The Hello Bar is a simple notification bar that engages users and communicates a call to action.
 

How I Failed at Buying a Rental Property

by J. Money on Thursday, December 12, 2013

fail stamp

[By guest author, Jeff Rose today. AKA The Rock. AKA new-published-author-who-included-me-in-his-book-so-now-I-can-say-I'm-officially-published-too ;)]

If there is one thing that sucks about being an entrepreneur, it’s the fact that you always want to dabble in new things.

When I was six years into my career of being a financial advisor, things were good. My business was growing and I really had no need to pursue any new ventures.

Unfortunately, I’ve been sucked in by too many Robert Kiyosaki type books and I’m constantly intrigued on how I can start new businesses. Plus, I’m used to hustling and working multiple jobs when I really didn’t have to (weird, I know).

When I was in college I worked two jobs and served in the Army National Guard. So being busy was normal to me. I was busy growing my financial planning business, but after years of growth I finally hit a comfortable spot that allowed me more time in the evenings to pursue new things.

Meet Carlton

My father-in-law had ordered some DVD and audio CD training by Carlton Sheets that showed you how to make money in real estate with no money down. To this day, I still don’t know why he bought it, but what I do know is that he gave it to me.

After listening to every single CD and watching most of the DVDs, I knew what my next BIG thing was. I was going to be a real estate investor.

Boom!

There was only one catch.

Besides listening to Carlton while I was driving in my car, I knew nothing about investing in real estate.

Let me emphasize the keyword in the previous sentence: NOTHING. Don’t worry though because my father-in-law was going in with me.

Do you how much experience he had investing in real estate? NONE.

Sounds like the perfect pair, right? (don’t answer that)

My father-in-law is quite the handy guy; we thought because of that we’d be perfect business partners. I would be the numbers guru and he would be the handyman. It was a match made in heaven.

The First Find

The first property we ever made a bid on was a HUD house. The house was an extreme bargain located in a nicely developed neighborhood. We even bid about $5,000 higher than the asking price. If we had got the house, we would have made a killing. Unfortunately, we were outbid and forced to move on to the next money maker.

The next stop was a rental property. It was one side of a duplex that was located relatively close to both of our houses. Because of this we thought maintaining it would be simple (wink, wink), yeah, because we knew what we were doing. Remember, I am the real estate expert. ;)

The list price was approximately $120,000 for a two-bedroom duplex and the rent was around $1,200. At the time, I thought I remembered reading that if the monthly rental income is 1% of the asking price, then it’s a pretty good deal.

Unfortunately, I never really verified that with anyone. I don’t know if Carlton told me that or if I got it off the internet. Anyway, it all sounded good so we made our offer. (Can you see the train wreck getting ready to happen?)

After going back a few times with the owner, we finally agreed on a selling price. The buyer also required that we put down $500 for earnest money (like a deposit), which we happily did, and we finished the contract paperwork at our realtor’s office.

Donald Trump Look Out

I remember how excited I was that I just closed on my first rental property. Donald Trump, eat my dust. What is even more funny is I remember attending a sporting event with a good friend of mine and I was boasting to him that I was confident that within a year I would have at least 10 rental properties.

Go big or go home, right?

Shortly after closing the deal, I thought it would be good to meet with my CPA to tell him about the deal and get his opinion. Why I didn’t meet with him beforehand, I still don’t know. Not only is my CPA quite the tax expert, but he also has dozens of rental properties himself.

When I told him about the property and its details he was kind but deliberate. He politely informed us that we had overpaid.

What I think he wanted to say was,

What the hell were you thinking? And why didn’t you ask me first?

He explained that we were cash flow positive now but all it takes is one small thing – a roof repair, the air conditioner going out, fill in the blank with any minor thing, and then we would be out of the money.

He elaborated by sharing that most good rental properties are purchased well above the 1% range. He said that it is a bare minimum, but he would never buy a property at that rate.

He also informed me that most good real estate deals aren’t found by looking through the local newspaper (which is where we found ours). They are found through connections or situations that you just luckily happen upon like a friend or neighbor looking to sell their property.

When I asked him what he thought I should do about the current property that we had just closed on and deposited our $500 earnest money, he told us to do our best to get out of it. He also said that this happens routinely and that you could come up with some valid excuse to get out of it.

