Our First Investment / Mistake / Lessons Learned

21 Replies

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Butler.

Purchase price: $62,000
Cash invested: $47,000

Our first rental property. An early 1900s brick duplex in an area close to the main street of the town (Butler PA - it's hard to call it a suburb of Pittsburgh since it's pretty far). The current owner had been using it as an office for the last 25 years and had maintained the home pretty well. It seemed like it didn't need much work at the time (but that was soon to change)

What made you interested in investing in this type of deal?

My initial analysis showed that this should cash flow $300 per month with our initial investment of $21,000 (25% downpayment plus closing costs and prepaids). It seemed like a good first investment. I kinda knew that my numbers may be off just a little bit, but just getting started was more important.

How did you find this deal and how did you negotiate it?

MLS. The day that we saw it, my agent informed me that someone else was writing an offer on the house that night and they also had another showing that night with folks who intended to make an offer as well. We made our offer knowing that at least one of the others was FHA and thus would require a more strict inspection. That said, we fell into the "highest and best" trap.

How did you finance this deal?

Portfolio loan through a local bank. 25% down, 5% interest rate for 15 years. I like that we are paying down the principal quickly, but I think we will opt for 30 year financing as we can get it going forward for the flexibility.

How did you add value to the deal?

We didn't intend to do any kind of value add, but we ended up replacing the roof, replacing two windows, replacing a fridge, residing an addition, repainting and reflooring (replacing old carpet with Allure) one of the units.

What was the outcome?

Our initial hopes of $300 monthly cashflow and $21,000 initial outlay (17% COCR) are now closer to $75 monthly cashflow and $47,000 (2% COCR). This is due to numerous repairs that I didn't notice myself before closing, code enforcement being called on the house and general mistakes of a rookie investor.

It took 1.5 months to get it fully rented and now we have one unit with a problem tenant that our PM placed that won't let people in to do repairs and is also trying to withhold rent. Yay!

Lessons learned? Challenges?

If it looks iffy, fix it. Most of the repairs that we fixed in short order we knew about ahead of time but didn't prioritize until outside elements forced our hand. Going forward, we are allocating $10,000 in up front repairs per property, no matter what. We are also looking at roofing, windows, siding with a more scrutinizing eye and treating inspection reports like gospel.

Beyond that, failure to properly account for PM, capex / repairs and lienable utilities came back to bite us as well.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Mars Bank was great for our financing and Wright Insurance did an awesome job lining up our coverage.

We learned a lot more lessons than the ones I had space to fill in above. Rather than let this experience defeat us we are taking the mistakes we made here and learning from them. We are in the process of closing on our 2nd investment and have taken great care to not replicate our past blunders.

Thanks @Megan France  

We also learned about expectations for Property Managers. We didn't shop around and ask the right questions the first time and it's certainly come back to bite us, for our new acquisition (closing in a few weeks)  we reached out to a number of different PM companies, with the following questions:

#1 What methods of rent collection do you use? 

#2 What property management software do you use? 

#3 What is your process for tenant screening? 

#4 How many units does your company manage? On the same note - what is the size of your staff?

#5 How do you handle maintenance requests? Do you have an in house staff or just a list of trusted contractors? Do you keep an expense reserve amount for each unit? 

#6 How do you handle evictions? What costs surrounding these are passed on to an owner? 

#7 What is your monthly management fee? Is there a minimum charge per unit? 

#8 What is your initial leasing fee and lease renewal fee?

#9 What is the minimum term for your contract with an owner?

Getting to see how different folks have responded to those questions and how the answers stack up and analyzing the data (e.g. if the company manages 800 units but only has 3 people dedicated to the PM side of the business, that's not super great in terms of quality control) has been eye opening.

This investment is a unfortunate situation. Your money is not working for you and even at a loss you would be better off selling than holding on to this property. If you hold you will discover it is going to be a money pit that will only get worse.

Sell it, get as much cash out as possible and move on, lessons learned.

Never hold onto a bad deal expecting it to get any better, your equity is dying a slow death.

