Help! Am I doing something wrong? Do I have what it takes?

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Help! Am I doing something wrong? Do I have what it takes?

Shalom Shore
Rental Property Investor · Buffalo, NY · Member since 2015 · 11 posts · 15 votes

I'm turning the community in the hopes that you can talk me off the ledge. Or at least provide some support or advice. 

I dreamed of investing in real estate for years. I networked my *** off and managed to buy four properties, all financed at around 75% LTV, so I have some margins.

I picked a good location - Baltimore, where I have supposedly enviable cash flow, $400-600 per property after PIMI, but before variable costs. 

That's the clincher. All the stuff that goes wrong. I tried bracing myself for this in advance - "always expect something to go wrong" I was told. I braced myself for the 50% rule - I was gonna have expenses every month on the houses. A repair here, a fix there, I thought. 

I wasn't prepared for massive expenses, on all the houses, for what feels like all the time. Bleeding thousands of dollars in one go on pest removal, tree removal, mold removal. Expenses that wipe out an entire year's rental profits in one afternoon. How do people do it? 

I can't catch a break. Not a week goes by without a tenant complaining about an issue. And these are good tenants, who pay on time and try to take care of things themselves with the professionals I send.

And the truth is, worse than the expense, is trying to get people to help me resolve things. For fear of sounding like a trite broken record, It's such a huge struggle to find reliable people. No one has anyone to recommend. I find people myself (after calling lots of numbers where no one answers), have good initial conversations, and then they don't show up. There goes another day. Time to make more phone calls tomorrow while the tenant tries to live in a basement that's flooded in sewage. 

Don't get me wrong. I'm not afraid of hard work. When I discovered heaping piles of bat guano in an attic of one my houses, I rolled up my sleeves and cleaned it all out myself. I try to be a valuable contributor to my local community, referring others to key market resources and helpful individuals. 

I supplement the costs of all these repairs with my day-job salary, otherwise this would all be over a long time ago. But I'm plagued with frustration, feeling like I can't get it right even though I've tried so hard. Am I unlucky? Am I actually lazy or undisciplined? I'm wondering if there's something I'm missing, or if other people have word of encouragement for me.

Thank you all for being such a great community. 

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Erik W.
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
8y

How long have you been doing this? It's not uncommon for the first 2-3 years for a business (and for most newbies, REI is a business, not passive investing) to show little to noprofit.

I'll share my background and maybe that'll be encouraging.  

I started in 2005 and knew NOTHING. I tried reading books and doing research, but you don't know what it's like until you do it. So we bought a SFH in a Class C hood...then another, then a few duplexes, then a quad-plex...then came 2008-09! For the first 5 years, we made little to no money, and being in the hoods we were, very little to no increase in property values. I did almost all of the work I could and self-managed. Only hired out professional stuff. We weren't feeding the rentals from our W-2 income, but we never did better than break even. Gradually, I came to almost hate rentals.

Then our second mortgages paid off (we'd borrowed on our home and from family to get started), and we started actually cash flowing positive on a regular basis.  My outlook improved.  

I also learned that if you're going to play in Class C, you must STEAL property.  Not just get "good deals"....STEAL them.  The owner should almost be cussing you on the way out the door at closing, but simultaneously they love you because the property is such a disaster they can't figure out what to do with it.  So the 2% rule (monthly rent is 2%+ of the "all in" purchase + closing + rehab cost) is where I START looking.  If below 2%, I don't touch it.

That's how I began to make money. The cash flow covers all expenses, CapEx, PITI, Management, etc. I still self manage but I include a management fee of 10% I pay to myself along with my owner's monthly draw from profits.

I'm not a big time player, but we're now doing well enough that if I lost my day job, we could live okay.

Going forward, I'm looking at moving in more full rehabs in B hoods so we can get cash flow and appreciation.  It's a tight market now in my area.  I see posts here on BP how some folks pay $500K for properties worth $750K.... I don't know how they do it honestly, but I think they're not the norm.  Either that, or their markets are extremely inefficient and my market is ridiculously efficient.

