Lessons from My First Purchase

23 Replies

I just wrapped up a busy (and cold!) week in Owings Mills (outside of Baltimore), where I was rehabbing my first rental property. Being my first real estate purchase ever, it was exciting and intimidating to go through the underwriting (don’t get me started), closing, and rehabbing processes for the first time. I made a number of newbie mistakes, and thought that I’d share those with others who might be getting ready to make their first purchase.

Stand by your numbers. I made several offers on HUD REOs, always through the listing agent since I didn't have one lined up in the area (also a mistake). While I knew what numbers I needed to hit (70% of ARV after repairs were factored in), the annoyance that I encountered from the listing agents and rejections from HUD led me to soften my stance. On the property I purchased, I offered 70% of ARV without factoring in repairs, and immediately kicked myself when HUD accepted without even countering. Clearly, I left money on the table and also tied up excess capital in the property, since I likely won't be able to get all my cash out when I refi in 6 months.

Build your team first. My initial "team" was the listing agent who became my buyer's agent when I made my offer through her. I'd heard about HUD's "lax" standards for their listing agents, and I'm afraid that in my limited experience, they were absolutely true. My agent was purely interested in her commission, and just about the only time I was able to get her to advance my interests was when it looked like the lender wouldn't finance the deal. Likewise, once I hit the ground in Owings Mills to get the condo into rental condition, I was on my own.

Sweat equity isn’t free. Because I had compromised on my initial numbers, I tried to cut my losses by doing the rehab myself. This meant that for the first three days of my week in OM I was scrubbing walls, applying layer upon layer of primer, and basically working from the moment I got up until I crashed on the floor at night. I was NOT doing the things that would make my next investment more successful: networking, looking at properties, and building a team.

Focus on what you do best. It wasn’t until I realized that I wouldn’t be able to complete the rehab in time that I finally asked for help. And then amazing things started happening. Instead of spending the day with a roller in my hand, I was meeting other investors and rehabbers; I got referrals to great contractors; and I made connections that will enable me to do better deals and scale in the future.

Some lessons you can only learn yourself. I’ve listened to all the podcasts, followed the forums, and read a couple of dozen books. So, I knew what I was supposed to be doing but allowed doubts and other personal weaknesses lead me off course. For those like me, it might take three days of HARD labor and imminent failure to understand why the best practices are the best.

In short, this week completely kicked my ***. But I learned some very valuable lessons and ultimately managed to turn it into a success by reaching out to more experienced investors and contractors for help. Just as importantly, my initial numbers (though not ideal) left me room to make some costly mistakes without losing money on the deal.

For other potential investors who are still in the “book learning” stage, I’d suggest that you probably already know what a good deal is. Find one, stick to your numbers, do it, and take your learning to the next level. ;-)

Happy investing!

Thanks for sharing Matthew. I am an entrepreneur but I want to become an RE investor and your post gives some insight into the process. You mention you read some books. Although I know there are book recommendations on the forums, would you mind sharing any that you would say stood out in helping you get to your first deal?

Thanks again

@Matthew L.   thanks for posting.

For you and others the "70% rule" is not really meant to apply to rentals because it does nothing to address cash flow and expenses of owning rentals. It can be a good backup check to make sure you are not into a project for too much and own a rental that is upside down.

Thanks for sharing and Congrats @Matthew L.   on your first purchase. Like you said no matter how much you read you will always make mistakes and those mistakes are the best learning experiences by far. 

You're story is an inspiration and appreciate the insight. Keep sharing the successes and the "failures" or a better term would be learning experiences!

@Pedro Velez  I got a lot out of The ABCs of Real Estate Investing, The Millionaire Real Estate Investor, and J Scott's books on flipping. 

A little off the beaten track: Every Landlord's Tax Deduction Guide. This book helped me understand the immense tax benefits of buy-and-hold investing. It also saved me a lot of money by helping me understand which costs would be deductible and which would only be depreciated. Did you know that you can deduct up to $5k of start-up expenses or expenses for your home office? I didn't.

@ Robin Secord has collected all of the books recommended on the podcasts if you want additional recommendations.

http://www.biggerpockets.com/forums/62/topics/1697..

Originally posted by @Matthew L. :

@Pedro Velez I got a lot out of The ABCs of Real Estate Investing, The Millionaire Real Estate Investor, and J Scott's books on flipping. 

