I figured I start a forum post detailing my experiences as a new-ish real estate investor. I've written a couple of blog posts, but it may be better to use the forums as well to generate some active discussion. At least that is my hope! Look forward to hearing all of your comments, criticisms, etc.
#1) Getting my feet wet...
I was fortunate enough to find BiggerPockets about a year ago, and it has opened my eyes tremendously in that short time.In fact, it’s a constant source of sadness that I didn’t have this resource ten years ago. Nevertheless, after obsessively scouring information over the last year or so, I’ve finally decided to start the process of documenting my experiences as I journey down the path towards financial freedom.
If you are a fan of the BiggerPockets’ Podcasts, you know that many of the successful R.E. investors got their “push” from the book “Rich Dad, Poor Dad” by Robert Kiyosaki.I, too, was motivated by this inspiring book back in about 2003. At the time, I was a freshly minted Second Lieutenant stationed at the Pentagon in Washington, D.C. Though I was itching to start utilizing the lessons learned from the book recently finished, the market prices at the time were very prohibitive. Combine that with the lure of taking advantage of the opportunity to enjoy the company of family, which happened to live about 20 minutes away, not accounting for traffic of course, from my office (i.e., living free…well, I gave them some money, but nothing near market rents).
I spent the next four years saving the extra income in the hopes of one day being able to purchase my first property. The idea at the time was simply to purchase a place after each PCS (i.e, permanent change of station, essentially a forced military move to a new duty station). I had the foresight to place those funds into both a Roth IRA and the government-sponsored 401k known as the Thrift Savings Plan. If you can recall, from 2003 â 2007, the period I lived in D.C., if you were "in the market," you could essentially do no wrong in both the stock market or real estate. Everyone was a genius. So, though I "missed" out on the gains in real estate, I was able to capture quite a bit in index funds (I dabbled in individual stocks as well, but that is a story for another site).
From there, I moved on to Dayton, Ohio to pursue and Master's degree on the military's dime. It would be an 18 month tour, and I would finally be able to purchase my first property! It's late 2007. The market is beginning to show signs of stress. Real Estate prices have fallen ~10%. I'm thinking, "wow, I'm one lucky guy. I am getting such a great deal on this new construction condo!" Ugh, a condo? Anyway, I purchased this property, a 2 bed, 2 bath, 1350 sqft condo for $115k. I used conventional financing with a 30 year fixed loan at 6.12% after paying points (Hey, historically this was a great rateâ¦). It was structured as an 80-10-10, where the first loan is at 80% of the purchase price, the second loan is at 10% with PMI (private mortgage insurance), and it is followed with a 10% down payment. This brought my payments for PITI (Loan Principal, Interest, Taxes, & Insurance) to $765/month on the first loan, $85/month on the second loan. It also had condo fees at $160/month and homeowners association fees of $72/month.
So, to sum up this "deal", I was in for $12k (at the time, I didn't want to waste my VA loan, not knowing that you could take out multiple VA loans as long as you were below the threshold of about $415k), with payments totaling $1082/month. I was in a great location! As I'd read, "it's all about Location, Location, Location!" I had that down, so the rest (appreciation, rents, etc.) would all magically fall into line. Little did I know, rents for a similar property where going for about $750/month...
Being in the military and having to move for the second time, I was essentially forced to use a property management (PM) company. Now I will say, I've had a pretty good experience with them. They tend to keep my unit occupied and don’t charge an arm and a leg to do repairs. But, adding on a 15% PM fee on top of a bleeding rental is torturous.
Here are the numbers:
- Purchase Price: $115k (I broke rule number one, you make money when you buy. I paid market value in a declining market. I’m still shaking my head.)
- Down payment: 12k
- Rent: $825/month (I allow pets)
- PM fee: $123
- MX: $82/month (10%)
- Vacancies: $82/month (10%...It’s actually been closer to 7% the last 5 years)
- Reserves: $41/month (5%...I probably can drop this due to this property being a condo. The condo/association fees generally will cover this)
- PITI (Loan Princial, Interest, Taxes, Insurance): $850/Month
- Condo/Association Fees: $232 (in the last four years, these fees have increased to 264 or 14%)
- Cash Flow: -$585 / Return on investment: Let’s not talk about this.
