What I enjoy about this article is that it offers an honest opinion about the challenges within real estate investing.
Admittedly I do have some points of clarification and areas where I disagree and I’d like to Showcase below:
Summary
- Four single-family houses and one duplex at the peak of his real estate portfolio.
- Started in 2003 in the residential market and purchase two single-family properties with $30,000
- Both properties purchased were foreclosures and one of them he mentions that it was in a neighborhood that most investors were avoiding
- Utilized the BRRR method. The full BRRR cycle (Rehab and Refinance) seemed to take 6 months or less.
His Mistakes
He became a Landlord and didn’t leverage a Property Management company. This is not to say that landlords cannot be successful. Being a landlord required a certain level of skills, patience and knowledge.
Spending so much time between managing my properties and my day job, it didn’t take long to burn out. I started avoiding tenants and didn’t start eviction proceedings as soon as I should have after non-payment. Even after a tenant moved out, it would be a month or two before I spent the week necessary to clean up the house and get it back on the market.
I can absolutely imagine the level of stress and time commitment required to manage properties and having a full-time day job. Especially without the appropriate automation and systems in place to make your life easier.
The conversation needs to be had with you and your family to determine if you plan to self-manage or hire a property manager. There’s pros and cons and either option can absolutely work!
Points in the Article I Disagree with
I found a couple of managers that would consider my rentals but only at a fee of 15% on gross rents, well over what I could afford given the properties’ cash flow.
There are a couple points that I’d like to discuss regarding his statement above.
The amount of research he did does not seem like it was sufficient enough in order to find the right property manager. Did he do a full research of all of the property managers in the area? Did he connect with local Real Estate Investors that are following his exact business model? More than likely there are investors that are doing exactly what he is doing and have the experience that he does not have. This means they are doing something right.
Are they self-managing or do they have a property manager if they have a property manager then they could potentially get a referral fee for offering the contact information of the property manager that they use. Along with the fact that most experienced Real Estate Investors want to help the newbies.
If they investors do have a property manager then either the management fee of 15% gross rents is lower than what the article shared of or it is 15% of gross rents and somehow that local rental real estate investor is able to make the cash flow work.
Which brings me to my next point, by completing the refinance you took too much money out. The more money you take out of the deal, or the higher the loan that you placed after the refinance, means that you’re going to have less cash flow. If the lowest management fee that you are able to find is 15% then that fee needs to be included in your calculations so that when you go to refinance, you ensure that the loan is the right amount so you meet your minimum cash flow requirement.
Only buy houses and in neighborhoods in which you would want to live. If things don’t go as planned, you may need to live in one of your rentals.
Consider those individuals that invest out-of-state. They may not want to live in the rental properties and in the neighborhoods where they invest in. However what about those that either invest out-of-state or live in Maryland and invest in Baltimore City, Maryland. There may be great cash flowing properties with great amenities and a decent neighborhood that you may not want to live in.
It seems like individuals using that rule ignore or choose not to place as much value as other rules. For example, Would you want to work in the company that you invest your stocks with? Real estate investing is that, it’s an investment not your home.
While I do like the idea he mentioned of if at worst case scenario, you hit rock bottom and need to live in one of your rental properties, I suppose that is an extremely last resort. I would hope the investor is doing anything and everything possible in connecting with his or her net worth way before that idea even becomes a possibility.
Try paying at least 20% of the purchase in cash to give yourself some financial flexibility and lower your mortgage payments.
This all depends on how you want to invest. What is your strategy? If you are following the BRRR model, then you will not be paying a 20% down payment on a property in leveraging traditional financing. more than likely you will be using your own cash or other people’s money (OPM).
On the other hand, his comment regarding the financial flexibility by lowering your monthly mortgage payment, can be accomplished by leaving more equity in the deal and refinancing with a lower LTV.
Points to consider
- He scaled fast
- He didn’t mention how he did his cash flow analysis for each property
- He was a landlord with a full-time job
Conclusion
Every real estate story and journey is going to have its pros and cons. Everyone is going to fall into the same and different traps. It’s all about the preparation, your mindset and your network that will determine whether you succeed or fail.
Develop the network and follow those that are succeeding in exactly what you are looking to do.
All passive income starts with active work. I strongly urge you to consider real estate investing as it changes lives.
Read the full article here: https://www.physicianonfire.com/lost-it-all-real-estate-investing/
