8 properties I decided to pass on, tips for beginners
As many of you know, I started my investment journey with a purchase of a 4-Plex in Marshall, MN nearly five years ago. This was after researching and educating myself on real estate for over a year.
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Soon after I got my first investment property I was really intrigued and was hooked on the concept of passive income and the associated tax savings via the tax code. Thinking I could easily replicate my experience with the fourplex, I kept looking around the area for deals that made sense. Unfortunately the number of deals that did not make sense was a LOT bigger and I realized sometimes, the best investments AREN'T found where you live.
Here are 8 of the most memorable properties I passed on that I had to share.
Prospect #1
I remember one property we looked at that had so much deferred maintenance that yes on paper, it cash flowed VERY well, but all the extra cash would’ve gone to maintenance and upkeep. Our property manager looked at it and he agreed as well.
The other downside was that the current owners rented to college students, which in and of itself isn’t bad. But I did chuckle when we were there for the inspection. The one that was still there obviously was a WEE hung over from some partying the night before (I assumed) and seemed to forget that we were coming. After a few knocks, he finally stumbled to the door to let us in.
Also amusing, while we were upstairs we noticed in the bathroom there was some bubbling of the linoleum around the toilet. Kerry our inspector, flushed the toilet and sure enough there was water leaking, obviously a bad seal and and very obvious it had been leaking for some time. The college kid said, "Uh, gee, like should we call the landlord for that?" In my mind I was thinking, NO wait till it starts a waterfall into the kitchen downstairs, THEN let the landlord know about it!
Now I am a big believer of that you either LEARN or you EARN with each transaction.
The biggest thing I learned with this property (and was the final reason we walked away from this) was that easements can be done very well or VERY poorly. There was an easement for the shared driveway and part of the yard given to the neighboring property. In review of it though, my mother-in-law who worked over 30 years in the legal department for a large Fortune 500 company flat out said it was THE worst easement she had ever seen written up in her entire time. And she saw easements all over the country!
Our banker that we worked with even chuckled and said, "Technically, by law the neighbors could drive right through the house yet they would not be in violation of the easement."
This was also an example of the worthiness of inspections, and other due diligence. Yes, we were out $600 with the inspection. Yes that was our net cash flow for almost two months with our fourplex and yes that was $600 we couldn’t spend or invest elsewhere. However it was very, very cheap insurance as I have no doubt in my mind that if we would’ve purchased that property, it would’ve been a lot more expensive than $600.
But after that one, there were others.
Prospect #2
There was another single-family home where I learned that at one point siding was made with asbestos. I honestly did not know this. I was only familiar with wood, vinyl, aluminum, steel and of course brick and stucco. And if there’s too much damage then obviously you have asbestos mediation to worry about that drives up the cost. So add another checklist item: avoid homes with asbestos tiling or asbestos siding. Interestingly enough after I learned that and knew how do identify asbestos siding, I saw more and more instances of it, a concept known as the Baader–Meinhof phenomenon or frequency illusion.
Prospect #3
Another house: low entry price point in a good area. Hey I think this could work! Although it was funny, the owner said 'oh I’ve never had water in the basement.' Well, as luck would have it we decided to do the showing AFTER there was a large rainfall the day before and the ground was very saturated. Went into the basement and, hey guess what? There’s water! Funny it must’ve just been a coincidence and it was the first time ever in that home's history that there was water in the basement. Oh no, wait, take that back actually there was plenty of evidence of it as we looked at the walls and the foundation. It was a little depressing as initially I thought this could be a great value add property with an additional bedroom added to the basement by just framing a new wall and inserting an egress window.
Prospect #4
Next up: duplex right in Montevideo, MN where our property management company was located. They were actually LOOKING for additional rentals as they were in short supply and had a waiting list of eager renters. Being right in town it was almost a guarantee that they would rent it, so one check box checked off!
Here I got to learn how prevalent old knob and tube wiring could be in older houses. I then learned that a lot of insurance companies, ours included, will NOT insure properties with older wiring. End of discussion. No higher premiums to cover it, no higher deductibles or different and more expensive policies just flat out will not insure the property. Which then of course becomes a bit of a quagmire as you need to get the insurance in order for the bank to lend on it as they want to be a loss payee if something happens to the property to medicate their risk. I asked one of my electrician friends what it would be to rewire the house and he just chuckled and said 'You don’t want to know.' So we passed on that one as well.
Prospect #5
I really learned with this one of how important contingencies are even for minor or seemingly silly things. Basically a contingency gives you an option to walk away from a deal that you have under contract if something doesn’t pan out. Two of the most common contingencies are financing contingency and inspection contingency. Therefore if you are unable to qualify for a loan and/or there is something glaringly wrong or something you don’t like that the home inspector found, you can walk away.
