How I almost lost my shirt...

The Truth About Real Estate Investing…Part V

How I almost lost my shirt.

Click Here for Part I

Click Here for Part II

Click Here for Part III

Click Here for Part IV

Now I’m stationed in Guam with my new family, and I have two rental properties that are cash-flowing nicely. I’m in heaven.

As I spend a majority of my life at sea, I recruited my wife to manage the Property Management Company. She takes to it quite well, though she doesn’t really enjoy the task.

I didn’t really mention before, but I bought these two houses in 2005 and 2006. Both with very little money down, so my equity position was not great. While they were cash-flow positive, they weren’t much. From my perspective at the time, I was accounting for all the annual money that the rental Real Estate was bringing in (except for depreciation, which I wasn’t aware of at the time.)

In 2007, I lost a tenant. My PM worked diligently to find new tenants, but there weren’t many bites. After a couple of months, they recommended I lower the rents, which I did…by $200 per month. Finally got a tenant in place at the 3.5 month mark, but now my cash-flow is negative instead of positive. On top of that, I’d paid 3.5 months of mortgage without any rent coming in. That really damaged my savings account (which was light to begin with).

Back on track…except…the second home now had the tenant move out. We were a little more aggressive getting tenants in this time. We didn’t wait so long to lower rents since the market was shifting. It took us only 3 months this time to get tenants in place, also at $200 per month less than previous tenants.

Needless to say, my savings was gone, and now my cash-flow was negative on both houses. By the time everything settled out, I’d gone from positive cash-flow to close to $300 per month negative. Over the next few years, this grew to about $500 per month.

Rebuilding savings was difficult, but we kept on struggling because the alternative was worse. Finally in 2008, I was promoted again, and we were transferring again. Back to the mainland we go. Another ship, another deployment. I also started putting back money into Thrift Savings Plan (US Military’s 401K).

I decided it was time to hire a CPA to do my taxes for the first time. After reviewing my taxes for the year, I noticed that depreciation was claimed on my two rental houses. I asked about if I can claim that on my previously filed returns, and was told yes. For a grand-total of about $600, I was able to file my new taxes, and amend 3 years of back taxes saving about $4,000 just due to depreciation. Thank you CPA!

That’s the year I learned there are people smarter than me when it came to tax time. I won’t make that mistake again.

The next year, I was selected for the Limited Duty Officer program, and received my commission in the US Navy. Unfortunately, not a pay raise on this one…yet.

Again we moved, and again I was on sea duty. More time away from home. Fortunately, our new tenants were signing new lease agreements each year and we were able to slowly adjust rents upward.

After a year at the new job, we find out my wife is pregnant with our first child. This prompted us to start looking for a new home. About two month before the birth of our son, we bought a new home (first new Real Estate in 6 years). It was a short sale (also something new to me), and we were able to pick it up at a great price. I was able to take advantage of the First Time Homebuyers tax credit…for my third house. I also discovered I could use my VA eligibility, even though I’d used it before. I got cash back at closing, which was awesome!

Two years later, another promotion, another move. Not a ship this time…at least not one that goes to sea yet. We sold the house…for a profit, and decided to live in housing at the next duty station. I kept telling myself that it was too difficult to invest in Real Estate at this duty station, I’ll do it at the next one.

While at this duty, I refinanced both houses, reducing the payment, so that now I’m back in the positive cash-flow realm. Win! I still wasn’t making further investments though.

Two more years, and another transfer, another promotion, another ship. Back to Guam we go! “Still too difficult to invest…”

Two more years, another transfer, another promotion, another ship. Back in the US! “Still too difficult to invest…”

I decided to get an appraisal done on the second house (the one I pay PMI on). Appraisal comes back, and I’m at 60% LTV! Get rid of that PMI, please! More positive cash-flow follows. My savings are growing, my 401K is growing. I’ve spent the last 12 years studying Real Estate Investing, reading books, blogs, forum posts (thank you Bigger Pockets).

I survived the Housing Crisis by the skin of my teeth. I’ve managed to build my credit, my savings and my retirement accounts. I had a successful long-term flip. I’ve made myself smarter. What am I waiting for? Why am I making excuses.

Come back later to find out what I did next.

Click Here for Part VI