick profits, but most of those come after years of buildup. Not always, to be sure, but it's easy to get stars in your eyes- especially if you are talking to people who were able to jump on the massive opportunities of the housing crash. But if you get started, even slowly, it will snowball for you eventually too.

I'm guessing that your info about the tenants (how good they are and what they can and can't afford) comes from the seller, so that's to be taken with a grain of salt. If your rents are below market, start raising them. Do it slowly- nobody is going to move over a 10-15 dollar raise. If you lose those tenants, there are other good ones out there.

You don't give any numbers, so I don't know how sucky (or not) a deal you've gotten into. But you could still bail at this point, and it might be worth it I don't know. I wouldn't worry about looking flakey to people who are being flakey themselves- think of it as not putting up with their flakiness!

Post some numbers if you want more input. I invest in Columbus, so I might have some relevant advice. Or not, lol!

@Jean Bolger

Fair enough.

I'm getting it for $63K with 25% down (although originally it was 15%, because it was a primary home, and silly me didn't ask before what constitutes an investment property even though the loan officer knew I'm looking at pure investment properties). Rent is $400 and $425. Market is around $500. (I know, I know....)

I suppose I took too much of a learning angle that I didn't want to have to change tenants or really manage them. I did meet the tenants once. Oh well, lesson learned there.

Good point about the flakiness. I like to keep my options open, and that includes preserving bridges. Although I don't know if I'll ever use this bank again.

@Christian Lautenschleger One of my favorite aspects of this forum is that people feel comfortable enough to admit their reservations and missteps publicly. I would imagine that many investors on this site can relate to your feelings of buyer's remorse.

I currently only have 4 properties, but looking back to my first, I still say to myself 'what was I thinking'. Knowing what I know now, I certainly wouldn't have purchased my first property in the same manner. I am, however, thankful for that first property because it enabled me to become a more savvy investor and more efficient and effective landlord.

It is far better to make a big mistake on a small investment (duplex) than to even make a small mistake on a larger scale project (apartment complex).

Where is your property located in Columbus? Your cash flow and appreciation may be stagnant and you may have tied up working capital, but you still can take advantage of your tenant's debt paydown and duplex's tax shelter. Also, it seems as though you can still eat the earnest money and walk away and move on.

@Jim Herbst

Yeah, at least this may help someone in the future.

Everyone makes mistakes. Lots of ink has been spilt from the stories of failure from eminent businesspeople.

It's off Broad Street in the SW part of town. It's in a nicer pocket for that part of town. I don't want to discuss housing trends, as that's above my pay grade.

For your last point. How hard is it to walk away? I don't mind losing that earnest money, as what I've learned has above and beyond been paid for from that. I like my agent, and he'd ostensibly lose his payday, but this is business.

Yeah, your price is kinda high for those rents, but you should still have some cash flow. It really just depends on how your expenses pan out. And the area, which will effect your ability to raise rent or not. Look on the bright side- when you DO get up to 500/side you'll have $175 more monthly cashflow. Incremental increases, at first, (with just your two units) seem useless. But as you get more property you'll see the power of that. Say you had twenty five units, and all of them got a $20 increase- that's an extra six grand a year to you. This is what I mean about the slow game.

I did a quick analysis using the 50% rule:

Purchase Price: $65,000

Downpayment: $16,250

Loan Amount: $48,750

Mortgage Payment assuming 5% interest rate over 30 year amortization: $261.70 (not including Taxes or Insurance)

Total Rent Received: $825

Expenses assuming 50% rule: $412

Total Net Income: $412 - 261.70 = $150

Not terrible! Believe me there are people out here that have made way worse deals. Myself included. You learn to structure your deals better in the future.

@Jean Bolger

And that's what I would happen. Real estate is definitely a slow game.

@Brandon C.

It's not just that, but any other expenses. It's an as-is property and although it is in good condition, I'm not sure how much the repairs would increase value and would probably have a hard time selling it under the current scenario (it's been on the market for ~year).

Of the first 10 properties I ever bought in hindsight I would say 6 of them were terrible investments. And even now I bought a couple last year that I regret. The important thing is to get started but be patient with it as a poster above suggests. If you're looking to get rich quick buy and hold real estate is not for you. If you want to get rich over time you're taking a good first step.

The numbers on your deal don't look too bad to me especially with room to slowly raise rents. Be careful to keep cash in reserve if hvac/roofs etc are older.

If you're not losing money then you're doing all right. My first deal was a pig and cost me loads. It makes you more cautious and in tern a better investor. Find out what you like to do. What you are passionate about. Wholesaling, fix and flips, buy and holds, lease options ect ect. So buy and hold's not for you, move on to the next one. Good luck!

@Christian Lautenschleger

Two of the main things I hear over and over again on the BP Pod-casts from those already in the REI game (many owning many properties/flips/etc...) is that you will always be learning AND that most REI investors biggest failing is they never get into the game. Congratulations, you are in the game and learning. You are now above 80% of the people who want to do REI.

(Yes, this is a shot of encouragement. I get like this when I drink my morning coffee)

@Christian Lautenschleger Hi, there is no such thing as regret, its all about learning about your strategy and moving on. Obstacles are defeated when you're persistence in your learning. From my viewpoint as long as you're not losing money ( please take into account the future capital expenditure) then you're getting a free education. if you can get out, make up your mind and get out , else continue on and look for other ways to get cash flow from this property.

@James K.

I think you hit the nail on the head. For me, the first investment was always going to be about the learning experience. I think I've achieved a lot of that without ever receiving the keys.

And the future capital expenditure is key. From (mis?)communication from my bank, it's going to cost me $10K more than what I originally accounted. I can still afford it, but it will greatly effect how I expand. Instead of having more money in the bank, even if the property won't yield much, I kind of have to start from scratch for property #2 (I know there are other ways to grow than using my own money, but I don't think I'm at that point yet).

Again, I view myself as an entrepreneur first, always thinking ahead. I'd like a little more than a hundred or so per month. I'm looking at potential, and I don't know if this is it.

@Christian Lautenschleger It sounds like your heart is really not in this deal. I know that you are not supposed to fall in love with the property and that's not what I mean. It seems like you don't really believe in this deal and you are going through with it out of a sense of obligation to the bank, the Realtor and the bridges you don't want to burn. All of that speaks of you being honorable and of high integrity. However, you owe it to yourself and your enterprise to do what is best for your goals without being unethical. You have plenty of latitude to walk away from a deal that is not being handled to your level of professional expectations. If you don't believe in it. Don't do it. You will have another first deal that will not be as good as your tenth, but in my inexperience opinion, this one is not the one.

Much success to you.

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