And so it follows, this was the first mistake that I made in the real estate game. This property continues to be a thorn in my side. I know many of you are probably thinking, “sell, sell, sell”, but I like Brandon Turner's approach: just do twice as better next time. Unfortunately, I still hadn’t found BiggerPockets during my next purchase….to the bane of my existence. I have managed to do some things recently, again thanks to BP, to make the number presented look a little bit better. Nevertheless, this is a terrible investment. I even broke most of the Rich Dad, Poor Dad rules. Luckily, as I travel down this exciting journey, the story starts to improve. It's a slow, but steady process.
#2) First purchase after a military move
Following my first experience in real estate, detailed in my first blog post Experiences of a "Relatively" New RE Investor, Part One, the naive Frankie at the time was feeling pretty good. Now, a single Captain in the Air Force with no kids, I felt confident that I was well on the path to financial Freedom. I had acquired my first property with a long-term plan to acquire one additional property every 3-4 years when I moved to a new location. By the time I reached retirement age (i.e., 42 for us military folk), I wouldn't have a worry in the world…
In my mind, I was only losing about $380/month, and I could easily cover that with my income. My "math" only took into account PITI, condo fees, and management fees at $850, $232, and $123 respectively.I did not realize that you also needed to account for vacancies, maintenance, and CAPEX on top of that to get a true indication of cash flow.Adding these to the mix, my actual cash flow was -$585/month.Yikes.
Upon my move, I figured I could save some money by paying off the second mortgage which had a remaining balance of about $11k.This dropped my actual loss down to ~500/month on a $23k investment.My property, originally worth 115k, for which I paid full price, was now worth ~$90k.Mind you, my stock portfolio had also dropped significantly.For my next military assignment, the Air Force moved me to Edwards AFB, CA in 2009 which is in the Mojave Desert about 1.5 hrs. Northeast of Los Angeles.
My investment career wasn't looking so hot.However, rattled as I was, I was an avid fan/reader of Warren Buffett (still am as a matter of fact).I was confident that times of panic were the best times to look for golden opportunities.Ok, I was fairly confident.If I would've been REALLY confident, I would have bought up everything I could get my hands on.Instead, I stayed the course and stood by my plan.I kept contributing to my IRA and 401k, and began looking for another property to purchase with the intent of living in it while stationed in the area and renting it out when I moved.
Now, looking back, I realize that I made another rookie mistake.When searching for the property, I did not educate myself and become an expert in my new market.Granted, it’s a little more difficult for military members to accomplish this as we only get about 8 – 10 days to find a place to live.However, I could have started the process from Ohio.
Anyways, for those that know the area, I found a foreclosure in a great neighborhood west of highway-14 in Lancaster, CA about 40 minutes for base.The previous owners had purchased the property at the peak of the market for ~$450k.It was now being listed at $195k.If I were in their shoes, I think I would have taken the hit too and walked.Well, probably not due to my security clearance, but I digress.
I offered $185k which was immediately accepted.I was surprised by how quickly I picked this up because I had made 3 other “low’ offers on other units that had all been bid up well above the original asking price.I say low because I was only under-bidding by about 5%.I thought 5% below asking was a good deal, but know I know you should look closer to 20-30% below market value.
Now, I did some things right on this property.It was a 4bed/2.5bath at 2550 sq. ft. purchased at about the trough of the downturn.During the 3 years I lived there, I had 4 roommates at various times, pulling in an extra $21k total (sound familiar to Brandon Turner's "house hacking" philosophyÃ¢ÂÂ¦great minds think alike???).I also used my VA loan, so I only had to pay closing costs of about $3.5k.Unfortunately, this area was in what's called a "Mela-roos tax" zone for roads/neighborhood upkeep which added an extra $350/month to my PITI.Therefore, my total payments were $1600/month.
