About 13 years ago, I was on a Navy ship sailing home on deployment from Iraq and a squadron mate of mine starting talking about the several houses that he owned. He was a bit senior to me, but it still amazed me that he was able to afford several houses at the same time. I had no idea about the power of leverage or the idea of having other people pay your mortgage. He suggested I read a book called “Rich Dad Poor Dad.” Being on deployment and, more importantly, on the way home, I had nothing but time. So I found a copy of the book on the ship. The ship has books and games all over the place. So I started reading and I couldn’t believe what I was reading. As a result I started rethinking the way I was looking at money. I won’t go into all the details, because that is not the point of this post. However, another squadron mate of mine who was also on the deployment also read the book and we began to brainstorm. We got on the internet and looked at rental property markets all across the country. We looked at population growth, unemployment, home values, rental rates, etc. We narrowed our target market down to Phoenix and Las Vegas.
Now, what 25 year old man do you know that doesn’t want an excuse to go to Las Vegas. Las Vegas it was. I started looking at the Las Vegas market to find a rental property that would work for what I needed. At the time, I thought that I needed to find a place that I could rent for the price of the mortgage and taxes. I did not think about things like repairs, vacancy, etc… but that was only because I was ignorant!! As a result, it was really easy to find a house that met my criteria. I settled on a three bedroom, two and a half bathroom single family home with an attached two-car garage in north Vegas. The house was originally listed for $150,000 and it had been on the market for about three months. This was definitely a buyers market, but again due to my ignorance, I didn’t know anything about that. After talking with my real estate agent, who my buddy and I picked off the Coldwell Banker website because that is who his parents used (again, ignorance is bliss), I made an offer of $137,000 and the seller accepted. Home Run!!
You will have to forgive me because I don’t remember all the numbers, and didn’t keep any records (not smart). However, the numbers looked something like this:
Purchase Price: $137,000
Down Payment: 5% ($6850)
Closing Costs: $1500
Interest Rate: 6%
These numbers combined put my monthly payment of principal, interest, tax, and insurance at roughly $950 per month. All I had to do was find a family to rent my new rental property for $950 a month or more. That should be easy. Again, I had not even considered any repairs, vacancy, capital expenses, utilities, etc……
We found a tenant to move in within two weeks and they were willing to pay $1000 per month. Home run right. As it turns out, it worked pretty well. They paid for a year up front so we didn’t have to do much. We rented the property to them for the year and then they renewed their lease. They decided to pay the next year each month, rather than in advance and everything was smooth until they stopped paying! In April of 2005, the tenants missed their payment for an initial time and we had to evict them. Evict them we did and then I got the call from my property manager. The house was not in good shape. The family had done quite a number on the property. As a result, off to Vegas I went. I met a friend of mine in Vegas and brought a friend with me. We spent a long weekend fixing up the property, painted, re-tiled the kitchen, new carpet, etc….
I wasn’t really thrilled with the prospect of another tenant so I decided to put the house on the market. When I called a real estate agent, I was floored. They recommended a sales price of $250,000. In 17 months I was in line to make a $113,000 profit. After about a month on the market, I sold the property for $247,700. After closing costs ( I negotiated with the agent to sell for a 1% commission, making my total real estate agents feed 4%), I netted a profit of $84,000. This includes the closing costs and commissions on the buy, as well as the minor rehab I needed to put into the place after the tenants moved out. Not too bad for screwing up about every possible thing I could.
List of things I screwed up
1. Real Estate Agent: I just cold called a Caldwell Banker and pick an agent. No vetting, no recommendations
2. Property Manager: I just utilized one the real estate agent recommended. I didn’t interview her or anyone else. She was just starting and was ill prepared for the job. I can write an entire blog on her shortfalls and maybe will at a later time, but one of the main give aways was when she told me the house had a lot of damage. When I got to Vegas to fix it up my neighbors said it had been in rough shape since the tenants moved in. I am not sure she ever even went to check on the house during the entire 17 months.
3. Numbers: I didn’t take into account any vacancy estimates, repair estimates, capital expenses (I had to repair the slab at one point), property management fees, HOA fees, etc.. I was only concerned with getting as much rent as I needed to cover my mortgage.
Things I did well
1. I bought in a greatly appreciating market. I have since learned to NEVER buy for appreciation, however it worked this one time.
2. I got really lucky!
This one worked out really well, and was truly the catalyst for what has turned into a successful real estate investment portfolio. However, I learned a ton and made a bunch of mistakes. In the following blogs, I will outline how differently I look at rental properties now during the evaluation stage in order to buy at the right price and protect my investments from all the things that come up that you never expect!