Should I give up on real estate?

Question

My journey investing in real estate has not been long and I have already faced what I see as extreme difficulty. I bought my first single family rental in September 2021 in a strong and growing market (Chattanooga TN). The house was by all means turnkey as it was newly renovated and had no major items brought up in inspection. By April of 2022, I had to evict my first tenant who didnt pay rent and left all of their stuff. During my first year of owning my first rental, I paid around $3000 in various repairs. Still committed to RE, I purchased my second single family rental in February 2023. This house was also newly renovated and had no major items flagged in inspection. Three weeks after closing, I was told the HVAC needed to be replaced which cost me $6500. Fast forward to today, I was told the septic tank line needs to be repaired / replaced for an estimated $9500.

This was a shock to me because I didnt even know my property had a septic tank. I looked in the inspection report and it read that the septic / sewer was not inspected because it was not visible or inaccessible.

I feel like Ive been diligent to follow the book taught by BP - choose a market carefully, dont buy a run down property to chase cash flow, keep all contingencies to protect yourself in escrow. And still, I feel like Ive been destroyed with thousands of dollars in repairs on things that seem to just come up and Im not sure how I could have avoided.

Is there something Im missing? In all the stories Ive heard on the forums and podcast episodes, I have never heard an investor speak of this level of repairs needed in such a short period of time. Luckily I have had reserves to cover these repairs, but I certainly cannot afford to keep up at this pace. I believe in the power of real estate but right now it seems like the best option is to just cut my losses and get out.

Any insights would be appreciated. Thank you

Greg Scott · Answer

Your experiences do not seem normal.  Please do not react emotionally to sell and make a bad situation worse.   You may be past the worst part of it.

Let me ask a few questions to provoke ideas for preventing issues for you on future purchases.

Did anyone inspect your HVAC system prior to purchasing?  Typically these things can be foreseen.  If the heat exchangers are shot or the system is 15+ years old, it will need to be replaced. It would be odd for a newer, good condition HVAC system to fail.

Did the seller provide you a disclosure sheet?  In most states, they would need to disclose that you are well / sewer and not city systems.  All major systems should be inspected, because, as you know, it is very expensive to fix ones that have problems.  If you read the inspection report and it missing major systems, ask the inspector to go back or find another inspector.

Did you get a second opinion on all these repairs?  If a property manager is telling you these repairs need to be made, are you sure they are not handing the business to their brother's construction company?  I'd always get 3 bids on a large repair and spend some time talking to the contractor asking questions.

How are you sourcing these purchase?  It sounds like you may be using a turnkey provider that tells you the properties are fully repaired, when they may have actually been putting lipstick on a pig.

Who is doing your screening? You should be able to adjust your criteria to reduce the odds of evicting a tenant. The stronger the criteria, the longer you may have to wait to fill the vacancy, but waiting an extra couple weeks is usually cheaper than an eviction.

Matthew Masoud · Answer

Both HVAC repairs and Sewer scope should have been caught on the inspection report. Good news is these items are CAPEX items that you won't have to do again for 15+ years.

Not every year in real estate is going to be a cash flow positive one but over a 10-year period when you factor in cash flow, equity, and debt paydown you're going to be fine.

Get a better inspector for future projects, be diligent in your selection of tenants, and keep trucking forward.

Alecia Loveless · Answer

@Peyton From The good news is that both expenses can be included on your tax returns as write offs but ask your accountant first.

Definitely in the future be sure to look on the disclosure form to see if it is public water & sewer or well and septic.

If it is a septic system I ALWAYS recommend having a septic inspection by an independent septic inspector. These inspections run around $600+/- and the inspector will inspect the tank and tell you the condition of that. He should tell you the condition of the septic lines running from the house to the tank and of the lines from the tank to the leech field, if anything is broken or needs repairs.

Then he should do some digging in the leech field to determine the condition of that and give you an overall idea of how it’s condition is and approximately how many more years you can expect it to last.

It is important to try to find the independent inspector because if you hire a septic company to do the inspection they will try to convince you you need to buy a new tank or worse still, a whole new septic system.

Sean Wilson · Answer

@Peyton From

If you want a second opinion/price on the septic repair, shoot me a message.  There is only one company I trust with my septic needs around Chattanooga, and I'll be happy to share their contact info.

Raymond Richmond · Answer

A mini split system aka heat pump would of been under 3k installed and more reliable. Sometimes it pays to know the trades so you can manage these repairs.

Andrew Syrios · Answer

This is definitely an awful and abnormal way to start out in real estate. I'm sorry to hear all that.

The one thing I would say is that life tends to oscillate from good or bad. In statistics, things always move back toward the mean. Your initial experience seems to be on the far end and not surprisingly colored your perceptions on real estate.

I won't say to just hang in there and it will get better. But I do think it's important to note this is an exceptionally awful and abnormal start. Real estate, in the long run, builds wealth and if you do continue, I suspect you'll look back at this start as a funny story. But there are other investments and you should look at this very seriously and try to detach any emotions from this before making a decision how to move forward.

Should I give up on real estate?

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