Seeking advice from experienced investors about my difficult start

[Matthew S.]

Hi All,

I have a question for more experienced real estate investors.

I am a young (late 20's) investor in the Washington, D.C. area. Two years ago, I bought my first place, a four bedroom house in a good location close to the city. It was a good deal; bought for a relatively good price at a sub 4% loan. I rent out three of the four bedrooms to other young professionals, which covers PITI and part of utilities. I have no debt and am able to save a lot of money each month. That's the good news.

The bad news is that my good friend / business partner and I bought an investment house last year which went south. We did not know a lot about real estate investing, and we did not extensively analyze the numbers or factor in repairs/maintenance. We overpaid, and we got into a negative cashflow situation. Also, we bought in an expensive area, near to Washingon, D.C., where the rent-to-value ratio is not attractive to begin with. Unfortunately, our real estate agent told us it would be easy to make money renting the house out, and we believed him. We we should have known better.

In the last few months I’ve read a lot more about RE investing and become aware of these mistakes. Anyway, we have now decided to sell that house, which will result in a significant loss for both of us. It will not destroy us financially, but I am bitterly disappointed in myself. I feel like a failure right now and I hate that, because I am very competitive and successful in most other areas of life.

I am quite discouraged, but not at all ready to give up. I am motivated to learn what went wrong this time and do better next time. I still have a good full-time job, am living at very low cost, and will soon have more money to invest. I want to be a successful buy and hold investor, and understand that it’s a long term thing (I don’t want to flip or wholesale). My question for more experienced investors is, where should I go from here?

I am planning to do my next deal alone or with a new partner, since this past experience has strained my relationship with one of my best friends, and we are not ready to try another investment together.

Houses in my area are in the $350,000-600,000+ range. I am becoming aware that my goal, which is to become a buy and hold investor with a portfolio of houses, may be difficult in this market. So, should I look to far-outlying areas of the DC suburbs where housing is cheaper? Or, perhaps I could look to nearby towns like Winchester, VA, or Charlottesville, VA? Or, perhaps another state entirely? People have talked to me about investing in places like Texas or Arizona where the rent-to-value ratios are much better. Of course, then I would not be able to rent out and manage it myself, which is something I enjoy and am decently good at. I would prefer to buy within driving distance from where I live, but if that's totally unrealistic, I'm open to whatever works.

Obviously, I need to research and run income/expense numbers on the next potential deal much more carefully than I did on the last house.

Also, is it best to look for houses that are in good condition and don’t need much work (i.e. retail-price houses), or are most of the good deals to be found in houses that do need fixing up (including short sales and foreclosures)?

It would also help me to learn a lot more about RE investing in general. So, I am going to start reading more books about investing, read more on these forums, and talk with people at our local Capital BP meeting, and perhaps find a mentor there. Also, I am going to be meeting with a banker to talk about what they want to see in terms of financials when it comes time to apply for a future loan.

If anyone here happens to be from the DC or Baltimore area, and is open to the occasional meeting for mentoring purposes, I would be interested in that, and I would certainly buy you dinner. I wouldn’t be looking for anything intense or weekly, more like periodic/occasional meetings. I would be grateful if anyone were open in this.

Thank you for your time in reading this.