If I were you, what would I do differently?  Lay out your target numbers (expenses and anticipated profits) before the deal.  What kind of a deal would make you smile if you bought it?  Then do a deal that fits your numbers.  Afterwards, ruthlessly scrutinize how well you did vs. your projections.  Where were you accurate?  Where did you miss?  Where did you totally fail and fall flat on your face?  My worst area has been estimating rehab costs.  I always went too low, even after adding in a 15% "WTF?" cushion.  So I have to add even more cushion.  Where I succeed is estimating rehab time lines, ARVs, and rents.  Get to know your strengths and weaknesses through strict planning pre-purchase and afterwards doing honest self-evaluation.  I learned this in the Army.  Make the plan, execute the plan, evaluate how it all went.

Also, try to find someone who is doing what you're doing and job shadow them in exchange for free labor.  The investors I know who are busy always need "go-fers" to run errands, pick up supplies, take documents to the courthouse, etc.  Trade labor for education.  Maybe have the investor agree to scrutinize your next project.

Good luck.

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  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    @Larry Frank I agree . A SFH makes no financial sense to me
    0Reply
  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Shalom Shore:

    I'm turning the community in the hopes that you can talk me off the ledge. Or at least provide some support or advice. 

     Shalom, I didn't read all the responses yet, so I apologize if this has been covered.

    I've found the best way to avoid the sequential problems you mentioned in your first post is to do a thorough rehab immediately after purchase.  I assume you purchased distressed properties at a low price and that is what allows your generous cash flow.  However, one mistake some investors make is performing only minor repairs after purchase.

    I prefer to buy a distressed property and address all the biggies, like electrical, plumbing, heating, roof is needed, etc.  I usually always redo the plumbing.  If the electrical wiring looks okay, I might not rewire, but I will definitely pay to replace all the outlets and sometimes the light fixtures.  New faucets and bathtub/shower fixtures as well.  If I see evidence of bugs or rodents, I deal with it before the first tenant ever moves in.  Scrimping on those can lead to repeat service calls for minor issues.  Spending the money to update upfront can give you years of good service.  

    It might not be what some investors do, but I've found it works for me.

    Houses for sale for low prices are priced that way for a reason.  Rehab them correctly, and you might avoid some of these issues.  If you paid so much that it doesn't make financial sense to repair some of the major capex, you probably paid too much for it.  

    Regarding contractors, you will run into some bad ones during your early days.  It probably can't be avoided.  My advice is to be persistent.  Once you find out one is unreliable, don't waste time arguing with him or setting up additional visits to fix what he didn't fix the first time.  Move on to the next name on your list.  You'll waste some money, but eventually you'll nail down some reliable contractors for each discipline.

    0Reply
  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Larry Frank:

    You probably paid too much for the property. Honestly, I don't know how anyone makes money from SFH unless the area appreciates. One roof is 10k, there is 3 years of profit.

     $10K.  Jeez!

    I just put a roof on a new purchase a couple of days ago.  Material and labor was about $3500.  If I got a quote for $10K, I'd keep calling other people.

    I know that might be the going rate for many customers, but I'd never pay that much for a roof on a SFR. Never.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Jill F.:

    @Shalom Shore

    Plumbing issues can happen anytime but what we have found, when taking over old properties is that there is most always a backlog of deferred maintenance-- and plumbing and appliances are a frequent offenders (probably due to expense). Normally, in buildings that we have maintained for a while, I wouldn't expect, in one property, to have more than half the toilets with broken seals at a given time because we repair them as soon as we get a report of a toilet rocking. In our latest purchase, these toilets rocked until the ceilings below were damaged and the flooring rotted. In these situations, when we pull a toilet, we shore up the floors install access panels, replace the usually either non-existent or non-working shut off valves and then install a high-efficiency toilet and make ceiling repairs. With a proper fix we won't be back out patching it up every couple of months. At each turnover, we replace applicances with new or very gently used nicer appliances. With our low budget property purchases we have been spending another 2000-3000 per unit renovating and repairing in the first 6 months or at the first turn over. To keep the price in that range while getting the most bang for our buck, we do as much as we can and we're fairly skilled. My hope is that when we get up to around 50 doors that we will be able to afford to have more of the reno work done. We already are able to outsource the vast majority of routine maintenance one we have a property stabilized.

    tldr; It takes us six months to get a property stabilized to the point where all we have is 'routine' maintenance.

     when I bought a bunch of this stuff.. during reno I always replaced the waste lines.. to the street if they were not PVC and been done recently.. number one issue is when people start living there and sewage gets backed up..   although nothing preps you for when they try to flush diapers down the toilet or other things..  so glad to be done with that part of my investing life.. 