A little off the beaten track: Every Landlord's Tax Deduction Guide. This book helped me understand the immense tax benefits of buy-and-hold investing. It also saved me a lot of money by helping me understand which costs would be deductible and which would only be depreciated. Did you know that you can deduct up to $5k of start-up expenses or expenses for your home office? I didn't.

@ Robin Secord has collected all of the books recommended on the podcasts if you want additional recommendations.

http://www.biggerpockets.com/forums/62/topics/1697..

 Thanks for the info Matthew. 

@Ned Carey  Thanks for taking the time to comment on my post. You always provide great insight. I agree that the 70% rule is useless when it comes to cash flow. Still, I like it as one criteria for evaluating deals because it leaves you in a good position to pull your cash out later.

@ Matthew L.

It's generous of you to write all this down and post it for the benefit of your fellow investors. These are words of wisdom. I think it takes guts to lay out what you wish you'd done better, and not pretty things up for public consumption.

So purely out of curiosity, let me ask, what drew you to Owings Mills in Baltimore County, when you live in California? I understand from various conversations around BP that making the rental numbers work in California is not easy. But goodness, why come all the way across the country? And why not go, say, to Baltimore City, Atlanta GA or Richmond VA, which RealtyTrac finds are the best rental markets in the country?

Here's a link to the new report with clickable map etc.:

http://www.realtytrac.com/news/real-estate-investing/first-quarter-2015-residential-rental-market-report/

I mean, nothing wrong with Owings Mills, but I don't see it as anything more than one of many affluent suburbs, which you can find just about anywhere in the U.S. Am I missing something? 

@Nancy Roth  Great question! You're absolutely right about the challenges of investing in CA. For me, once you're talking about hopping on a plane to see a property, the difference between Denver, Atlanta, and Baltimore is negligible. 

I went to grad school at Johns Hopkins, so I naturally gravitated towards Baltimore when I started thinking about out-of-state investing. I know a lot of investors do very well in the city, but the demographic trends aren't nearly as promising as Owings Mills. Baltimore is a city on the decline, whereas Owings Mills is one of two targeted growth areas in the Baltimore County Master Plan. 

Across the board, Owings Mills beats Baltimore on unemployment (5.6% vs 7.8%), projected job growth (35.8% vs 33.6%), population growth  (+53.2% vs -3.6%), vacancy rates (6.7% vs. 18.8%), and percentage of renters (51% vs 41%). When you tack on lower property taxes, newer construction, and more landlord-friendly laws, it just looks like a much safer place to park my money. Moreover, while I know we shouldn't count on appreciation, the above demographic trends suggest that Owings Mills offers better prospects than Baltimore.

All numbers are from bestplaces.net.

@Matthew L Actually, Baltimore's population has stabilized in the last year or so. Yes, there is a lot of vacant housing stock as a result of the decades of population loss as all the industry closed or moved out of town. But the housing surplus in town actually keeps rental acquisition costs quite low, especially in relation to the rents you can charge in that market. A mostly renovated house I bought in 2013 for $30K, in which I've invested $6K to get rent ready, is now yielding $1200/month, most of which is subsidized. Subtract taxes, insurance, maintenance, pain-in-the-butt nature of Baltimore City, whatever you want, but that still yields a pretty good return. 

Your cost of acquisition in Owings Mills will be much higher, but the rent will only be slightly higher. The county levies tax at a lower rate, but the higher acquisition price means you ware likely to pay more in taxes than you might expect. Your insurance costs will probably be lower. And you are more likely to attract middle-class tenants. That definitely takes a lot of the difficulty out of the landlord biz. 

BTW, if appreciation is key to your investment strategy, you are better off in Baltimore County. You'll get meagre to no appreciation in the city, except in a very few neighborhoods.

Long story short--I guess it's a matter of choosing which problems you can live with. There is no perfect, problem-free business. Or life, for that matter. 

Thanks for writing.

@Nancy Roth  If I was local, I'd certainly look to the city for better cash flow. But as an out-of-state investor, I really want to be as hands off as possible, so I'm encouraged to sacrifice cash flow for lower maintenance properties and tenants.

That said, the great cash flow you and other investors are getting in the city is very tempting...

Great chatting with you!

Originally posted by @Matthew L. :

@Nancy Roth  Great question! You're absolutely right about the challenges of investing in CA. For me, once you're talking about hopping on a plane to see a property, the difference between Denver, Atlanta, and Baltimore is negligible. 