@Nick Michaels thanks for sharing! It looks like you know exactly how to prevent this mistake from happening again. Inevitably, we keep making new mistakes anyways & you've definitely got a healthy attitude about it.

Was this property a 47k rehab job, followed by a refinance at market value? I'm having a bit of trouble following the numbers. The local banks can be really tough on terms sometimes, 15 year is not ideal. 

Would you say that once this thing stabilizes a bit more your cash flow would increase?

@Elliott Elkhoury so the down payment was $15,500 (25% of $62,000), with closing costs and prepaids it came to around $21,000.

We knew from the inspection that the front porch roof would need to be replaced, but thought the main root had some time left (even though it was over 30 years old). Weeks after closing, our insurance disagreed and informed us that all of the roof needed replaced and our independent insurance agent who got us that policy informed us that most companies would concur. So we had to fix the roof ($11,000).

Then one of the units wasn't renting because of smells (I disagreed and I have a keen nose, but you have to agree with the markets on these sorts of things) so rather than reduce the asking rent, we had the old carpets replaced with Allure, and the whole 2BR unit (so 2 BR, LR, K and BA)  repainted that was $5,000.

So then we have this tenant - I am not sure our PM even ran a credit / BG check as I was able to find a laundry list of debt collections and even a recent eviction judgment with a very basic and free court documents search on the internet. Who had been a handful from the day she moved in, complained about the freshly painted walls and new flooring, though the PM company insisted on placing this tenant. She eventually called code enforcement on the property because the thermostat was set to 71 and it would only get to 70. Of course code enforcement found a load of things (though were unconcerned with the nonissues the tenant asked about) that we knew about but wanted to fix later. So we are in the process of fixing those, and thankfully the local guy from code enforcement is easy to work with and flexible. But we are ballparking $6,500 for those repairs. Phew


After all of this, I take full responsibility - I should have walked through the units and made sure they were 100% ready to rent and addressed any issues from the getgo. I foolishly expected PM to have some sort of quality control before they showed a unit and they didn't - that was a failure on my part.

The long term plan is likely to sell this once we pass the one year mark (this September) and would only pay long term CG taxes on it. I agree 100% that our money, even taking a loss for the money we sunk in for repairs would be much better invested somewhere else. 2% COCR is lower than CD rates :(

Originally posted by @Nick Michaels :

After all of this, I take full responsibility - I should have walked through the units and made sure they were 100% ready to rent and addressed any issues from the getgo. I foolishly expected PM to have some sort of quality control before they showed a unit and they didn't - that was a failure on my part.

The long term plan is likely to sell this once we pass the one year mark (this September) and would only pay long term CG taxes on it. I agree 100% that our money, even taking a loss for the money we sunk in for repairs would be much better invested somewhere else. 2% COCR is lower than CD rates :(

do you really think you will make a profit selling it.. if so i would not worry about a small amount of taxs you might owe sell ASAP so you dont have more bad stuff happen

Well there's taxable "profit" and real profit. There is no way I am going to make a real profit on it - I would need to sell it for $110,000 after having bought it for $62,000 to #1 Pay off the 75% LTV Loan of $46,000 #2 Recoup the down payment, closing costs and all the repairs I made (~$46,000)... AFTER factoring in seller closing costs... just to break even

Realistically I can maybe get $80,000 for it after all of those repairs. Thus I would likely only recoup about $25,000 of the $47,000 I spent (there is some opex of me having to transfer money to keep the bills paid while we got tenants in)

But I am not sure the tax man is going to see it that way. I don't think with a short term CG sale, I can write off the $22,500 in repairs that I made to reduce my taxable gain, can I?

@Nick Michaels

EDIT: I had this up to reply to and a lot of answers to questions were posted, but not displayed when I commented. 

Great read and post! Good luck with the next one and looks like you are taking the lessons learned and applying them. 

I think that you'll still likely come close to your projections long term as long as you were budgeting for capex/repairs reasonably. Reason being that for the next 25 years+ you won't need to worry about a roof. 