In this case I had a contingency built in that our property management company could manage the property. Overall the property was in pretty decent shape and while I did foresee a few items that would need to be fixed right away, the cash flow was great and it was in a nice location as well. Actually, was only a few blocks from our duplex that we had in Willmar that was purchased summer of 2018.
Interestingly enough, at the time that we were pursuing this property, our property management company decided to take a different direction and manage properties only four units or larger going forward so hence the contingency was enacted. In this case I had a contingency built-in that our property management company could manage the property. Since they wouldn't be able to manage it and I sure wasn't going to self manage it nor wanted to add another management company to the mix, we walked away from this.
Prospect #6
Now this was one for the record books!
Property was a fourplex! Maximizing of a Freddie/Fannie loan spot (for a conventional mortgage a 1-4 unit property still qualifies as a residential property). Newer roof. Newer siding. No foundation issues. Not in a floodplain. Cashflowed well. Professionally managed (or so we thought) and our property management company would definitely manage this one. This has GOT to be the one!
Went into the first unit. The lady had a lot of cats so there was definitely a VERY potent pet smell. OK, not the end of the world the carpet kind of needs to be replaced anyways and we learned from our four plex with the chain smoking owner that a lot of cleaning, elbow grease, painting and replacement of carpet can take care of smells.
Second unit: overall not too bad but kind of small and a little dated but very functional. What was interesting though, a dishwasher was in the kitchen, yet all the dishes were in a sink drainer. Both my wife and I were thinking, well why in the world would they be doing this if they have a dishwasher right next to it? Thinking that maybe it didn’t work or there was some other issue my wife opened it up and......there was a family of cockroaches living in the dishwasher! She quickly shut the door and we decided well OK we’re done with this one maybe go to the next one.
The third unit was a real treat. Here the cockroaches were all over on the kitchen counters. We saw them right away when we walked in. And someone was living there!! At that point we said nope, done, out of here! We walked out and didn’t even put an offer in.
Prospect #7
Found another one that looked really interesting, was an eight plex even! Cash flow was great, able to be managed by our management company and our bank was willing to lend on it. Newer roof and brick build so looked very solid.
Long story short....we got four....yes FOUR different sets of numbers for the rent rolls. First was what it "should rent for," then what they collected from the tenants, then factored in what the section 8 vouchers and after putting my foot down finally got an actual trailing 12 month rent roll in which there were quite a few vacancies throughout the last 12 months.
My gut was telling me to walk away. If they weren't upfront with the rent rolls....what else might they not be upfront on?
Prospect #8
Found a triplex in 2018 and was thinking about putting an offer on it. Digging into it more though there were quite a few issues not least of which two of the units were month-to-month which we weren’t really thrilled about. The largest unit, for whatever reason the tenants were actually paying about $150 above market rent and the tenant shared that they were looking to move out to a starter home as they had just gotten married. While yes on paper it looked good and it was technically a four bedroom unit, the four bedrooms were incredibly small. So when evaluating CURRENT rents being collected, make sure that they are in line with comparable MARKET rents.
Also this property was on a corner lot which typically, corner lots have higher property taxes and have the potential for higher assessments when streets and sewer are redone.
The other interesting thing was that two of the three units had really awkward bathrooms built in and how the showers were designed, pretty much anyone over 4 1/2 feet tall would have to bend over in order to utilize it. And the overall layout of the property didn't make it easy to remodel unless you did almost a whole gut job. Add in some expensive plumbing issues that would have to be redone and several code violations, this was another one we decided to pass on.
Obviously there were many others, but these were the most memorable ones I could think back on. While we have lucked out with the two properties in Minnesota, it has been very difficult to try to duplicate that luck again.
Hence why looking in other markets has been a plus and been much easier to find cashflowing properties. From Memphis, TN to Bessemer, AL there are MANY markets in the US that might make better sense to invest in.
Most Popular Reply
Each on these problems just represents a opportunity. I’ve bought knob and Asbestos siding and foundation collapsing and mold and beg bugs etc. don’t run from problems as they all mean money because most people think think like this post is written. Some electrican said it’s expensive to rewire a house? Yes, it is, but not if you can make 80k on a deal. Then, a 8k rewire doesn’t sound that bad. I’d focus on solutions and numbers and not on buzz words and fear.
I once bought a house for 7k because the foundation was failing and everyone was scared to even walk inside. Fixed it for 20k and did nothing else and resold for 50k in about 6 weeks.
If you comb through BP there will be tons of these examples with others who made way more than me. Fear should not decide what you do. Get educated and understand what things cost to fix and make your decision based on that info instead on if a house has bugs and your spouse thinks it’s icky. Icky is where all the money is. Embrace the icky. 🤢 = 💰