When I moved in the summer of 2012, it looked like mortgage rates had sunken to about as low as they would go (I was wrong, they dropped another .75 basis points…but who can time the market).I decided that I would refinance to get a lower monthly payment.For $2k, I was able to reduce my monthly payments by $230.Add this to the fact that real estate prices were rising fast (my Ohio property was now worth about $95k and the one in California was at about $240K!).I was able to find a good tenet who was actually the best friend of my neighbor.This tenet and his wife were both doctors with one pre-teen child.They had bought there place at the height of the market and were just wrapping up a short sale.I was able to get them on a 2 year lease at $1600/month with a $1600 deposit and no property management.What a great opportunity (they continue to be absolutely fabulous to this day)! I was cash flowing $230/month (NOT!…gotta remember those other pesky expenses Frankie!). I was a pretty happy camper at this point.
So let’s look at the numbers:
Investing timeframe: 4.5 years
Total properties: 2 SFRs
Total equity: $62k
Total Investment: $44.5k (includes 3 years of negative cash flow from Ohio and roommates)
Total Cash Flow: -500/month (breaking even on the CA property when accounting for all expenses and still have the thorn in my side in OH)
CoCR: 139% over 3 years (~40% annually)
Not too shabby for a newbie…But I was still lacking the resources of the BP community!And my next purchase would also be made without it :/
Congrats My husband is also active duty! We have done the same thing using personal properties to buy 3 houses and pure investment to buy 2 more properties for a total of 5 rentals. We are hoping to acquire another 2 in the next 8 months. Living cheaply while the hubby is on deployment :)
Honestly the military's transient nature is the best kept secret. So many of our friends won't buy houses because it is scary :) I totally started a blog/website to help more people who are "intimintated" by Biggerpockets awesomeness!
@Elizabeth C. ,that's awesome! I also have 3 houses (purchased the 3rd when I moved to Scott AFB about 2 years ago), and one pure investment property that I purchased in July (4-plex). I'm looking to get another one hopefully by year's end, and continue down that road for the foreseeable future.
I'm also currently deployed. I've been here for a little over a month and am using this as a way to save up for another downpayment. Looks like us military folk thing alike!
I agree, the military is a godsend when it comes to learning this business and building it for success. BiggerPockets has been incredible, and I've been trying to get my friends in on that secret as well. It's been very tough going, but I think some are finally starting to see the light! Pay it forward right?!?
@Frankie Woods Congrats on getting started, and not letting the first deal stop you. I've seen a lot of people quit investing for similar experiences.
On a side note, 15% for property management seems a little high.
I should have bought property or two when I was at Edwards. Well, live learn and do better each time.
Have you checked out the Lifeonaire REIA? http://www.lifeonairereiastl.com/ A bunch of good people there. If you go, say "Hi" to Shaun McClosky for me.
Next time you're in Dayton give me a shout.
I'm also active duty AF. :-) Enjoy reading your posts about the journey you've taken!
@Darrin Carey thanks for taking the time to read thru the story. I agree, 15% property management is probably too high. They also have a high vacancy history. Maybe it's time to find someone else...
I think I got a little lucky at Edwards, but I'm not complaining!
I will definitely check out Lifeonaire. Always looking for good sources for networking!
I will definitely give you a shout the next time I'm in Dayton.
Thank you @Kelly Miller ! I enjoyed writing the post and reflecting on past experiences. It's a good way to learn and hopefully I help some others along the way.
You still out here in Lancaster?
@Frankie Woods All markets move at different rates and times. Some of the "big" markets have jumped up. A lot of the rest are "still waiting." This summer was the first move in Dayton, supply has gone down. If the trend continues, next the prices will start moving up.
This time though I'll have a few more properties.
