My first investment retrospective

[Account Closed]

A quick overview: I am doing these write-ups on my first couple real estate investing endeavors for a couple of reasons. First of all, I am trying to let people know more about myself, and especially those of you who operate in my short list markets. :) I’m newer to BP and I understand the hesitation that some members have of wasting time conversing with transient tire-kickers, so I’m hoping to show that I do have some experience and assets when it comes to real estate. Secondly, I realized that even though I have done a few investments, I have never written about them and chronicled what I learned from each one. This seemed like a good idea and maybe it will be useful for others starting out, but it’s mostly to distill my own thoughts on what I did before.

Investment #1

My first investment was more of a paid educational experience. It did not turn out the way I thought it would from a financial or operational standpoint, but I still consider it a "success story" because it was the first time I jumped into REI and that was a big step in and of itself, and I learned a lot.

It was an out of town mobile home. I had been wanting to invest in real estate for several years before I actually pulled the trigger on anything. I had read some books and been to some seminars. I am first to admit that I’m not really a handy person. I’m analytical and a numbers type. I came across a fellow in San Antonio (I won’t use names because he still operates there) around 2007 who was basically what you would now classify as a turn-key seller/operator. We spoke and he said come down for the weekend ‘boot camp’ / tour of the market. I did that and it was really interesting. They had a variety of investments from apartment buildings down to small mobile homes. I decided to do the smallest investment they had, because I figured a couple grand if it didn’t work out I could chalk it up to life experience and learning.

I purchased the mobile home for I think $~2000. I’m pretty sure they picked it up for $500 or less, made $~500 in the repairs, then flipped it to me. I then ‘flipped’ it to a buyer they had lined up to lease to own the property. It was going to be a $5000 to me plus interest on a 5 year payment schedule where the buyer pays me the monthly payment on the MH and additionally the lot rent to the MH park, although since I officially owned the MH until they finished making payments I was on the hook for paying the MH park. The turnkey provider had a “property manager” (quotes intentional) on their team they would assign me if I wanted to use them and that was going to cost me $50 a month or something. If the deal went the full 5 years (it didn’t) I would have made out really well. I don’t recall the exact numbers today but it was something like tripling my initial investment over 5 years. I will never mess with mobile homes again but I can definitely see the allure from a numbers perspective.

So we got started, the buyer moved in, and for a good while things ran ok. I would get a deposit in my account when the PM collected the rent, and I would cut a check to the MH park and mail it. The payments did not always arrive like clockwork but they did arrive. Sometimes 5 days late or so, but they showed up. After about a year and a half the payments starting coming in much later, to the point where we were more than halfway through the month, and I was cutting checks to the park before I was getting the payments on the MH. I started having to make more calls asking what was going on, usually when I called then the payment would “show up” shortly after. (Like if I didn’t call and make noise I wasn’t going to get my money.)

Finally a little under two years in, the payments just got so behind and one month it didn’t show up. I was not really getting much in the way of results so I decided to speak directly to the owner of the turnkey company whose property manager this was. Needless to say I was pretty shocked when the words out of his mouth were something along the lines of, “Oh yeah, I don’t work with that PM anymore. He flaked out and decided he wants to go back to school and be a dentist.”

With this information I got the PM to admit he wasn’t really doing any work he only was continuing to collect the rent for me because he banks at the bank I had my account with and it was a free $50 a month, but once we ran into issues he basically didn’t want to do any work and that’s why the rent was late and then stopped. I fired the PM at this point and got a referral for another PM in the area who could help try to clean up the mess. She went over to the MH and to her surprise the person who was on the loan for it was not living there anymore. What she found out was that he basically decided at some point he didn’t really want it anymore, and just moved out to another one in another park. He let another family move in and was collecting rent payments from them, passing them on to my PM who was passing them on to me. To make matters worse, this family appeared to be undocumented immigrants and were in a fight with the buyer claiming they paid him rent the month he stopped paying me and so on. In either case we were going to move to evict everyone out of there but they decided they would rather leave on their own and surrendered the keys to my new PM. Once she got inside she found it had been trashed out and was full of mountains of garbage. There was a hole in the floor in the bathroom. I had her schedule a contractor to take a look at the cost to get rid of the trash, repair the property and clean it up. Before he made it out there apparently a feral dog found the hole in the bathroom, climbed up inside and had a litter of puppies in the unit. So, then we had to get those removed.

At this point I found out that the cost of fixing the property back up was going to be more than I wanted to deal with. I didn’t want to continue to operate in this low quality of an area, so I ran all the numbers and decided to call this an educational experience I was “done” with and unloaded the MH to another investor who didn’t mind doing the work. I walked away with 40% of the payments which probably didn’t quite cover my investment but I was not out a whole bunch of money, and I gained a lot of useful lessons.

So what did I learn? (Or what did I think I learned?)

I did not do enough due diligence on the area I was investing in. I bought sight-unseen, and due-diligence undone, in an ultra-low level neighborhood one of the poorest sections of town. The theoretical numbers looked awesome, but without a real team in place and some systems and back up plans, I had no chance of long term success there. For a long time after that I was convinced that it was stupid to ever invest out of your local area. I do think that’s true if you are going to be doing any of the work yourself, but if you have teams in place I no longer believe that. (But I did for several years.)

I did not do enough due diligence on the company/person I was investing with. I bought on a sales pitch, and the support ended once I cut the check. The fact that the man whose operation I was investing with did not even let me know that the person he had put in place to PM my investment was no longer with the company until I called asking what was going on showed just how messed up that process was. I should have asked a ton of questions like what level of communications should I expect, what happens if one of your key people (PM, GC, etc.) quits, what backup systems do you have in place, how do you deal with situations like the tenant moving out or sub-letting? I didn’t ask any of them and so ignorance was bliss for a little while but then it was bad news.

If you don’t have a team or system in place to handle each type of scenario, it is really stressful. I was working a full time job in a city 5+ hours away from this property. Every month when I had to spend 30 or 60 minutes of my time calling around because some payment was missing without an explanation, it was the most stressful time of my month.

I didn’t take action as soon as something was wrong. I should have called up the chain much earlier, I might have found out what was going on with PM guy way before it became a disaster and been able to correct it. But because the money “eventually” showed up, I was lazy and let it slide until it had slid too far.

I did learn that I do like real estate investing, despite the way this one turned out and decided to do another deal a bit closer to home, where I learned a bunch more lessons. That one is coming in post #2.

I consider this to be a "success story" because it was an education and an education is valuable.

Marc