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 #2 – The SFH "Ugly" HUD Home.

After my adventure started going south with the MH (http://www.biggerpockets.com/forums/223/topics/137346-my-first-investment-retrospective) I decided I still wanted to keep pursuing REI and learn more but I was convinced that I couldn't trust anyone to do it for me so I needed to do it myself! (Another novice perspective in hindsight.) I decided I need to buy a SFH (no more mobiles) in a local area. I started looking into HUD homes, foreclosures, MLS listings that seemed like good deals, etc. I made some local connections including a landlord who was a couple years ahead of me and had built up about 7-8 house portfolio. I spent a lot of time driving around with him looking at his properties and seeing what level of neighborhoods he worked in and what type of results he was getting. I also asked around for recommendations on investor friendly realtors and I found one who was an investor himself and owned 40+ houses. He worked in pretty low end neighborhoods (lower than I wanted to be in) but he knew what he was talking about and in hindsight I wish I listened to him even more than I did, as most times I deviated from his advice I was wrong. But that's how I learn. The hard way.

We spent a couple of weeks searching for SFH's that would be a good fit but they all had major issues wrong with them. We were focusing in the Garland, TX area which is a town with really strong rental market (or it was at the time anyway). The neighborhoods we were looking in were like B- on a C scale. There were no war zones, and no real issue walking the neighborhood during daytime, but I'm not sure I would walk alone at night, something like that. The nicer houses were probably worth 75k, and I zeroed in on one that had promise which was a HUD home that was vacant.

This home was UGLY. U.G.L.Y. I can’t find the before pictures but I wish I could show them to you. There was a raised wall around some trees in the front and the trees were so overgrown you could not see the house from the street. That was one clue that it could be a good deal. If you could see past the over grown wall of tree leaves, you would see that the house was four (4) different colors. My theory is that a day labor / handyman type used whatever leftover paint from his odd jobs to paint the house with and that’s just how it ended up that way. One surface was red, one was blue, one was puke orange/pink, and I forget what the last one was. It goes without saying that the color scheme did not look good. The back yard was super overgrown as well with 2’ tall grass/weeds and trees hanging over and pulling down sections of fence.

On the inside the house needed new flooring throughout, paint throughout, new thermostat, some new outlets and switches, several new doors including front/back. The kitchen was disgusting, the cabinets had a thick coating of coagulated grease on it from years of fried food cooking I’m guessing. They were the ugliest color of puke orange (the same as the outside of the house.) The bathroom needed new everything except the tub was in reasonable shape. The windows were in terrible shape but were pretty standard for the neighborhood so we didn’t do anything with those.

We decided to buy and purchased the house for around $40k and including financing and repairs and the tools I had to buy we were probably all in for about $50k+. I would say knowing what I know now it could have been all-in for a lot less but I knew less back then too. Much of the extra expense was due to the fact we did most work ourselves and didn’t own tools, so every time we needed to do something, I had to go buy several hundred dollars of tools to be able to do that job. It would have been more cost effective to find a COMPETENT (i.e., not me) GC I’ve seen enough from other investors now to know that the house could have been made rent ready for probably 5K worth of work. Now I have a lot more tools in my garage. We spent a couple months fixing it up because we did everything on the weekends and mostly ourselves (and since we were learning, we were slow at first.) Ultimately, we did get it fixed up and we rented it out for $795/mo to a family who was living across the street with their uncle. During the fix up people walking the neighborhood would poke their heads in the house and we did get many comments thanking us for fixing it up saying it never looked that nice (which is a compliment because we didn’t make it look that good really, it was just THAT BAD prior to our scarcely competent rehab work.)

Because we were our own GC on this and did much of the work ourselves except for some electrical and things like that. I laid the entire house worth of vinyl flooring myself and did all the interior painting. We did have a tile guy cut some tile for the kitchen backsplash which made a good impression. We sanded the greasy cabinets and painted them and put new hardware on them. We painted the exterior a SINGLE color with a different color of trim that looked much better (although the paint job was not stellar, it was still a huge improvement.) I cut away a mountain of overgrown tree limbs and got the worst case of poison ivy I have ever had in the process. I got the back yard in reasonable shape. The front yard had no grass growing in it the ground was so compacted it was harder than the concrete driveway.