Always good to hear how military people take advantage of moving around and the VA loans to build a portfolio. We are GS retired AF and started our portfolio when we were at Tinker. We now have 15 houses in total. They are all in OKC as we found the market so good and the pool of tenants plenty. We just came back from Italy and bought 2 while we were over there. We have used PMs since 2012 as we are long distance. Currently we are in DC. We haven't decided whether yo buy here or not we are still following the OKC market and looking at MD and Delaware for our next purchase.
Good for you for not giving up. Btw I just found this site at the end of last year myself. Wish I had found it before. Still I think we learnt the hard way not always a bad thing.
@Frankie Woods Keep the posts coming! I'm thinking about pursuing a similar plan if I'm able to join the military in the coming year.
@Bradley Bogdan will do! Thanks for reading! The military has been great so far.
@Sara Cunningham I hope to be where you are at in the future! It's good to see other military folk taking advantage of the benefits we have. I think many of us don't realize how good we have it.
I had no idea OKC was such a good market! I think we are lucky because a lot of the military insititutions we get "stuck" at are in pretty good locations/cities. It makes opportunities ripe for us buy and holders!
Slowly working on building the portfolio and continuing to learn on the way. A definitely agree with you; sometime the best way to not only learn, but institute those lessons in our daily decisions, is by making the mistakes firsthand. It really sinks in when that happens, haha! Thanks for sharing and I wish you the best as you continue forward!
@Frankie Woods Love the post! I am also in the Military currently deployed here in the great land of Afghanistan. After this deployment I will be in position to pay off my first rental property completely (rents for $850)...I know its against some of the rules on this site, a lot of people like to never pay off their homes and use the leverage system.
I just want one house completely paid off and the others I will put down the 20% or VA Loan and then just start buying them back to back and building my portfolio. For me there is just something to be said about having at least one home paid for in full. It helps me sleep better at night especially with 3 kids and a wife. Security, Security, Security...
I own a home at Fort Bragg NC, I was thinking about moving out of that house after this deployment and renting it out, then buying another house in that same area utilizing my VA Loan. What do you think? This would make 3 total properties I own with one being completely paid off and its being rented at $850 a month.
@Chance Cooper thanks for taking the time to read the post! I was in Afghanistan (Bagram) in '12. I'm now at Al Udeid...it is soooo much better, haha!
There is nothing wrong with paying off your homes. In fact, that is a pretty contentious item in this community. I say, do whatever makes you comfortable. Security is a GOOD thing. Though you can get better returns using leverage, you can also get a lot burned a lot more if things turn sideways or upside down. I may actually use a combination: pay of some homes with some of the cash flow while I continue to leverage others.
I think that strategy would be ace! I am actually thinking about doing something similar. you know the area so you have that covered. What I would do is find a place to buy FIRST, and then move. That way you get a GREAT deal before uprooting yourself. Just be mindful of the moving costs (which are really pretty insignificant in the grand scheme of things).
Looking forward to hearing more about your story!
You can't use a VA loan to purchase rental property that I know of. You can of course use it to buy a home to live in, then when you get ready to move you can get permission to rent the property out. However that ties up the VA loan too. My main house in OKC is under our VA loan. We are getting ready to sell that as its too big to rent out and get any cash flow on. We are going to take the equity from that and purchase a smaller rental house for cash.
3) Round three of the master plan!
Welcome back to the third installment cataloging my burgeoning real estate investing “career”.Actually, up until now, I really viewed these experiences in My First Couple of Blog Posts more like a hobby.In hindsight, I should have spent much more time learning each individual market BEFORE finding and purchasing each property.Ah, to live and learn!C’est le vie!
I arrived at my new duty station in the summer of 2012.Scott AFB is nestled in a relatively small community about 30 minutes east of St. Louis.It’s actually a pretty sweet deal: close military family who take pride in executing the mission while looking out for each other; relatively close to several major cities (St Louis, Chicago, Nashville, Memphis), but far enough away to avoid the hustle and bustle; easy access to many outdoor activities; growing tech industry, close to five excellent transportation routes (the Missouri and Mississippi Rivers, and I-70, I-64, I-55); and an exciting baseball team (I’ve drank the Kool-aide and am now a solid Cardinals fan).Talk about Location!
