LB Note: I'm excited to feature Joseph Hogue of PeerFinance101 on the site today. In addition to my own real estate investing story, I'm happy to share others as I think they are valuable learning opportunities!
Stories of failure in real estate investing seem to be the norm but avoid the traps and you can make money in rental properties.
Lauren shared her real estate investment mistake a few years ago. It was a difficult story to share but not an uncommon one.
Like so many real estate investors before, she jumped headfirst into the myth of fast money in fixer-uppers. From problems with a contractor to overpaying for the home, it nearly bankrupted her.
I say it’s not an uncommon story because I’ve seen dozens of real estate investors make the same mistakes in more than a decade as an investor myself.
In fact, Lauren’s story motivated me to share my own real estate investing story.
Spoiler alert: It’s not a happy one either.
From Rags to Real Estate Riches
Like Lauren’s story, mine begins with HGTV and the dream of turning fixer-uppers into consistent cash flow.
I was just a few years out of the Marine Corps and finishing my degree in finance. The real estate boom was just building momentum and the infomercials for real estate rentals were playing constantly on cable.
I finished an internship as a commercial real estate agent and liked the larger scale of commercial property, but the money seemed to be in residential rentals. You could buy a house with just a few thousand down on overly-generous loan programs and then have a renter pay the mortgage for you.
I saved enough in the Marines and through part-time jobs to buy a beaten-up house on the north-side of Des Moines. For those of you not familiar with the north-side…there are parts that would have to be built up to be called run down.
It’s a mistake many new real estate investors make and I was no different.
I couldn’t afford just any fixer-upper. The idea was that I could buy a fixer-upper in a less expensive part of town and still get solid rent each month. After remodeling each house, I could refinance it to cash out and put the money into another rental.
That was the strategy and I turned it into six rental properties along with my own home within two years. I had over half a million in real estate with a fifth in equity.
Over a hundred grand in equity and renters paying more every month isn’t bad for a kid of 24-years old.
And Back to Rags Again
I was working my first job after college as a Financial Reporting Analyst, that’s pronounced accountant but I liked the fancy title, and the idea of not having to do anything with my real estate investment made great sense.
The problems with tenants started within a few months. Between having to repair windows that were mysteriously broken and every other fix, I was getting at least a call every week. I could fight with the tenant on the repairs that were their fault but that usually meant they moved out or got behind on the rent.
Worse than the constant calls from tenants were the notices from the city inspector. It’s a strict rental code in Polk County and the owner is responsible for keeping screens on windows, yards free of garbage and smoke detectors in every room. This might not seem like an unreasonable request until you get the wrong tenants that rip out screens, take down smoke detectors and use the lawn as a warehouse.
So why not just evict bad tenants or wait for the perfect renter in the first place?
Well, most ‘perfect tenants’ didn’t want to live where I was renting houses. Evicting a tenant meant a 45-day process where I wouldn’t get a dime in rent. Once the tenant was out, it was a weekend renting a U-Haul truck to fill up with the garbage left behind to dump at the landfill before work on Monday. Then it would be another few weekends of carpet, paint, and repairs to get the house back on the market.
Most of those 3 a.m. infomercials and get-rich schemes won’t tell you that cash flow on real estate rentals is extremely unstable for at least several years into the plan. Adding more houses means using as much debt as possible which means higher mortgage payments that eat up most of the rent.
That leaves almost nothing left to hire maintenance or management, so you’re left doing as much of the work as possible.
I was working a full-time job upwards of 50 hours a week and spending another 20 on my rental properties. The result was a neglected real estate business. I started avoiding tenants, waiting too long to evict just because I didn’t want to mess with it. When a house was vacant, it might sit for months before I could get it fixed back up to rent.
I was able to sell a couple houses, but it was 2007 and the market had already dropped out of real estate. I drained my savings and started missing mortgage payments. I filed bankruptcy in 2008, only saving my own home.
The Real Estate Investing Mistakes You Can’t Afford to Make
I still believe in real estate as a great investment and long-term creator of wealth. Don’t let mine and Lauren’s stories throw you off one of the best asset classes available to individual investors.
You do need to go into real estate investing knowing the rules and the most common mistakes though. Knowing how to avoid the traps that caught us will help you create your own, happier and successful, story of real estate riches.
- Research and get all the free money you can from renovation programs and city grants. This is something Lauren did spectacularly well, including finding forgivable loans and reduced property taxes.
- Connect with other real estate investors or consider creating a real estate investment group that can pool your talents. Try finding interested investors with different talents including maintenance, real estate law and property management. You can informally trade ideas and help each other out or pool your money in a formal investment company. (Try Bigger Pockets or Afford Anything!)
- Learn how to do some of the more expensive repairs. I’ve never been particularly handy but was able to learn electrical, tiling and basic cosmetic fixes like installing carpet.
- When you do need to use contractors, get a written contract for the job that guarantees the cost will not go over a certain percentage of the bid. Include the criteria under which you can hire someone else and a payment plan that leaves the majority of the fee until after a successful inspection.
- Maybe one of the best real estate investing rules is just to take it slow. Considering much of your return is through a mortgage payoff that stretches 15+ years, don’t expect real estate to make you rich overnight. Start with one or two houses, a duplex or triplex is perfect, to ease yourself into the challenges of property management.
- One of the first things I tell new investors is to only buy houses in which they would want to live…because you may need to someday. Buy quality homes in quality neighborhoods where you’ll be able to find good tenants that will treat your investment with respect.
I still own rental properties and will buy others in the future. I’ve learned from my real estate mistakes and hope to someday share my story of ‘Rags to Riches to Rags and then Back to Riches’. Save yourself the trouble by learning from other real estate investors and their mistakes.
That way, when someone asks you to share your story, you can write ‘Rags to Riches, End of Story’.
Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business.