It didn’t take me too long to call my realtor to let her know what I needed to do. I had succumbed to the fact that the $500 would be my tuition payment to Real Estate 101, but my realtor said that this happens all the time. While I felt bad for wasting the duplex owner’s time, I’m still happy that we didn’t lose our butts by being tied to this property for eternity.

The Takeaways

I learned a ton through that whole experience. Here were my key takeaways:

  1. Audio Programs Don’t Teach You Squat. Carlton Sheets isn’t the first course I’ve listened to, but it will be the last. These type of programs are a good primer, but you would learn much more doing it on your own or finding a mentor to teach you the ropes.
  2. Don’t Forget What You are Passionate About. I like numbers. I really don’t like real estate. Jaded by potential BIG profits I let my greed get in the way of what I really care about. Do you know how many real estate properties I own currently? Zero (except for my house). I finally had to succumb to the fact that real estate isn’t my thing. What is my thing is financial planning and investments which is why my “next big thing” became my blog GoodFinancialCents.com.
  3. If You Have a Resource, Use it For God’s Sake! My CPA is one of the most prolific real estate investors that I know, and would have happily shared his knowledge with me had I asked. Doing so would have saved me hours of time and frustration.
  4. Don’t Let Your Blunders Ruin You. The whole experience could have wrecked me from exploring new business ventures. The one thing you have to understand about all entrepreneurs is that we all fail. It’s in our DNA. What makes entrepreneurs different is that we don’t consider them failures; rather learning experiences. And trust me, I’ve learned A LOT over the years and this wasn’t the last time I learned from a business venture.

What have you learned? Have you tried any new hustles that didn’t work out the way you thought they did? How did it affect you? What did you learn from it?

I’ll leave you with one of my favorite quotes:

“There are two necessary conditions to become an entrepreneur: absolute confidence and total ignorance.”

-Dan Sullivan

——–
Post by Jeff Rose, CFP. Jeff is the catalyst behind some awesome movements such as: The Debt Movement, The Roth IRA Movement and The Life Insurance Movement. He blogs at Goodfinancialcents.com and just released his first book, Soldier of Finance, which intends to help you kick the butt of your financial situation.

[Fail stamp by: Nima Badiey]

Pimp my stuff:Tweet about this on Twitter60Share on Facebook25Share on Google+6

We recommend:

{ 48 comments… read them below or add one }

1 Alicia @ Financial Diffraction December 12, 2013 at 6:20 am

You don’t even want to know the cash flow on my rental… It isn’t negative, but it just scrapes by. It is due to the fact that we couldn’t sell, and it was a fast move. We will re-evaluate in five years. But since it is a well-managed townhouse condo complex, most of those disasters that potentially could knock me under water (roof, windows, big time maintenance, except for furnace) are covered with the condo fees and contingency funds. So it isn’t as bad as it might sound on paper.

Reply

2 Jeff Rose December 12, 2013 at 10:06 am

The positive thing is that you haven’t lost your butt and also sounds like a good learning experience.

What I didn’t mention in the post is that we found out from someone that the A/C unit went out a few months after we got out of the deal. That would have completely ruined any chance of making money on the deal.

Reply

3 J. Money December 12, 2013 at 5:15 pm

We lose money every month on our rental too! Because we wanted to move and had to rent vs sell (we’re still underwater). This stuff is def. not for the faint of heart.

Reply

4 Anne @ Unique Gifter December 12, 2013 at 8:21 am

It’s nice to hear people share their non-amazingreal estate storie, not just the “always make 5000%” stories. $500 isn’t too, too bad of a penalty, it’s probably not much more than that course cost!

Reply

5 Jeff Rose December 12, 2013 at 10:07 am

Agreed! I’m positive if we would have went through on the deal we would have regretted it for many years.

Reply

6 Sohale December 16, 2013 at 7:30 pm

Hahha, this is hilarious I had to chime in. I live in beautiful Vancouver, Canada where real estate prices are astronomical to say the least. Most properties provide investors with a rental return of 2-4%/yr, which barely covers the mortgage let alone all the other costs involved. So 12%/yr by that measure is amazing, I’ve looked across Canada and 12%/yr rates can only be found in northern boom towns.

