6 Lessons I Learned From My First Investment Property

Buying real estate is definitely not for the faint of heart. Especially if you’re just looking to get started. With any property — old or new — there are always risks involved. But, of course, some properties carry more inherent risks than others.

My wife and I jumped into real estate investing with a fairly risky property — a 70s-vintage log house in a woodlands section of the Catskills in Upstate, NY. Due to its location in a rural area, the house had a septic system for sewage and a well for water. It also featured some wonderful original details from its mid-70s construction, including carpeting in the bathroom, a brown bath tub, bright red Formica counters, and linoleum flooring in the hallway and kitchen.

But it was a beautiful property on 1.3 acres of land in a very attractive area for hiking, skiing, dining, and enjoying nature — all just a couple of hours north of NYC. We knew that it could become a great source of rental income as an STR (short-term rental) and a wonderful place for own enjoyment too.

Here is how things unfolded:

My wife was in the Catskills with her father, who had spotted a For Sale sign in front of an attractive log house on a beautiful piece of land. He told my wife about it, and she arranged for them to see it. She called me after the showing:

Julia: “Hey, we’re buying a log house.”

Me: “We are? What log house?”

This was the summer of 2018 and I wasn’t in real estate yet. In fact, we were still renting a 1-bedroom apartment in Brooklyn, crammed in with our two little kids. I was still running my NYC tour business, which I had founded in 2010 after quitting my corporate job in finance. So I wasn’t thinking about real estate investing, short-term rentals, cash flow, passive income — none of that stuff.

But, my dear wife had already discovered the BiggerPockets Real Estate podcast and had become an avid listener. She would listen to it on her subway ride to her job in Manhattan and on the commute home. So, unlike me, she was already in the right mindset for real estate investing. Thus, the phone call.

Luckily for us, this was 2.5 years before the outbreak of COVID and the insane bidding wars that ensued for any piece of property outside of NYC by folks desperate to get out of city apartments. So we made a fair offer slightly below asking and were able to get a deal done.

The seller was a sweet elderly woman originally from Norway, whose husband had passed away recently. They had built this home and lived in it for 40+ years.

It featured a stone wood-burning fireplace, a vaulted ceiling, a covered balcony overlooking the mountains, and a garden area with an aged hot tub.

We were total newbies when we closed on it in late summer of 2018. We immediately proceeded to do some minor updates and improvements, brought in some new furniture and home decor items (thankfully, we got a lot of help from family) and within a couple of months of closing, we had our listing live on Airbnb for potential renters.

We called it the “Woodland House”.

The “fun” began soon after. One of our first guests brought a very large dog without getting our permission (we have a “no pets” policy). These guests left their dog locked inside our bathroom, while they went out to ski all day. Our neighbors later told us they heard the dog howling for hours. After they checked out, our cleaning lady informed us that the dog had badly scratched up our bathroom door, door trim, and the section of the bathroom carpeting near the door (we hadn’t removed the bathroom carpeting at that point). To add insult to injury, they also broke our glass coffee table.

The guest that booked the reservation had no reviews, and quickly went MIA after we confronted him about the damage. Luckily, Airbnb provided a backstop to hosts for guests that do damage, but we had to go through the somewhat unpleasant claims process to get compensated for the damages.

Lesson #1: Be very careful about which tenants you accept — short- or long-term.

We now generally do not accept any guests without reviews, unless they provide sufficient info about themselves that gives us enough comfort level to make an exception. We also now have a 1-week booking minimum, which does a lot in terms of weeding out “fly-by-night” types of guests that want somewhere to crash after a day of skiing, as those are the most likely to cause damage and neglect your house rules.

But our “fun” was just beginning.

During our first winter as Airbnb hosts, one of the guests who was staying with a group of friends was walking from the house to his car to load up before departure when he slipped on the ice in our driveway, fell awkwardly and broke his ankle. Our Ring camera facing the driveway caught the very unfortunate incident. We felt awful, but obviously, there is only so much you can do as a host in the middle of winter when your property is in a mountain region. He was walking fast and wasn’t wearing the right shoes. Still, no-one wants to see one of their guests slip and fall on their property and end up with a broken ankle. Besides his well-being, we were very concerned about a possible lawsuit.

And while Airbnb does provide a million-dollar liability coverage for hosts, I didn’t want to have to test it. Luckily, he didn’t file suit.