We encountered some unexpected things in the process, and the fact that it still worked out just shows that we got lucky since I didn’t have any idea how to estimate rehabs. I just knew the roof/ac/plumbing ‘seemed’ ok so that was probably the big ticket items. Things that we were not expecting: The water heater needed to be replaced, and some electrical was not working and needed to be rewired. I outsourced a down on his luck guy to scrape up all the old flooring for like $75 and boy was that a deal when he scraped it up and found another layer underneath and had to scrape that up. Also found a multi-wheelbarrow sized bird nest in the attic from what must have been years of birds getting into the vents on the side of the house. Paid someone to remove that (yuck) and seal off all the openings with mesh. We had a few plumbing issues once the renters moved in due to tree roots in the sewer line and a pipe freeze (outside) on a cold winter day, but generally once we fixed it up, the house was rentable for the next couple of years with few repairs required.

In terms of managing the property we put an ad in the local paper and that was more or less worthless. The neighborhood was a strong rental area and so where I got 90% of my calls from was the for-rent sign in the front yard that cost me $10 or whatever at Lowe’s. Ultimately, the people I rented to were living across the street with their relative, who had been one of the people poking their head in while we were fixing the place up.

Because I had such a bad experience with PM on the mobile home, I was going to do it myself and I was extra cautious on renting to people. I did get an application from a couple that seemed very eager, loved the place, but my spidey sense went off about them and doing a bit of internet sleuthing, I found out half of the stuff on their application was a lie, their current “landlord” was really her sister who they were living with, etc… Dodged a bullet with that one. The family I ended up renting to was a guy and his wife and children, and his mom. They barely made enough money but they did make enough. They didn’t have any evictions but did have some medical collections on their credit report. Given what I know about the health industry, I wasn’t really going to hold that against them. They didn't have any collections for anything else outside of medical. I rented to them and they moved in. There were a couple of maintenance requests once they got in (I mentioned the plumbing issues) but once we ironed out a couple of those there was not much in the way of crazy requests coming from them. The big thing with these people is that they tended to be late all the time. I had a 5 day grace period in the lease (mistake) which meant that they never paid before the 5th. I did have a $50 late fee and they did pay it every time they missed the 5th payment. I think I probably made an extra month worth of rent payment over the 2 years because they were late about half the time. But never got to the 8th day (which is when I file for eviction.) They just got their pay or quit notice every month, then paid + the $50. It was a bit of a hassle, but honestly, it was a pretty profitable extra 10 minutes per month for me.

A couple years later we were in a personal place where I was in the middle of starting up a new tech company that was going to take 110% of my time and we were starting a family. We moved a bit further away from the rental so it was a little more of a hassle to deal with. The renter around this time started running into financial troubles and while they were making payments it started to get dangerously late, so I decided to take a hiatus from rental management and offered him to get out of the remainder of his lease (kind of a hollow offer since he was on month to month) if he would leave quickly so I could sell the property (it was prime spring listing season) and everyone could win. He did leave pretty quick and I did ultimately sell the property for close to 60k plus I pocketed two years of rents @ $795/mo + $25/mo on average in late fees. We had paid off the home pretty quickly so for most of the time we owned it, there was no mortgage outlay. This home was much more profitable and was a net win financially as well as experience-wise for us. My taking a break really didn’t have to do with the property so much as other factors going on in our life like starting a business and a family at the same time.

So lessons learned on investment #2?

I am definitely not a handy person or a competent GC. I think we lucked out on this one, but I realized this is not my strength. I have enough knowledge now to have a rough idea of the work needed and budget, but I’m never going to do close to as good work as a competent rehab team under a good GC.

UGLY houses can result in profits. The house with its cartoonish 4-color façade was sort of silly to look at but I saw that *most* of the expensive bones of the house were in reasonable shape and it was just ugly stuff that I could do a lot of work on myself that needed attention. I made a 15k+ spread in two years after renting it profitably during that time. This house could have been a flip in the hands of someone better than me.

Owning a property in a strong rental neighborhood makes it so easy to rent out, especially if like in this neighborhood, many of the families have been there for years. The locals poked in to meet us and see the inside, and told their family and friends about it, and that’s how we got a lot of our traffic and ultimately the family we rented to.