Anyways, I’ve been into real estate since I was 13, helped my parents/relatives/friends purchase/sell about a dozen properties in North America & Europe. There are 2 ways to make money in real estate, #1 is rental revenue, which is great in a flat market. #2 is y-o-y price growth. What I would have done in your scenario is purchased a multi-unit building – duplex, fourplex, take your pick. Based on the fact that purchasing a 1/2 duplex yields 12%/yr, I would figure you could find a fourplex that yields atleast 18%/yr. This protects you on the income front, while also providing you with great exposure to rising prices. In the event properties prices rise even 10%, you can refinance and look for your next property. A friend of mine did this and he is now sitting on 23 properties last time I checked, in rural Canada, Seattle, & in parts of California. FYI – A true entrepreneur NEVER gives up on a challenge. I was merely good at math from a young age, but I HATED just the idea of what accountants do – count other peoples money, so I went into real estate head first, never looked back. I also found an amazing property, single family home with the potential to rezone into 4 lots, this is great because where I live land is 2/3 of the cost of a typical million dollar property.

So in the face of low rental yields, I have found other methods of making money & I do this all while diversifying my holdings between a number of cities. You don’t realize how lucky you are to be in a market like that, if I was down there with a good credit history and even as little as $10,000, within 5 years I would be sitting on atleast a dozen properties. I’ve researched markets like yours in the states – with +12% yields, the problem is as a Canadian I would have to put down an uneconomical downpayment.

Anyways, good luck with your situation.

Reply

7 Dave @ The New York Budget December 12, 2013 at 8:39 am

I agree with Anne. There are far too many “easy money” stories in the real estate world and it is good to come back down to earth every once in a while.

That said, I am still interested in real estate. I am in your boat of not knowing the first thing about it, which begs the question: how do I GET to be an expert? How do I learn? I don’t plan on getting into the game until I can answer and execute on that question.

Reply

8 Jeff Rose December 12, 2013 at 10:10 am

@ Dave Great question. I know that just working with the realtor I learned a lot. I also learned who in our area was “in the know” of real estate deals. Call them up and offer them a cup of coffee. I’ve made some good connections this way.

Since you have a blog, you could always try the angle of interviewing them. Feed their ego and they might show you some of their tricks.

Reply

9 J. Money December 12, 2013 at 5:16 pm

HAH! Brilliant!

Reply

10 theFIREstarter December 12, 2013 at 6:20 pm

Dave, check out the forum at bigger pockets:

http://www.biggerpockets.com/forums

There are a lot of knowledgeable members and you should be able to learn enough and get any specific questions answered as well! Good luck :)

Reply

11 Jeff Rose December 17, 2013 at 1:49 pm

I second this. Those guys know their stuff.

Reply

12 Dave @ The New York Budget December 17, 2013 at 6:18 pm

Thanks all!

This is great info! (and great tactics!)

Reply

13 Chris @ Flipping A Dollar December 12, 2013 at 8:41 am

Being out $500 sounds like a win to me! I’m sure there’s real estate courses out there that cost a lot more than that.

Have you gotten back into the real estate game since this first blunder?

I really love the idea of real estate investing but we A) don’t have the capital and B) aren’t sure where we’re going to end up geographically until my wife is done with school.

Reply

14 John S @ Frugal Rules December 12, 2013 at 8:42 am

Thanks for sharing your story Jeff. This is one of the main reasons why we’ve not gotten into real estate – I don’t like it, nor do I have a clue what to do with it. I know you CAN make good money at it, but it’s just not me. I love that Sullivan quote as well as I think it’s so true. Thankfully my fails haven’t been too messy but have been good learning experiences.

Reply

15 Martin December 12, 2013 at 8:43 am

I love that quote, I’m going to steal it Jeff.

That’s funny because we’re the opposite. I hate numbers, but love real estate. I just sold my rental property for a handsome property and have another one being built.

As for failures — I have always failed at these damn eBook launches. I just want to help my readers. But I also want to make a few bucks in the process. Each failure is just humbling. It also makes me angry to be honest. And it hurts my confidence.

