Getting started in Real Estate

Many years ago, if someone would have told me I would become a full time real estate investor, I would have said they were wrong! However, while I was in the Army, I heard about a Command Sergeant Major who owned 15 free and clear single family homes. Since the government cannot be depended on for your retirement, I thought this would be a great retirement plan. I never did like the idea of retirement plans as you have to depend on someone else managing your money and investments for you. The temptation to move money from your pocket to their pocket is too much. Social Security funds were moved to the General Fund so Congress could have a 20% pay raise while complaining that the 3% pay raise for the military was "too much". With military retirement - the money may someday be taken away from you. However, investing in real estate as a retirement plan puts you in control of your own outcome. Should you need some money, you just sell one home and pay for whatever you needed and still have 14 free and clear houses on hand.

So, in January 1982 we got our first rental house paying cash for it. The realtor looked at us like we were a little crazy as we were living in a 2-bedroom apartment and renting out a house. We later wished we had invested in 4 4-plexes instead of just one house. Hindsight is always 20-20 so we will not kick ourselves too much for that mistake. Later we got another house using financing temporarily. After we refinanced our personal residence, we paid off the rental home giving us our second free and clear rental property.

After saving some more, we were looking for our third home when my wife got a brainstorm and suggested we look at an apartment complex instead. I was not too impressed with the idea, but looking at the numbers was enough to convince me. We could buy a house at the time for about $65K and rent was about $500/month. The apartments were for sale for $20K per unit and were rented for $400/month. It was not long before we sold our 2 single family homes and invested in a 27-unit apartment building. We did not know anything about 1031 exchanges so paid taxes on the gain from the sale of the 2 homes and invested what was left over. We went from owner of 2 free and clear homes to the owner of a 27-unit apartment almost overnight.

We did not want to get involved in the management so the on-site manager was supposed to stay. Three weeks after closing the roof started leaking. It was 45 feet wide and 350 feet long and totally flat. We did not have enough to replace the whole roof so just fixed the North half where the leak was. Also, the plumbing company who the previous owner had used did not put a dielectric union in the hot water tank that was used for the hot water base-board heating system. As the hot water came out of the tank, the heat was generating electricity. (Remember in those boring science classes hearing that if you heat the junction of 2 metals, electricity would be generated?) The heating of the cast iron and copper pipes made the electricity which in turn ate through the copper pipe causing pin hole leaks that blasted 2 foot square holes in the sheetrock. Got that fixed and three months after closing manager moved out of state so we became the manager of a 27-unit apartment just like that!

Having the manager walk out like that was the best thing that could ever happen to us! We learned faster than we had ever expected of what was required to manage apartments. Rich Dad – Robert Kiyosaki – says in one of his books that the best way to learn something is by doing it! The second best way of learning is to have a mentor show you how to do it. The list goes on down the line and then at the bottom of what you could picture as an upside down pyramid is reading about it and hearing a lecture about how to do it as being the 2 worst ways of learning. These last 2 ways are how we are taught in school and we all know how that turned out!

Having gained experience and saved up some more funds, we went looking for another apartment 2 years later. This time we got a 43-unit apartment that had a mix of efficiency, 1-bedroom and 2-bedroom apartments. Our first one was all 2-bedroom units and people were always stopping by looking for a 1-bedroom unit. I thought having a mix was better. It was instead worse as the turnaround in 1-bedroom apartments is very high. For a year and a half, we owned and managed 2 apartments for a total of 70 units.

We sold the 27-unit apartment in 1998 and tried to do a 1031 exchange into shopping centers. Of the 3 properties we identified, 2 were negative cash flowing so could not get financing and the third property the income did not justify the high price they were asking. Needless to say, we ended up not doing the exchange and had to send in some rather large checks for income taxes for capital gains. The money left over was put into the bank and we continued to look for additional properties.

In April 2000, we bought a 31,000 square foot downtown office building using the money from the 1998 sale with interest earned from the bank as the down payment. We were short so had to borrow funds from our kids savings accounts to get the down payment. We did not have enough to make the first mortgage payment when it came due so did a signature loan with the credit union for $15K to use for the first mortgage payment and as a reserve for any repairs that might be needed! Loan was paid off in about 6 months and the office building was self sufficient after that.

I got to the point that I hated that office building. The previous Owner had jury rigged the heating system that allowed heating and air conditioning to be on at the same time. It took about a year of trial and error repairs to get the heating system operational. One unit would be at 90 while other units were at 45 degrees. Thought that some of the attorneys, accountants, senators office or other tenant would sue us as it was rather cold to work in that kind of environment. The tenants actually were very understanding of the ordeal and also very surprised that we gave them some credit on their rent for putting up with the situation while we were working on getting it fixed. I spent a lot of time on the roof of that building. 

