To grow or not to grow - the tribulations of an RE investor

[Esther Tama]

I'm a newbie OOS investor, just closed on my first SFH investment property in Muncie, IN (Westside). The home was turn key and was able to rent out for $1100 within 1 week of being out for rent. The cash flow will be about $380 after all expenses, incl PM. Not bad.

But not awesome. 

BP podcast and blogs says the first one is not supposed to be a home run, but the one they gets the momentum going. I guess it’s kind of like your first relationship - rarely is it a home run (haha).  

My goal for my first was to learn and make connections/build relationships.

Found a decent PM that manages many properties. I didn’t like my RE, so I found a different one that was more experienced with investors. My lender was super conventional and rigid, and need more options. Everyone I inquire about construction crew, people refer to them like unicorns… evasive and mystical. I’ve yet to gain respect as a newbie investor. Kind of like when you’re 18 applying for credit - it says you need credit history to get credit, but you can’t get history without credit. Wah? 

I think overall, I learned to ask better questions. 

 But now I’m stuck.

I've got the RE bug, but need lenders and financing options that will allow me to grow my portfolio 2-4 properties a year. I don't want to stop at 1 a year. I want to purchase with cash, but be able to refinance most of my initial investment back out to recycle the $$$ to purchase more. But my DTI is too high with my primary residence and now another property under my name.

My next step is to call all credit unions in the Indiana/Muncie area. I’ve reached out to two portfolio lenders. I’ve connected with my own credit union for more financing options. I’m even considering seller financing.

I’m looking to also search meet-ups for OOS investors in the Muncie area. I like this area compared to Indianapolis because it’s a smaller radius and I have a good pulse of the neighborhoods. It’s like a mid-town/small town feel and I appreciate that, esp being from SoCal. 

Anyone who has solid advice, connections, similar journey or perhaps want to join a virtual meet with like-minded investors are welcome to connect. 

To grow or not to grow is NOT the question. But how. 

Thank you for reading. Invest on!  

[George Azita]

You need to be very cautious in regards to what you think you are learning from the so-called experts because people who earn money by giving advice tend to explain only the positive things that can happen in an ideal world. You rarely see a wannabe guru teaching you about all the horrible things that can make your deal go bad a little while down the road and a guru rarely teaches the entire abundance of items you need to factor into your projections that you need to do before you purchase a property.

My point is; don't get over-excited after buying one property until you see what happens down the road. You claim you will be earning a cashflow of $380 per month, but I will bet that you will not earn earn anywhere near that amount because there are many things you most-likely did not consider e.g. an expensive plumbing problem, roof, fire, failure for tenant to pay rent, or a number of other bad things that will eat up your $380 cashflow. 

A high percent of investors project that the maintenance for a single family home will be 8% per year and if you are collecting $13,200 per year then the average investor predicts that your maintenance will be $1056 per year, but that is nowhere near close to what real maintenance expenses are. Just about everything on this planet has a life expectancy and everything inside and outside a home has a life expectancy. One year, your water heater goes out and in California the average cost for a 40-gallon water heater by a professional licensed contractor is more than $2200. There goes 2 years of your projected maintenance. 

If your furnace needs to be replaced the average cost for a forced air furnace is $5,000 to $12,000 and that is for heat only. I am a plumbing and heating contractor, called several contractors in Idaho last week and those are the prices I was quoted. So, there goes 5 to 10 years of your projected maintenance.

Then, when a tenant moves you need to paint, replace flooring, clean, repair and replace appliances, make several repairs like replace door locks. replace missing and broken screens, replace faucets,  replace cracked or damaged sinks, do yard cleaning and repairs, tree and plant trimming and the list goes on and on and when your tenant moves you get hit with total costs of about $6,000 to $12,000 and this is in additional to plumbing, furnaces, etc.

It appears that you are purchasing out of your area and you will inherit many risks and additional expenses by having to pay a property management company and because you are not hands-on for everything.

I would like to see you post all your numbers and projections and I will put them in my software and give you my opinion. I am in the Los Angeles area, have been investing more than 50 years in single-family and multi-unit properties is several states and I have not been able to find homes or multi-unit properties where the numbers make any sense for about 3 years and I hear the same story from many other experienced investors. Now, you have to wonder whether after reading about real estate and watching some videos you are smarter than the experienced investors who are backing away from buying any properties at their current high prices.

This is the last thing every new investor needs to give some serious consideration. There are many experienced investors bragging about how much money they made in real estate and they do this bragging to motivate people like you to invest in real estate. Even I made more than $40 million since 2001, alone, but the thing you need to know is other investors, like myself, purchased rental units for $67,000 and now they are selling for $300k to $400k per unit. Just 3 years ago, rental properties were literally doubling in value every year meaning you could have made 100% on your money every year, but real estate prices have actually been on the decline for the past 6 months. In March 2021, I purchased a 6-unit property for $291k per unit and for the past 6 months I've been seeing many properties in more-desirable areas for $250,000 to $290,000 when the properties in these more-desirable areas should be far more than the $291k I paid.

I've had several million dollars to invest for the past few years and have been holding off. I see hundreds of people posting about their investments, have many friends who are paying super high prices for properties where the rents cannot be increase, significantly, and I don't see where these investors have any projections that make sense. Rather than people just saying a property is a good investment I would love to have someone prove that I am wrong by having a friendly and constructive argument that consists of a thorough and complete analysis.

Stick one toe in the water at a time and wait to see how the temperature feels before you regret finding out that you based your projections on a totally incomplete analysis. It is the things you did not learn that will make you hate the real estate business and bankrupt you.