I started out wanting to live in the city.As a single dude with no kids, who wouldn’t!?!?However, the more I looked, the more I realized that most of the properties were 1) old (average age of about 90 years); 2) too expensive for my “needs”; 3) needed a lot of work, or 4) in war zones.Add that to the fact that the commute would get really old really quick.Yeah, no thanks.
Therefore, I decided to buy new construction.New construction?Why on earth would an investor EVER buy new construction you ask?I’m sure there are indeed situations were it makes sense.This was not one of them.Ah, the trials and tribulations of not having BP…
I ended up purchasing a 4 bed, 2.5 bath SFR with one of the bedrooms converted to a loft-like open room concept.It looked awesome!Hardwood floors throughout the first floor (good), great kitchen (good), big rooms (good), for $183,000 (bad!).To top it off, the community had a pool for just $45/month in HOAs.Rents in the area were going for about $1,500/month for 4 bedrooms and $1,200/month for 3 bedrooms (at this point, I actually had the prudence to look at rents in the area -good).
Through several conversations with several lenders (good), I found out that I could actually have multiple VAs at one time, up to a limit of about ~$417k.The loan in Lancaster was for $195k, so I still had ~$200k left.Awesome!Rents would cover my PITI and I would have to put virtually no money down! Score! Wait, not so fastâ¦.
Those pesky additional expenses that you have to account for: vacancies, maintenance, and capital expenditures.Dang it!
The verdict is still out on this purchase.I still have about two more years remaining at this duty location.I haven’t yet hacked my house by taking on roommates (though I may need to seriously consider this option for the remaining time here).Hopefully, I can get closer to the average rent for 4 bedrooms at $1500/month.That will put me at about break even as far as cash flow (actually losing about $75/month).If I get the 3 bedroom rate of ~1200/month…well…not looking so good. BP! Where were you?!?
Well now I do.And now I think I’m quite dangerous.As you’ve seen, I’ve made, repeatedly, some pretty bad rookie mistakes.Nothing to break the bank, but bad nonetheless.It’s good to say that I’ve been learning along the way, and BP has really brought those mistakes to the forefront of my mind.Though I’m sure I will continue to make mistakes as I grow, I’m sure we all do, I truly believe I will get more of the things right going forward.
In the next installment I’ll talk about my latest deal, which in fact, is a pretty good deal if I must say so!It’s a 4plex in St. Louis.I can’t wait to get into that and hopefully hear what some of you have to say.
I would love to hear feedback if you have it.Go ahead, leave a comment.I won’t bite.
@Frankie Woods, thanks to you and all who serve. I appreciate your sharing of stories in this manner. Much like the podcast this week, your message of having a good education is resonating with me.
I know to some it might seem like I am sitting on the fence, but I think spending these last four months putting together my business structure will be beneficial for me when I pull the trigger next year. Learning from the experiences of folks like you is a very powerful and helpful thing.
@Ronald Perich Thanks for reading! You'll see a lot of people saying you should just jump in to avoid "Analysis paralysis".But I think this should be framed or caveated with the importance of education, which a lot of folks on the forum do.
In my opinion, you’re approach is excellent.You’ve created a game plan (thru your business plan) and outlined a timeline.Now you have specific criteria which will prevent sensory overload and limit the effects of the “next shiny object”.In addition, your timeline should ensure that you don’t sit on the sideline indefinitely.
You’re well on your way!I wish you well, and I hope you share your story as you progress!
@Frankie Woods , I enjoy reading your past experiences and looking forward to any other info you have to share. You've already commented on one of my posts knowing that I'm also a veteran and wanting to take the VA loan route to start my real estate investing journey. Thanks for sharing
You are obviously an intelligent fellow since you are now a Cardinal fan. Go Cards! I forget where you are originally from but by the time your duty is up at Scott AFB you will probably want to have a permanent residence here.
I am a Vietnam Vet and I appreciate you and your fellow servicemen for serving your country today.
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