My Second Acquisition - Lessons Learned

I recently closed on my second rental property which is a 3bd 1ba 1950s Cape Cod style home in Grand Rapids, MI. There are a few things I did right, and more than a few things I did wrong on this acquisition that I would love to share so others can learn from me for their early acquisitions and so that these lessons are ingrained in me so I don't make the same mistakes on the next one!

I purchased this home while living in San Diego, relying on family and my real estate agent to take videos, vet the neighborhood, help with nailing down potential rents, and all of the various other tasks required for boots on the ground. As this is my second deal, I decided to use conventional financing so that I can build credibility and learn on my own dime rather than put family and friends' money at risk. My first deal was a new construction house hack in Pensacola, FL so I guess you could say this was my first "true" investment property acquisition. 

As in many places, the MLS market in Grand Rapids has been extremely hot this past year. I made about 10 offers on different places prior to this offer getting accepted. They were asking $135 and we ended up settling on $131 with an additional $2500 in seller contributions to closing. I closed on the property a few weeks later, put a property manager in place, completed the majority of the rent-ready rehab work, and placed the property for rent yesterday. 

Here is a quick run-down on what mistakes I have made thus far:

1. Overpaying - There is definitely something to be said about being worn down after having a number of properties being snagged at above asking price. This will not be a home run by any stretch of the imagination. I will earn about an 8% CoC after setting aside money for vacancy, capex, repairs, and PITI. I could have been more aggressive in the searching phase by trying to get an off-market deal via direct mail, wholesellers, or just more relationships/networking through the local REI and BP. 

2. Underestimating Rehab - Initially, the place looked almost rent ready. I estimated spending about $5k on some minor cosmetic fixes. After the inspection, it started looking closer to $10k, but my desire to do a deal led me to close anyway. I have completed all of what I would consider "mandatory" maintenance (required by the city code, and overall cleanliness) while deferring some of the items due to budgetary constraints. This just lends more credence to the advice of "Take whatever you think the rehab will cost and double it."

3. Using Every Last Dollar - I spent my entire emergency fund and my entire reserve fund for my other rental property in order to acquire and rehab this property. I have placed myself in a relatively risky position if something completely unexpected occurs in the next month or two. Thankfully, I have a decently well-paying job and a high savings rate to be able to replenish my reserves quickly, but this is an uncomfortable position to be in and I plan to be more conservative on the next acquisition I make. 

I don't think I am alone in making these three mistakes. I also don't think they are dealbreakers as long term buy and hold investing can be very forgiving if done correctly. My biggest caution would be against my first point! Even though I overpaid, I will still cash flow $150-200 a month even after accounting for expenses and vacancy. I plan to be much more aggressive in deal sourcing in the future to put myself in a better acquisition position. Solving problem 1 will give a lot more leeway on problems 2 and 3. 

We all have a lot to learn from ourselves and others every day. One of my favorite quotes from is "Anyone who says they know it all is lying." Let's keep learning!