Post mortem on my first deal in the DFW area
Bigger Pockets Community,
I got lots of great advice on my first post yesterday so now I feel I owe the community information in return. My post is a post mortem on my first deal, a condo in the DFW area, and is intended for baby RE investors, like I was. I'm posting here in Houston because that's where I live and where I want to meet people, but the DFW market is a lot like the Houston market (similar tax rates, yields, and median prices). Enjoy!
My story is from the perspective of somebody who can pay cash, but only has time on weekends, since I am a dad with a demanding full time job. I am not a Realtor or contractor.
First all the failures. I tried to buy an REO rental townhome in Houston in the depths of housing recession in 2011/2 when I lived here once previously. It failed to close because the HOA had terrible finances and the bank wouldn't loan as a result. Didn't have cash back then. HOA docs didn't arrive until a few days before close. What could I do? I got my escrow money back but lost the due diligence money. Lesson 1: Cash solves a lot of problems.
But did I quit? No. I moved to DFW and tried again in late 2015. I found a great agent who did flips and rentals. My method for finding an agent was to drive a neighborhood I liked and see who was a flipping the same property I liked and call the agent doing the flip.
Put in an offer on a perfect rental that needed only modest work, but got outbid by an owner-occupier. Lesson 2: If it is attractive to owner-occupiers, they will outbid you.
I tried driving for dollars but nobody ever wrote me back (zero response). Lesson 3: Leave that to the wholesalers/marketing pros. Can't compete with the Ugly House billboard.
Had my agent bid on a house that needed $50k in repairs on Hubzu that was for cash only investors, trying to avoid competing with owner-occupiers. Got outbid by a full time pro, for sure. Lesson 4: Hard to compete on flips with agents and contractors. They have cost advantage.
After mastering the county title records site, I went to my local county foreclosure auction armed with cashier's checks and placed a bid at my second auction. At the first I just watched. At the second auction I got outbid by a New York hedge fund. Lesson 5: Hard to compete with hedge funds (although they tend to stick to big counties I'm told).
But did I give up? No.
I ended up going to look at an FSBO on Zillow without my Realtor since it was FSBO. Inside 10 seconds, I knew it was the deal for me. I had spent hours on Craigslist (best place in this part of DFW) looking at rents and knew it would rent for $1600 if I fixed it up. This was zoned to Coppell schools, among the best in the Metro, and the landlord who owned it let it fall into a little disrepair when the market supported a nicer property. He was ready to move on to bigger things, too. I went home the same evening and wrote a cash offer, with normal inspections. Within a few days and after inspections we agreed on $146,500. Cash close was super easy (Lesson 1: Cash solves a lot of problems). I got my great Realtor to advise me on what repairs and improvements to make and did about $6,400 in repairs and improvements. Total investment now about $153k. My Realtor did an open house and it rented immediately for $1595 to a schoolteacher (Yea! I love teachers!). Realtor handled all the paperwork and background check. Tenant paid me electronically using one of the major online services. Called me maybe twice in two years (it was a two year lease) so I could self manage. After expenses, which included a special HOA assessment and a month's rent to my agent, 24 payments of $1595 ($38k) left ~$12k in rental profit. This wasn't great because of the special assessment, but that was temporary, and I knew the fixed up property could sell for more, too. Tenant left, and, again, with my Realtor and trusted contractor, made $5k in repairs and improvements to make it sale ready, taking total investment to about $158k. Sold for $187k before it hit MLS because Coppell schools are top and close to airport. After closing costs, netted about $171k, or about $13k in profit. All told, in 24 months, made about $25k (half rental income, half capital gain) on $158k invested (about 16% return over 2 years). For a pro, this is too small and you can't live on it. For me, just trying to diversify from the stock market, I was thrilled to make stock market type returns (8-ish per year) with less risk than stocks. And I learned a lot and would have made much more going forward as the special assessment was ending. For me, it was a base hit, and meet my goals.
My biggest take-a-way is that if you have a good tenant, a modest profit feels great, the easiest money you ever made. If I had a problem tenant, the hassle for this modest profit would never have been worth the time and effort. The most important thing is a good tenant.
Hope you enjoyed the story. And now I want a double, of course.