We fixed up some aspects of the property “too nice”. My wife and I were used to living in new neighborhoods with nice amenities so we ended up spending more on things for the house in this B- poorer blue collar neighborhood that both were not appreciated and were not taken care of. We figured the nicer it was, the better tenants we would get. Oops. We didn't realize the neighborhood sets your tenant pool. We put in new blinds in the windows (whereas many houses just had cheap curtains) and a lot of them were broken when we took back possession. We put new hardware on a lot of doors and cabinets and they were all gross by the time we got the house back. I think in the more economically challenged blue collar areas, many families literally do not have enough money to afford proper cleaning supplies. I think in 2 years this family must have never mopped, dusted, or cleaned any surface in the house. It was disgusting when we got it back. I do think it’s partially that they were slobs, but partially the economic situation they were in. In hindsight I would invest in that area again but set my expectations appropriately for the neighborhood, and put more easily cleanable, less-fancy surfaces, appliances, and hardware in the house. I also realized that their kids caused much of the damage in the house. It was not so much that they didn't get any deposit back, but I kept a lot of it to cover stuff that 3 crazy little ones caused. Most of the damage was 3' or below in height.

I learned that I don't want to be a day to day landlord. I had satisfaction from working on the house to the best of my ability to fix it up. It did feel awesome to take a dump of an ugly home that was an eyesore and make it passable and livable. But I did not like even the few times I got calls from the tenant because of the frozen pipe - incidentally which was on xmas eve, or the couple of other issues we had. Living 30 minutes away meant it was always a few hours of my time to take care of things. I would probably always opt for a professional, quality property management company with in-house maintenance and rehab teams in place going forward. If I find a good one I'm pretty confident they would do a better job than my barely competent job, and it would be more time for me to scour the MLS and drive for dollars.

I should not have sold the house in hindsight. It was worth more than when we bought so I had created equity out of sweat, and it was really a great cash flowing house. I was making WAY over $500 per month net even after maintenance and taxes and insurance. In hindsight I should have hooked up with a great PM company, fixed up the mess the tenants left, and re-rented it. Then I could have probably sold it for $75-$80k in today’s red hot DFW market or just kept it forever, paying for itself every 4 or 5 years.

I learned my original thoughts about needing to be in control over everything (after my MH adventure) were not true either. I think the happy medium is something like this. Use professionals for each task that they are the best at, and manage those professionals. Stay on top of things, but don’t get bogged down into task level implementation. Many of the things we did on this adventure were super wasteful of time, although financially they worked out. Time is now my least available resource so I’m conscious of outsourcing what I can, and saving my time for what I really need to spend it on.

I found that relationships in this business make a huge difference. I had a relationship with a more experienced investor/landlord and he taught me so much just in my ride-alongs which basically cost me some time and some lunch checks. The relationship I had with the realtor/investor was great, I didn’t listen to him enough as he predicted we were going to realize we over spent on renovating the house relative to the neighborhood (and he was 100% correct). In hindsight I realize as I drifted away from that relationship, he was probably one of those golden mentors I should have spent much more time cultivating the relationship with and learning from. I had some relationships with guys who were blue collar construction guys (framers, etc.) who were low on work so I was able to hire them out for some of the rehab work I didn’t do myself for reasonable prices.

Lastly, I found that if you keep trying, you will get better the next time. Persistence pays off. Especially if you admit what you don't know (which is probably a lot if you are like me) and try to get it more right with each mistake. I am looking forward to picking back up on the investing train and starting on deal #3. I’m working on solidifying a better long term plan instead of just diving in and shooting from the hip, and I’m trying to make sure I remember the lessons I learned so far so I can get better at this and be even more profitable the next time.

I did find a couple of pictures, which aren’t the best, but you can at least see the house.

Here’s a few pictures of the front after we painted the exterior to a single color with trim a different color. Installed a nice front door, and I removed a mountain of overgrowth so you could see it from the street. No more red+blue+orange+pink. (Sorry but don’t have a picture of the before... just trust me.)

https://plus.google.com/u/0/photos?pid=6030935116177792674&oid=114864055884215008102

https://plus.google.com/u/0/photos?pid=6030935169281019538&oid=114864055884215008102

https://plus.google.com/u/0/photos?pid=6030935354001168818&oid=114864055884215008102

Here’s the kitchen after we sanded and painted + new hardware the cabinets, new counter top and sink and oven hood vent, and a tile back splash for effect. You can also see the new vinyl flooring we put in which was 12” home depot stick tiles.

https://plus.google.com/u/0/photos?pid=6030935261005987058&oid=114864055884215008102

Here’s the neighborhood. Looks pretty OK during the day.

https://plus.google.com/u/0/photos?pid=6030935445104258818&oid=114864055884215008102

Here’s me doing work. J

https://plus.google.com/u/0/photos?pid=6030934664419646882&oid=114864055884215008102

Marc

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