I went to grad school at Johns Hopkins, so I naturally gravitated towards Baltimore when I started thinking about out-of-state investing. I know a lot of investors do very well in the city, but the demographic trends aren't nearly as promising as Owings Mills. Baltimore is a city on the decline, whereas Owings Mills is one of two targeted growth areas in the Baltimore County Master Plan. 

Across the board, Owings Mills beats Baltimore on unemployment (5.6% vs 7.8%), projected job growth (35.8% vs 33.6%), population growth  (+53.2% vs -3.6%), vacancy rates (6.7% vs. 18.8%), and percentage of renters (51% vs 41%). When you tack on lower property taxes, newer construction, and more landlord-friendly laws, it just looks like a much safer place to park my money. Moreover, while I know we shouldn't count on appreciation, the above demographic trends suggest that Owings Mills offers better prospects than Baltimore.

All numbers are from bestplaces.net.

 I grew up in owings mills and have significant first hand knowledge of what you are referring to. Usually numbers are a summary of a larger set of data. For example, alot if owings mills population growth is as a result of the metro allowing people in baltimore city to move to owings mills. As a result, many once decent areas of owings mills have become a dump. Examine owings mills mall circa 1995 vs owings mills mall circa 2015. This has occured because all the bad people have moved in, and the good have left in droves. Owings mills high school is a good example of this progression. Compare 20 years ago to now. The previous will explain the "population growth" projection. Whats not being explained is how the quality of owings mills continues to become a ghetto ie milford mill, ie randallstown. If youre chosing between owings mills and baltimore, i would say the answer is dependent on the price difference of equivalent places.county laws/taxes are preferable...but more than likely you're going to pay for it negating the benefit. Large portions of Owings mills have became a county ghetto. Other parts are rather upscale. Very similar to the city

Good info. Thanks for sharing!

Account Closed Thank you for sharing your first-hand knowledge of the area. I personally I haven't encountered anything resembling a ghetto in Owings Mills, but my travels have been very limited. What areas would you recommend avoiding?

Mathew thanks for sharing. We all took hard knocks when we started up investing.

There are those who talk about it and those who act like it never happened! lol

I tell people I talk to I would rather work with someone who has failed on some level and learned then people who have not failed yet. The people who haven't failed tend to not know boundaries and how to properly asses risk in a situation. To them it seems nothing can go wrong as they haven't experienced it yet so they tend not to plan for it.

As a seller it's great and you seek out new investors to take advantage selling properties at  a premium but for buyers not so much....... : )

The asset managers get excited when they see a greenhorn buyer in their midst! Just be thankful your purchase is small. I have seen people make multi million dollar mistakes before. I wasn't involved on those deals but they felt because they had a lot of money they were indestructible. BIG MISTAKE

It doesn't matter if you have 10,000 or 10 million you can lose it quickly with the wrong choices.   

Hi Mathew, 

Thank you for your candor.

I am new to Real Estate investing, still building my team. Your words are like gold to a person like me, just getting into a new field of business.

I just wanted you to know that I appreciate any honesty I can find.

 Thanks,

Bruce.

Bruce Scott

Security Atlantic Investments LLC

@Joel Owens  Thanks for the encouragement. I'm a firm believer that mistakes can be  more valuable than success, so long as one has the courage to admit them. 

@Bruce Scott  I'm glad that you found it useful. PM me if I can be of any help. I'm not nearly as experienced as many on here, but my experience is fresh and freely available.

Good luck!

when i say ghetto, i say it in a way that   I wouldn't live there, not in a way that i wouldn't own rentals there. If you want to know those areas? Start from the owings mills metro stop (cause of problem), and expand your radius until you reach areas that look like you're in the country. Everthing before the country is "bad owings mills". I guess my point was that outside of county vs city laws/taxes...these two places are essentially the same, so i encourage considering price differences when taking the taxes/laws into account. And while the rents are slightly higher in owings mills, its only a result of everyone from the city moving there, and the prices of houses are way higher. Walk into the owings mills mall sometime to witness the effects of normal people running like wind

Thanks @J Scott ! I really like Owings Mills and didn't mind the weather...but I'm appalled at what passes for sushi there! :-)

Account Closed Point taken. I've been focused on the Red Run/Painted Mills and McDonough areas. 

I used to go to the Owings Mills mall in the mid-90s when I was stationed at APG and can't believe how much it's changed.

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