Reply

16 Jeff Rose December 12, 2013 at 10:13 am

@ Martin

I’ve been impressed with your real estate experience thus far; especially for a kid! :)

Maybe real estate is your calling and you can show young people how to get started?

Might be your golden ticket. :)

Reply

17 J. Money December 12, 2013 at 5:18 pm

(Or, how to pick up chicks. I’ve never met anyone who’s so good at it!! (Seriously – I bet you could make a ton with that, Martin ;))

Reply

18 Martin December 12, 2013 at 6:34 pm

You guys read my mind! I hope you don’t mind me posting links, but I started rough sites for both topics :)

http://thepropertydude.com/
http://www.pickingupgirls101.com/

I just need to spread the word now.

Reply

19 J. Money December 13, 2013 at 1:03 pm

HAH! Now do you TELL the ladies you have that blog? Or do you just scurry back to the computer afterwards to kiss and tell? ;)

Reply

20 Brian@ Debt Discipline December 12, 2013 at 8:52 am

Sounds like a great $500 lesson. Would have cost you much more if you went ahead with the deal.

Reply

21 Holly@ClubThrifty December 12, 2013 at 9:00 am

Yeah, rental properties are tricky!

We’ve got two rental homes. We bought one for that purpose and the other was our first “starter” home. We’ve definitely had a few challenges but I cannot wait until those babies are paid off in 12 years. They bring in around $2,000 per month now but we reinvest it all into mortgage payoff and repairs. Once they’re paid off, it will just be income! =)

Reply

22 Jeff Rose December 12, 2013 at 10:14 am

@ Holly That’s right! Once those puppies are paid off it’s for some nice cash flow. #easymoney

Reply

23 Holly@ClubThrifty December 12, 2013 at 12:58 pm

Yeah, I am actually really glad we bought them when we did 7 or 8 years ago. We were too ignorant to be afraid. I think I would be a lot more hesitant to get involved at this point in my life just because it can be a hassle and so much can go wrong.

Reply

24 snarkfinance December 12, 2013 at 9:51 am

I have a rental property right now (four units). I was lucky enough to have entered into the world of real estate with a Virgil of sorts: a professional real estate investor, as a partner. My building isn’t cheap (we are in Boston), but is a steal for the area. If all pans out, this property will essentially pay off the personal mortgage I plan on taking on sometime in the next three years (so the pers. mortgage will be taken on, and about 3-5 years later the investment property will be sold paying off the personal mortgage = 100% debt free in the Northeast… no easy task.)

Reply

25 Jeff Rose December 12, 2013 at 10:21 am

That’s the way you do it buddy! What you’re describing is where I thought I would be by now. Instead my cash flow has been my blog. I guess I’ll take it for now! haha…

That sounds solid though. Good job!

Reply

26 Debt BLAG December 12, 2013 at 10:02 am

I’m sure your CPA looked at much more than just the rent and purchase price, but that you’re just at 1.0% shouldn’t necessarily be a dealbreaker

Obviously, higher is better, but he should have walked through how much you’d likely pay in property taxes and insurance, occupancy rates, age of the appliances (for maintenance costs), what sort of rate you’d get, and so forth. Perhaps more than that, as a CPA, he should have walked you through the tax implications…which can be pretty huge given the U.S.’s property owner-friendly system.

Reply

27 Joe December 12, 2013 at 11:46 am

We are renting out our old house and that works very well. We know everything about the place and the mortgage is low.
Our 4 plex on the other hand is just scraping by. I am seriously thinking about selling it and taking the profit from the equity increase.

Reply

28 J. Money December 12, 2013 at 5:21 pm

That is the nice thing about renting out your own old place – you’ve got all the details covered from day 1 :) (Though you can also spot all the new trouble areas the tenants then bring too! haha… for better, or for worse)

Reply

29 Nick @ Step Away from the Mall December 12, 2013 at 12:16 pm

I had a 10-year battle with rental property I shouldn’t have bought. Then we got a way-too-high offer for it (like an almost exact place around the corner sold for over $100,000 less than ours two months later) and pounced on it to get out with a decent gain.

I love the idea of rental property, but I too did it wrong. Interest-only variable, bought it with “a buddy,” didn’t do proper tenant screening, and the list goes on.

Ouch!