Wondering what else you had to reno though? $47k seems like a lot for the work that you mentioned was done. Was there anything else? 

Just for reference I usually pay around 7-9k for a roof on a normal sized house or duplex. Siding depends on the material that you use. Siding for the addition would likely be less than the roof (depending on the size of the addition I suppose. Windows normally run 350-450 for me. Painting and flooring would probably end up around 5-7k per unit for a normal 1000 sq ft unit. So just looking at that scope I'd expect more like 25-35k.

I don't know the project or house so I can't say if you're budget came in high, but it seemed like it did a little. So just trying to see where maybe you could optimize the next one.

@Anthony Angotti The roof definitely came in high. The roofing company said they mismeasured the dormers or some nonsense and it came out to 3 square more than what they estimated, and they had to replace rotted underlayment on parts of the roof. In retrospect I should have fought them on that. The roof was very old. So the original quote was $9,000 and that was middle-to-lower among the 10 quotes I got. A lot of that had to do with the slope of the roof. Needless to say I won't be using that roofing company again due to the "change order"

So $47k was the total initial cash outlay of downpayment ($15,500), closing costs ($5,500), repairs ($12,150), personal "float" to cover mortgage / lienable utilities while tenants were placed factoring in that 1st month's rent to PM for leasing ($2184), a fridge replacement for one unit, carpet cleaning for the other unit, and rekeying for all locks.

But yes there are various places that we could have optimized, I wish I could have avoided these problems before they happened, but sometimes you have to get burned to know how to properly handle a fire going forward.

Originally posted by @Nick Michaels :

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Butler.

Purchase price: $62,000

Cash invested: $47,000

Our first rental property. An early 1900s brick duplex in an area close to the main street of the town (Butler PA - it's hard to call it a suburb of Pittsburgh since it's pretty far). The current owner had been using it as an office for the last 25 years and had maintained the home pretty well. It seemed like it didn't need much work at the time (but that was soon to change)

What made you interested in investing in this type of deal?

My initial analysis showed that this should cash flow $300 per month with our initial investment of $21,000 (25% downpayment plus closing costs and prepaids). It seemed like a good first investment. I kinda knew that my numbers may be off just a little bit, but just getting started was more important.

How did you find this deal and how did you negotiate it?

MLS. The day that we saw it, my agent informed me that someone else was writing an offer on the house that night and they also had another showing that night with folks who intended to make an offer as well. We made our offer knowing that at least one of the others was FHA and thus would require a more strict inspection. That said, we fell into the "highest and best" trap.

How did you finance this deal?

Portfolio loan through a local bank. 25% down, 5% interest rate for 15 years. I like that we are paying down the principal quickly, but I think we will opt for 30 year financing as we can get it going forward for the flexibility.

How did you add value to the deal?

We didn't intend to do any kind of value add, but we ended up replacing the roof, replacing two windows, replacing a fridge, residing an addition, repainting and reflooring (replacing old carpet with Allure) one of the units.

What was the outcome?

Our initial hopes of $300 monthly cashflow and $21,000 initial outlay (17% COCR) are now closer to $75 monthly cashflow and $47,000 (2% COCR). This is due to numerous repairs that I didn't notice myself before closing, code enforcement being called on the house and general mistakes of a rookie investor.

It took 1.5 months to get it fully rented and now we have one unit with a problem tenant that our PM placed that won't let people in to do repairs and is also trying to withhold rent. Yay!

Lessons learned? Challenges?

If it looks iffy, fix it. Most of the repairs that we fixed in short order we knew about ahead of time but didn't prioritize until outside elements forced our hand. Going forward, we are allocating $10,000 in up front repairs per property, no matter what. We are also looking at roofing, windows, siding with a more scrutinizing eye and treating inspection reports like gospel.

Beyond that, failure to properly account for PM, capex / repairs and lienable utilities came back to bite us as well.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Mars Bank was great for our financing and Wright Insurance did an awesome job lining up our coverage.