We would work at the apartments during the day and then at night we were the janitorial service for cleaning up the office building. Every weekend we were outside sweeping the parking lot and bagging as much as 20 trash bags of leaves from the mature trees in the downtown area. The building almost wiped out four-fifths of our family. Our daughter was graduating from Air Force basic so we worked at the apartment during the day and cleaned up the office building that night. We left on Friday for San Antonio at 10 PM and graduation was Saturday at 1:30 PM. Somewhere after Amarillo going to San Antonio I fell asleep at the wheel. One minute I was running 75 mph down the highway, the next, I woke up thirty feet off the highway. I was running parallel to the road, but was in the middle of a farmers field going 55 mph. It was a miracle we did not flip and wipe out almost our whole family. I have no idea how long I was asleep or how far we had travelle across the field, but was grateful to be alive! My son said go to sleep he was driving the rest of the way! We made it in time for the graduation and on the way back, we stopped for a few hours of sleep at a motel. Back in town on Monday - just in time to clean up the office building that night!

We sold the office building in 2002 to the Catholic Diocese who paid cash for it and with deeper pockets than we had put three new roof top heating/air conditioning units on the roof. To just rent the crane and remove the old units – I had an estimate of $100K. They were very happy with the building and we were very happy to be out from under it – we decided office building investments were not for us!

With our 43-unit apartment we had calculated we could have 14 vacant and still be in positive cash flow position. Usually, we only had 2-3 units vacant at a time, however in 2003 we had 18 vacancies over a 3 month period. By the time we finished rehabbing that 18th unit that year we were “burnt out – super motivated apartment building sellers”. It sold in December 2003.

Normally, you have 180 days to complete a 1031 exchange. However, if there is a tax filing due, you have to complete it by April 15th or before the tax filing due date. We identified our three properties. The ones we wanted were in Alabama, but were both owned by the same outfit and they were using them for a bait and switch operation. Losing the first 2 choices left us with having to close on the third property a 122-space MHP in NC. Seller almost backed out several times, but we were able to close April 4, 2004 and moved from a population base of over 500K to a small town with a population of 20K. After it was done, reality set in and we were wondering what we had done!

Our son was supposed to run the MHP for us and when our monster personal residence sold, we were going to look for a second MHP for us to buy. Son was able to manage from April to the first part of September 2004. He decided he wanted to join the Air Force so he came back in Sep and at the end of Sep I went to NC to take over the management of the MHP.

When we bought the MHP there were 82 occupied spaces in it. Two of these were owned by the same owner that was doing bankruptcy so I had no income for a 4-month period. After bankruptcy court released them the mortgage company foreclosed on the mobile homes and sold them to me. Selling one for a cash amount that more than covered the 4-months lost rents on both and the total price we paid for the two MHs sold me on doing “Lonnie Deals”. Other one was sold on terms and was paid off in 4 years with 15% interest. Hook, line and sinker – I loved the mobile home business! The management of a mobile home park compared to managing an apartment was like a vacation to us! Our monster house sold in February of 2005 so picked up wife and drove a little over 1800 miles back to NC.

During the four years we owned the MHP we bought repo MHs from Vanderbilt & GreenTree Mortgage companies. These were brought in and placed on our empty lots. After hooking up the water, sewer, and electric with all inspections complete, we would sell the homes "as-is, where-is" and finance the sale. When the property was sold in 2008, there were 108 occupied spaces. Of the 122 spaces, some had doublewides straddling 2 lots so there was an actual physical capability of having 116 total occupied lots. The monthly income from the notes exceeded the net income from the lot rents. The water and electric were all on separate meters so did not get involved with paying too many of the utilities.

We bought the MHP in NC in April of 2004 and sold it in February of 2008 for $1M more than we paid for the property. With all this extra money we needed to find a 1031 exchange to roll it into to defer the taxes. We had started negotiations on a 129 space MHP in CO in November of 2007. We finally got financing approved so in March of 2008 we did a 1031 exchange into the MHP in CO. This was a very strange closing for us. Usually we come to the closing with several different cashier checks for the down payment. This time we walked in empty handed and left with a check that was cut to refund the personal money we had put in for up front fees. That was a rather nice feeling. Walking out of the NC closing we had to keep pincing ourselves to make sure we were not daydreaming having left with $1M more than what we had bought for. Then within one week we sit down in CO and close on the other MHP and walk in empty handed and leave with funds to start the turnaround of the CO MHP.