Reply

30 Brad @ RichmondSavers.com December 12, 2013 at 2:15 pm

The one major financial mistake in my life revolves around real estate and it still haunts me to this day as I’m still paying monthly…

In 2005 we bought a few plots of land in this golf course retirement community in NC and we were able to sell a few for a nice profit. So of course we bought more and then the world economy collapsed and we’re still stuck with these things!

If it wasn’t for them, I probably could have retired already (by 34), but alas that was not to be.

I know a few other people who bought there who have just let them go to foreclosure, and amazingly the bank didn’t come after their assets. I don’t particularly like the thought of foreclosing on them when I can pay and I also know it would be my luck that the bank would come after me if I did! So we keep dutifully paying on these things every month…

Anybody have a good real estate lawyer they trust?? :)

Reply

31 J. Money December 12, 2013 at 5:24 pm

It’s a good thing you got a few wins in there before hand to help balance it out ;) I don’t like the idea of going bankrupt either when you can clearly pay and realize it was a mistake on your behalf. There’s def. times where I find it acceptable to declare, but it takes a lot for me as I too easily mix it up with morality – whether I should, or not. (Lots of people say it’s “just business” but to each their own)

Reply

32 Katherine December 24, 2013 at 3:34 pm

Brad, I can recommend the lawyer I have used for all my sales. He’s in Chesterfield VA if you are interested.

Reply

33 Christine @ ThePursuitofGreen December 12, 2013 at 3:44 pm

I’m happy enough with just buying my own house to live in. It’s a never-ending project and I can’t imagine having more than one house to fix up and repair all the time! I’ll just tinker away and experiment with my own house haha.

Sounds like you got out of something that could’ve been really bad! You’ve got some good luck and good people around you helping you and giving you advice.

Reply

34 Micro December 12, 2013 at 9:51 pm

I think the start up costs are the main reason why I haven’t ventured into many side hustles. I know there is money to be made in real estate, flipping things on craigslist, etc. There is also a great deal of knowledge needed to be successful and I know I don’t have that yet. The only way to get good at it is by doing it but I don’t want to lose a bunch through the start up costs and it wind up taking me a long time to recoup it back.

Reply

35 Ben @ The Wealth Gospel December 13, 2013 at 9:31 am

Good stuff, Jeff! I took a real estate class my last semester in college, but the whole time when you were saying stuff like “Can you see the train wreck ready to happen?”, I’m thinking, ummm no…I’m probably even more ignorant than you were haha.

I do appreciate that you wrote about sticking to your passion. I have no interest in real estate, but I’ve definitely been tempted by the potential. And those Robert Kiyosaki type books/classes can be intoxicating, but it definitely lacks a lot of the tools you actually need to do any of it.

Reply

36 Jeff Rose December 17, 2013 at 1:26 pm

Thanks, Ben! I have plenty of good friends around me that do really well with real estate but it’ s just not my thing. Not yet at least.

Maybe one day! But for now, I’ll stick to blogging. :)

Reply

37 Mr. 1500 December 13, 2013 at 2:53 pm

Real estate and rental properties are something that intrigues me as well. In our ‘hood (Northern Colorado), >=1% is unobtanium. Homes that cost $200,000 rent for $1250 at best.

However, I don’t think the 1% should be the end-all to the game. Some things that I think about are:
–> If you feel strongly that prices will go up and the rent covers the mortgage, it could be a solid long term investment. So what if you only make $3000/year from the home. In 15 or 30 years, it will be yours and someone else will have bought it for you.
–> Mortgages are much harder to get than they were in the past. Also, most people expect rates to go up from their historic lows. These factors will make home ownership more difficult, pushing more people into the rental market. Monthly rents have nowhere to go but up.
–> If the home is run down and you can do some basic improvements, don’t discount the value of sweat equity.

I like real estate as a compliment to the stock market. Stocks will go up and down, but people need a place to live always.

Reply

38 J. Money December 16, 2013 at 8:46 pm

That reminds me, I need to invest in some toilet paper stock… ;)

Reply

39 Lazy Man and Money December 13, 2013 at 8:56 pm

I would like to reiterate what Holly@ClubThrifty said.

I was reading this article and it sounded like it was deemed a bad idea because it wasn’t immediately profitable. I bought an investment property earlier this year that I don’t expect to make money… for 15 years until the mortgage is paid off. We’ll probably lose money if you count repairs.