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  • Account Closed
    Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes
    8y

    @Brian Ellis Straight up facts!!  

    @Shalom Shore You have 4 wives that's nagging the everlasting life out of you!  At times you thought about shaking the mess out of them but you know that approach won't work.  You have sit down with all 4 SEPARATELY and a mediator (repairman or inspector) and find out what they need to make you both happy.  If you take that approach it will be productive.

    1Reply
  • Account Closed
    Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes
    8y

    @Ian Barnes Do you have 1-3 good inspectors that you could pass their contact details over to me?  You know how it goes, one is always busy, another won't pickup the phone but that 3rd on...he is special and is there to help...but he is on vacation...smh!  So if you have a 4, that would be better.  Thanks Ian!!  

    0Reply
  • Ian Barnes
    Rental Property Investor · Baltimore, MD · Member since 2014 · 247 posts · 321 votes
    8y

    @Account Closed sorry, don't give out my contacts for free.

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    8y

    @Account Closed. 

    0Reply
  • Account Closed
    Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes
    8y

    Thank so much Ned!  @Ned Carey

    0Reply
  • Account Closed
    Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes
    8y

    @Ian Barnes - Thanks anyway.  

    0Reply
  • Larry Frank
    Rental Property Investor · Racine IL · Member since 2017 · 41 posts · 15 votes
    8y
    Originally posted by @Randy E.:
    Originally posted by @Larry Frank:

    You probably paid too much for the property. Honestly, I don't know how anyone makes money from SFH unless the area appreciates. One roof is 10k, there is 3 years of profit.

     $10K.  Jeez!

    I just put a roof on a new purchase a couple of days ago.  Material and labor was about $3500.  If I got a quote for $10K, I'd keep calling other people.

    I know that might be the going rate for many customers, but I'd never pay that much for a roof on a SFR. Never.

    0Reply
  • Larry Frank
    Rental Property Investor · Racine IL · Member since 2017 · 41 posts · 15 votes
    8y

    I just paid about 9k for a 4k square foot 2 story 4 unit for a new roof, so I think I exaggerated that for a small single family house.  Maybe I paid too much though.  

    0Reply
  • Michael Gansberg
    Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
    8y

    Hi @Shalom Shore - I feel your pain. I have over 15 years of experience in RE investing, so I can tell you a few things.

    1. It gets easier. For many reasons- primarily because you’ll get better at what you’re doing, also because you’ll (hopefully) expand and develop economies of scale, and you’ll find and develop associates who are more skilled as well.

    2. It will never be easy- not if you’re in C-class rentals. I’ve invested in everything from the lousy stuff up to A-/B+. At this point, I can say with near certainty that the cash flow on the lower-end properties is almost always less than you think it’ll be, and on the higher-end properties, the problems are fewer and further between, so the cash-flow tends to be higher-than-projected. As you figure this out- and buy accordingly- things should improve.

    Anyway, sorry for the long post, but I’m considering upscaling my portfolio- trimming the lowest quartile of my properties(which take more management than the upper 75% of the portfolio,) and segueing into more mixed-use and commercial properties. At a certain point in an investor’s career, the investor’s time value may become too great to deal with all the hassles of crappy properties. I think I’m there. 🤷🏻♂️ 

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    8y
    Originally posted by @Shalom Shore:

    I'm turning the community in the hopes that you can talk me off the ledge. Or at least provide some support or advice. 

    I dreamed of investing in real estate for years. I networked my *** off and managed to buy four properties, all financed at around 75% LTV, so I have some margins.