We learned a lot more lessons than the ones I had space to fill in above. Rather than let this experience defeat us we are taking the mistakes we made here and learning from them. We are in the process of closing on our 2nd investment and have taken great care to not replicate our past blunders.

 Nick, congrats on at least going out there and doing a deal. You thought it was a good deal and you pulled the trigger. And even though you didn't make money on this (not yet), you've LEARNED A LOT. Real world learning is better than listening to all 320 podcasts here on BP.

Having said that, if you can afford to keep this, do so. You will make money with this if you hold it long enough. I've made over a $1M profit on a problem property - and I shared what I learned about it here on BP:

https://www.biggerpockets.com/forums/311/topics/64...

Thanks for the responses everyone! 

We just got some interesting news - the professional tenant continues to not allow anyone in to do repairs. She was notified her yesterday about an electrician coming in two weeks to do some code enforcement repairs and she said she does not grant anyone permission to her home and we will be " prosecuted" if we enter. She is paying rent, albeit very late so we (by we I mean our PM company, as they placed her, this is their problem to fix) can't evict her on those grounds. Her son is residing there and refuses to sign the lease, also she is threatening the tenants in the other unit, so that's at least 3 lease violations. So this is gonna get ugly. Eviction is being filed, but this sounds like it is going to take a while. 

Friendly reminder to screen screen screen your tenants, and if you have a PM to do that, make sure you know their process :)

Happy Friday!

@Nick Michaels First off, thanks for sharing! It takes guts to do that. 

Man, sucks that this is happening on your first deal. I am sure you've learned a lot and I can almost assure you that the next deal will be easier. My first deal wasn't smooth either (didn't get as ugly as yours though). I had issues with the tenants I inherited as they started testing their new young landlord but I was self-managing so at least got to screen the new tenants (it was a 2-family) and eventually took control of the property by getting rid of the inherited tenants.

The tenant can threaten and say whatever she wants. As long as the landlord-tenant laws in PA allows you to enter with reasonable notice, all you have to do is give her 24 hour notice that you'll be entering and go in to do whatever repairs are needed.
Another option is to get code enforcement involved, especially if she's the one who called them. Tell them she's refusing to let you do the repairs to get the property up to code. One phone call from them explaining how the apartment will not be habitable without those repairs will get her begging you to complete them.

While you should always budget for a PM when underwriting a deal, I think it's good to self-manage at the start to learn the ropes. Not only will you screen tenants better, you will also know the full potential of a property and have a baseline to compare future PMs to. 

Good luck! 

@Nick Michaels

11000 for a roof on a 62k property!!! WHOOOAAAAA. I would've guessed 3k for another layer, 5k for a tearoff, or if all the gutters/soffits/fascia needed to go with it and it needed all new plywood. In that case maybe 8k.

Allure isn't cheap at all. Lasts forever though, but pricey. 5k for allure and paint sounds a little high depending on the size of the unit. I usually get it done @ 4.50/sf installed (which is way too much, i only did it once and only in living areas. Carpet in bedrooms all day). 

Are these your PM's prices that were billed to you?

@Elliott Elkhoury The roofing was $9,000 plus a change order that I should have fought. I found the roofing company myself after numerous quotes, this was not "the lowest" but "the lowest while still being a reputable company" (or so I thought). There was also a run on roofing work being done at the time (late Fall) since we had about 2 weeks of constant rain and with the insurance company breathing down my neck I couldn't afford timewise to be too picky even if there were better prices out there.

The allure was $4.50 per square foot and was for the whole unit, the painting was for the whole unit. That said the paint definitely came in higher than I would have liked. I should have just taken a weekend and painted myself - but four kids at home and the desire to get the place rented steered me towards making the more expensive decision.

I plan on avoiding these sorts of "rush" decisions in the future by identifying repairs effectively before I make offers

@Nick Michaels ahhh that's so frustrating- when the timeline/etc forces you to say screw it and just have to cough up the extra change. I definitely wouldn't recommend the self painting! But handyman for stuff like that?

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