However, after that, it’s likely to bring in the equivalent of $10,000 a year in today’s dollars. This diversification of income should be a core retirement asset for us.

Reply

40 J. Money December 16, 2013 at 8:49 pm

As long as you indeed hold onto the property for that long :) That’s the hardest thing for me to latch onto. I’d love to confident that we’ll still have ours years from now when it starts making profit, but chances are I’ll get rid of ‘er long before since it’s strains my head…

Reply

41 Lazy Man and Money December 16, 2013 at 9:57 pm

How much head-strain is a 10K annuity worth? For me, it’s a fair amount. If it gets too be too much, it’s time to get a management company.

Reply

42 Eddie Camacho December 14, 2013 at 2:48 pm

It seems like everyone has their own interpenetration of success and failure when it comes to real estate. (the major factor is cash flow) it has been wonderful for me!

I purchased my first property in 2008 when the market was down in Vegas. bought a $250k town home for 95k and paid it off, In 2010 I purchased another town home in the same development for 46k. now I have two sources of passive income receiving $1300 a month between them both after HOA and Property management fees.

Its not bad for a single international contractor with no debt, who has plans of living abroad after I retire in 5-7 years. the only mistake I might have made was buying town homes, cause those HOA fees are pretty expensive. I’m looking to purchase my next property in the next 2 months, which will be a much larger single family home.

I’m well diversified with other sources of passive income. I just figure all cents add up and if its positive cash flow you can’t lose. sorry for those who had bad experiences.

Reply

43 J. Money December 16, 2013 at 8:47 pm

Damn son, good for you! You’re on fire!

Reply

44 Howard December 16, 2013 at 3:08 pm

Buy a REIT,less hassle,better return,leave it to the Pros.
Renters can be nightmares and all the rules are against the owner.

Reply

45 Jeff Rose December 17, 2013 at 1:28 pm

@ Howard I”m sure there are good REIT’s but I’ve seen to many people lose their shirt in these investments. Especially the private REIT’s.

Reply

46 Lazy Man and Money December 16, 2013 at 3:44 pm

Howard, I did some analysis on a REIT vs. real estate itself. Looks like a lot worse of a return. See: http://www.lazymanandmoney.com/real-estate-vs-reits/

Reply

47 DC December 17, 2013 at 1:07 pm

Jeff, I am not at all a fan of those RE books, CDs, seminars or network groups. I do have a small portfolio of rental properties ranging from high rise condos to detached homes. Some managed by property management but most by me and my business partner. My opinion purely based on my experience so far: the cost of owning rental property is mainly divided (not equally though) into 3 components – interest, taxes and maintenance. Average cost of borrowing is around 3%, property tax is just over 1% and maintenance well under 1%. All combined, say total cost of carrying a property is around 5%. If proper research is done before buying, it is not hard to find property that appreciates 4% y-o-y which more or less gives it a wash to the cost of carrying property over a window of 3 to 5 years. Most markets where gains are over 4% y-o-y, have a yearly cap rate (for rental income) 6% compared to the 12% in your case. Considering that cost of property manager, commission / finder fees and vacancy the net rental return averages around 5% per year. Assuming a down payment of 20% to avoid CMHC premium and financing 80%, the ROE (20% down payment) is 25%. Any rental property with an annual cap rate of 6% will always have a positive monthly cash flow as well.

In your illustration, 12% cap rate gives a 6% cushion for unexpected repairs. Air conditioning, roof, furnace, etc. would not have cost over $7,000 each. If proper inspection is done before buying a $120,000 property, there’s no way you would be spending $35,000 over 5 years for repairs. I think, you had a good investment opportunity but the good thing is – it is not very difficult to find another one!

Reply

48 Jeff Rose December 17, 2013 at 1:23 pm

@ DC I could have had a decent investment property but I can quickly tell by the calculations you made I was definitely in over my head.

Plus in our area, properties don’t appreciate that much. In fact, I would be surprised if that exact same duplex couldn’t be bought for the same price today.

But you are definitely right in “not very difficult to find another one”.

Cheers! :)

Reply

Leave a Comment

Previous post:

Next post: