Confessions of a new landlord - How I overcame limiting beliefs

[Jay Chekansky]

All-right BP,

I figured this would make a great topic for a post that I hope helps some people out. In my first few years as an investor, I mindlessly subscribed to the notions that all tenants are headaches, all landlords are slumlords, and that I don’t want to field 11pm phone calls about plugged toilets. So without a second thought, I stuck to deals that were only fix and flips or seller financing. As you can imagine, this leads to some sizeable short term capital gains taxes each year and no limited wealth building

I’m the type of person that, for better or for worse, chooses to challenge paradigms by taking action. I see opportunities, evaluate based on the level of knowledge I have, and decide to move forward. I chose to challenge my own beliefs and see how I could handle becoming a landlord; So I bought 2 rental properties right off the bat in 2019 and ended up with an unplanned 3rd.

I’ve made the move from doing deals for pure income, to a mix of income producing plus cash flow, and towards the end of 2019 I was considering how to start to mix in some wealth building activities. I found a few opportunities that presented me with the following:

1. Cash flow off the bat
2. Opportunity for 1+ year holding period for LT capital gains taxation
3. Multiple exit strategies

Here’s a breakdown of each rental – why I did the deal, my landlording experiences, and how each turned out financially at the end of the year

- Property 1: Main Street

I found Main St on the MLS – it's in a more rural area of North Carolina about 45 minutes outside of Charlotte. I knew I'd be able to seller finance the house if the rental business didn't work for me. I bought the house with the previous tenant in place, with the plan for them to stay as long as they are good stewards of the property and paid on time. We signed a new lease on January 2.

Right off the bat, rent was late. I was paid for a few months of 2020, but eventually the tenant stopped paying and then voluntarily moved out. She even sold off the appliances before leaving!

I took the time to refinance my all cash purchase with a private lender on terms with a 15 year amortization. I then had a qualified buyer with a decent down payment to buy the house seller financed and wrapped the private lender 1st lien.

Purchase Price: $46,000

Expenses: $2832

Private Lender Refinance $38,000 on 15 yr AM

End Buyer Down Payment/Sale Price: $7500/$67,500

Total Income: $11,030

Monthly Cash Flow: $208

Cash On Cash Return: Inf (I have no money in the deal)

- Property 2: Lowry

Lowry was found on the MLS as well. It had been on the market for a while, so I made an offer that made sense to cash flow based on my private money loan rate and the existing rent rates. I knew this house could be flipped when the time was right and I'd have good margins there, so the immediate strategy was a little cash flow, depreciation, move to LT Cap gains, and hopefully some appreciation. In the meantime, the existing tenant was welcome to stay – I'm not in the business of displacing quality tenants who take care of the house and pay on time.

After 1 year with Lowry, I’ve worked to find balance between being a good landlord, treating people well, and also establishing boundaries with tenants and enforcing lease terms.  Overall a good experience, even though monetarily this one hasn't been the best.   As of October this year, the 6 acres at the end of the street had been cleared in preparation for new construction.

Purchase Price: $53,749. This was a mix of cash and a private money loan

Rent (Month/Annual): $795/9520

Expenses: $8274 including interest only note payments

Net Income: $1245

Cash On Cash Return: 7.8% - Not great, but I knew it coming into the deal

- Property 3: Prospect

Prospect was purchased as a flip. I have been very conservative the last 2 years with my house flips. If I can’t sell it retail, I want to be able to sell it seller financed or cash flow as a refinance/rental. The conservative nature has cost me in such an aggressive market, but it saved me in this case. I had a lot of issues with contractors, material prices, scope creep, and going over budget. Overall, I mismanaged the project. After finishing the rehab and looking at what I’d be making, net after taxes, it just didn’t make sense to try to sell this retail. My property manager suggested we list for rent at $100/month over what my initial idea was. It was leased up very quickly to a professional. I was able to refinance with a 30 year asset based loan. There is a much better feeling about renting a property that is “new” from top to bottom vs a rental with dated roof, dated HVAC, and old appliances.

Purchase Price: $36,456

Rehab Costs: $39,748

$ Left in property after refinance: $5,059

Net Income from rents (3 months): $2288

Cash on Cash Return: 45% to date

In conclusion, I am glad I decided to take action and face my limiting beliefs around owning rental properties. I had some good luck, some bad luck, some challenges, and some creative solutions. I built new relationships with property managers, lenders, and contractors. I learned and grew in a number of areas that make me a better investor – Based on my experiences in 2020, I have 3 houses currently under contract ready to be rehabbed for rental in January 2021.

Challenge that voice in your head that is holding you back. Make a plan - Challenge the limiting beliefs - Grow!

[Carlos Paz]

Hey @Jay Chekansky those are great learning experiences, thank you for sharing. We often times have to adjust key behaviors in our life in order to make powerful mindset shifts which inevitably lead to take action. Looking forward to all your success in 2021.

[Robert Godfrey]

@Jay Chekansky thank you for this fantastic summary of your year of investments, awesome! A couple of questions if you don't mind:

For Property #1, what is the advantage of doing seller financing over just a long term hold on a rental that will cash flow? Is it so your money isn't locked up, or maybe you didn't like the area or just wanted to get rid of it because of the bad tenant?

For Property #3, out of curiosity what was the ARV?

[Jay Chekansky]

@Robert Godfrey

The reason for exiting via seller finance was because it was the primary exit strategy going into the house.  I looked at my SF monthly cash flow at $210/mo with no expenses and the $7500 down payment vs holding the house and decided to sell.  The house itself was good - new roof, newer HVAC, New HW heater....so the heavy lifting had been done.  I just didn't care for the area and didn't think I'd be able to have better cash flow numbers as a rental. 

House 3 - when I bought the house, I expected the ARV to be $95k-100k. The house appraised at $104k. After looking at what I had into it, broker commissions, ST Cap gains taxes (ordinary income), making $10k for all that trouble just didn't seem worth it. I had created a nearly maintenance free asset at decent rents, so I figured I'd roll with it for at least a year. The house is also in an Opportunity Zone, so there are additional benefits to holding long term.

[Cole Britting]

Thanks for sharing! A mindset/behavioral shift can be very powerful. Best of luck in 2021

[Abhishek Pareek]

very inspiring thread

[Robert Godfrey]

@Jay Chekansky Thanks for the reply on the insight into these properties, eg I never thought of going into a deal to use seller financing right off the bat but see why you would do that. Where do you find buyers who want to do seller financing, just in the bp forums/word of mouth or maybe advertise on craigslist/Facebook?

For property 3, that makes sense why you kept it and that CoC return is fantastic. Always like a happy ending on properties like this.