    I picked a good location - Baltimore, where I have supposedly enviable cash flow, $400-600 per property after PIMI, but before variable costs. 

    That's the clincher. All the stuff that goes wrong. I tried bracing myself for this in advance - "always expect something to go wrong" I was told. I braced myself for the 50% rule - I was gonna have expenses every month on the houses. A repair here, a fix there, I thought. 

    I wasn't prepared for massive expenses, on all the houses, for what feels like all the time. Bleeding thousands of dollars in one go on pest removal, tree removal, mold removal. Expenses that wipe out an entire year's rental profits in one afternoon. How do people do it? 

    I can't catch a break. Not a week goes by without a tenant complaining about an issue. And these are good tenants, who pay on time and try to take care of things themselves with the professionals I send.

    And the truth is, worse than the expense, is trying to get people to help me resolve things. For fear of sounding like a trite broken record, It's such a huge struggle to find reliable people. No one has anyone to recommend. I find people myself (after calling lots of numbers where no one answers), have good initial conversations, and then they don't show up. There goes another day. Time to make more phone calls tomorrow while the tenant tries to live in a basement that's flooded in sewage. 

    Don't get me wrong. I'm not afraid of hard work. When I discovered heaping piles of bat guano in an attic of one my houses, I rolled up my sleeves and cleaned it all out myself. I try to be a valuable contributor to my local community, referring others to key market resources and helpful individuals. 

    I supplement the costs of all these repairs with my day-job salary, otherwise this would all be over a long time ago. But I'm plagued with frustration, feeling like I can't get it right even though I've tried so hard. Am I unlucky? Am I actually lazy or undisciplined? I'm wondering if there's something I'm missing, or if other people have word of encouragement for me.

    Thank you all for being such a great community. 

     Yea dawg, what your facing here is all part of the business. If it was easy everyone would be a multi millionaire investor. 

    Few things 

    • Did you inspect the properties before purchase? Tree issues, mold etc likely present at the time pf purchase, so if you didn't do inspections on these properties make sure you do them on the next ones so you'll know what you've got in store in the near future.
    • The tenants are complaining. What are they complaining about, can you share some examples. Some may be issues you need to resolve others may be irrelevant and you may need to reduce your ear's availability. With some tenants if you give them the opportunity to ask for things or complain it can be a never ending cycle. A tip on how to reduce your ear's availability is to set strict business hours on when you respond to the tenants. If a tenant texts you at 11pm on a Saturday and you respond at 11:05pm you are training them that this is ok behavior. What you should do is let them all know you will only respond to non emergency situations between 9am-5pm Monday - Friday or something of that nature. That right there will reduce a bunch of your stress.
    • Are you buying low end properties? Sounds like your properties are low end with tons of repair work. From the limited info I've gathered I think you are getting to lost in the numbers. Buy yourself a more expensive property that is in better repair and comes with a better tenant base. Sure it doesn't look as good on paper but looks like you are quickly finding out that there are serious trade offs as you go down in asset quality.
    1Reply
  • Dan K.
    Rental Property Investor · Boston, MA · Member since 2012 · 257 posts · 139 votes
    8y

    @Shalom Shore

    Take a breath, we've all been there.

    My first recommendation would be to take the foot off of the acquisition pedal.

    If you were asking "what should I do differently," I would say get as many units under one roof as possible so you can take advantage of economies of scale.

    At this point, just start living. Every condo, townhouse and SFH can be sort of viewed as a living organism. The water heaters, furnaces, AC compressors, etc. all have a personality. If you are managing the properties yourself you need to start figuring out how they all work.

    Additionally, find a great handyman. In my experience, a great handyman can pain, do basic plumbing and electric, swap out toilets, replace drywall, etc. A great handyman also knows when you need to call a professional. I'm guessing a lot of your trouble-calls come from small fixes that take some tinkering but can be handled by a great handyman. Another benefit of a good handyman is that the tenants will recognize him and it's not a new, random face on the property. Finally, you'll also learn a ton in the process if you watch and help him work.

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