My Journey in Rental Property and Real Estate Part 1: My First Deal

High Rise Rental Property

On the last day of 2015, I bought my first rental property, a four-unit building. All units were one bedroom units and had three long-term tenants. It was built in 1937 and was not in perfect shape. In all, I bought it for $112,500, and it was probably worth about ten thousand more than I paid for it right off the bat. It was listed for $125K, but had been listed for about 14 months. The rental property had been shown to prospective buyers at least 15 times. So why did no one buy it before me? Was it a bad deal?

No, in fact, it was a pretty good deal that grossed over $2,000 per month. The problem was that the owner at the time, was an out of state owner and he had a tenant showing the property. This tenant was the one that was tasked with “taking care” of the property (cutting grass, cleaning the hallways, replacing light bulbs, etc.). We will call the tenant John. John paid no rent to the owner, in exchange for his maintenance.

Tenant Sabotage

So, John was trying to convince every buyer to keep him employed and keep his rent low. Every owner fled as fast as possible because John was so overbearing. They wanted nothing to do with a long-term tenant who was not as knowledgeable about property maintenance as he wanted to make himself out to be.

He used extension cords as permanent wiring solutions for light bulbs, as an example. This has since been fixed. John did not scare me away when touring the rental property, mostly because of ignorance. Hindsight is 20/20 and at that point in time, I did not have it. Little did I know he would end up suing me.  I won, open and shut.

The unit that John the tenant resided in was not the first property I looked into buying. I looked at a few others before deciding, but I wanted the property so badly that I was blinded. My father was a pilot in the Marine Corp and flew helicopters. Throughout my childhood, I would hear the term target fixation. Target fixation is when a pilot was looking at something so intensely that he or she would crash into something else, like the ground or a mountain. That is what I had, target fixation. Blinded by the Benjamins.

Bad Decisions Continued...

My realtor gave me the number of a mortgage broker and little did I know that it would be a bad decision. After contacting the mortgage broker, he quickly sent me a pre-approval letter and I was only approved for $115K. I had been looking at properties in the $130K-$140K range. What a blow that was to hear. Therefore, I made an offer on the property for $112,500 and lucky for me, the seller accepted it the first time.

Not Expecting

I started the loan process in August and it took four, long, stressful months before it closed. First, I was going to use a conventional owner occupied loan at the 5% rate, but then I accidentally missed a credit card payment the same month, which was a rookie mistake.

I never miss a payment on anything, but did it at the exact wrong time and at the time, there was only about $50 dollars total on the credit card. Boy, did I feel dumb. That 50 bucks that was late cost me a pretty penny in the long run. Somehow the mortgage broker was still able to allow me to use an FHA owner occupied loan for 3.5% down. Both loans required that I live there for a year.

The loan process was demanding. It was something that I was not expecting at all. I thought the hardest part about buying a property at the time was finding it and getting it under contract. Everything that could have gone wrong with the loan did.

First, I met with the mortgage broker and he was extremely helpful. I had heard that he was one of the best from no less than three people. When I went to meet with him the second time at his office, it was about 5 pm late in the week. I was informed by the secretary that he did not work there any longer. WHAT?!

 

No idea

He did not call, text, or email me to let me know. I had absolutely no idea. We had met only one week earlier. How was I going to stay within the contract dates for buying the rental property now? Even the secretary at his former employer said he was one of the best. So, when he finally called me and apologized, he said he could still get the loan completed at his new bank. My ignorant self said, “OK.” Again, hindsight is 20/20. Three plus months later, and several contract extensions later with the frustrated seller, we finally closed.

As much as I disliked the mortgage broker for his inadequacies, he did get the deal closed. It wasn’t exactly how I would have pictured it, but I was ecstatic to be a property owner. When you make $30k a year at your regular job and acquire a property that grosses $24k a year, you tend to care less how it gets done, so long as it happens. Now, even though I was the property owner and lived there, I used a property manager.

 

No Time To Manage a Rental Property!

I had no time to manage a property. I worked full-time and went to college full-time. It was exhausting. The last thing that I needed was to have tenants calling me about fixing problems at all times of the night. Having two full-time commitments meant that I was not in my apartment much.  It is crazy to say, but I had no idea that the fire department had come out twice to my building in a week span about a tenant smelling gas.

This happened about 6 months into my ownership of the rental property. My tenants and I did not talk much, as they were middle aged women and I was a young male. We just didn’t have much in common. The occasional hello or goodbye was it. My property manager did not inform me and I never smelled any gas in my apartment.

The gas and electric company finally called me to tell me that they were going to shut off my gas and that I would have to get a pressure test on all gas lines before they would turn it back on. The property manager’s negligence could have killed three others and myself. Oh, and during this time, the tenants do not have hot water or gas to cook with their stove. So much for paying a property manager to do the work...

 

Fortunately...

Fortunately, a friend's dad was a licensed plumber. There were five gas lines in the building and I had to get them all tested and fixed if necessary. If I had called anyone else, it would have been at least $4,000 with all the items that he had to fix. My price was only $2,500. That virtually eliminated my profit from the first 6 months.

After firing the property manager, I took the phone calls from tenants for a month or so before I found another property manager. It wasn’t too bad, but it was definitely something that I did not want to do long term. More mistakes were made along the way, but they were smaller mistakes that we will save for another time.

 

Do Not Buy Emotionally!

Overall, you can save yourself tons of headaches by planning ahead and not getting emotional about a buying decision. My property manager used to be a good friend. I had no idea in a million years that he would neglect the safety of myself and others. Not only that, but he swindled and stole several hundred dollars from me over the course of his time as the property manager. I consider myself to be a somewhat intelligent individual, but the only thing that anyone can do is to move forward. Rental property is not for the faint of heart. It is a pain in the ass, but it is a lucrative pain in the ass.

 

Part II can be found here

 

By Trey Stevens

Feedback@PlusFourZeros.com

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

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