Lesson #2: Do your due diligence on your insurance coverage and liability protection.

Only after the incident did I realize we only had $300,000 in liability coverage per occurrence on our home insurance policy. What if the injured young man did sue us? And what if he was a professional athlete and sued us for millions of dollars in lost wages due to his injury? And what if there was a loophole in the Airbnb $1,000,000 backup policy that would have allowed the company NOT to cover our risk? Let’s say there was language about how hosts have to keep their driveway free of ice during the winter months. We could have been really screwed.

Since then, we have gotten a lot smarter about our liability risk. We now have a $1,000,000 liability coverage on our policy AND we have a sizable umbrella policy, which costs us just $1 per day! This allows my wife and I to sleep well at night not having to worry about what may happen during the next snow storm or frost.

Fast forward six months. We are now in the heat of summer and approaching the first-year anniversary of our log house purchase. By then, my wife and I had bought our first primary residence — a “house hack’ in Bayonne, NJ — and bid farewell to our 1br rental in Brooklyn of 8 years. We were having dinner when we got a call from our guests informing us that the central air-conditioning stopped working and that it was very hot in the house. And, as luck should have it, this was in the middle of a summer heat wave.

I asked our Realtor that we worked with when we bought the log house if he had any contractors to recommend. He gave me one, who sent his HVAC guy to take a look. A couple of days later, we received the bad news. The forced air furnace located in the attic was busted. Cost to replace (parts and labor): $7,500. We didn’t really have the luxury to “shop around”, since we needed to get the air conditioning working again as soon as possible.’’

Lesson #3: Always have emergency funds put aside for urgent repairs. 

There is a reason why every smart investor recommends budgeting and reserving for “cap ex”.  Little did we know, though, that our summer adventures were just beginning. Just a few weeks later, we got a call from different guests who told us that there was no water in the house. Not a drop. We initially thought it had something to do with the electric well pump, so we called the local well company and they promptly sent a service technician out. When we got the call back from the owner of the well company, it was the worst news we could have imagined. It turned out that the well had run completely dry.

Upon further questioning, I learned from him that when they (the same well company) drilled this well for the previous owner just a few months prior to our purchase (she owned two properties that were connected to the same well, so in order to sell the log house, she was required to pay for a new well), they stopped drilling at 48 feet below the surface. It was a “gravel” well, not a well that went all the way to bedrock. And apparently, the biggest problem with gravel wells is the risk of the aquifer drying up. That can happen with soil/rock shifts and other natural and human-caused occurrences.

So I asked the only logical question I could think of: Isn’t there a warranty on this? It’s just a year-old well. “Unfortunately, sir, we cannot provide warranties on the wells themselves; only on the pump equipment.”

“So what are we supposed to do now?” — I asked in desperation.

“We would have to drill a new well and go down to bedrock.”

“Why didn’t you do that the first time?!”

“We hit a strong water source at 48 feet and asked the previous owner if she wanted us to continue or to stop there. She said we could stop there.”

We had no choice but to dig a new well and to do it urgently.

Cost: $9,500.

Now, you might be thinking — that evil old lady — she really stiffed us on the gravel well. I don’t share that sentiment. She is the nicest old lady you will ever meet. There is not an unethical bone in her 85-yr-old body. She knitted traditional Scandinavian sweaters for my two kids, just because. I think she just took their word that they hit a strong water source. She wasn’t an expert on wells and aquifers, and I don’t think she knew the risks associated with a gravel well.

And frankly, the blame is squarely on us for not doing our due diligence. All we knew was that the seller recently paid for a new well. We didn’t bother to ask any questions about it, nor did we know what questions to ask. Obviously, after this very expensive lesson, if we ever decide to buy another property with a well, you can be sure that I’m going to check its depth and get an expert to look at it.

Lesson #4: If buying a property with water fed from a well, be sure to do your due diligence.

But wait, there is more!

A few weeks after spending nearly ten grand on digging a new well, our cleaning lady told us that the decrepit toilet in the unfinished basement had overflowed a bit. My father-in-law, who lives just up the hill, was nice enough to agree to clean it up himself, and we called a local plumber to snake the toilet. Problem solved, we thought. But two guests later, our cleaning lady called us again to tell us that the basement had a lot of sewer water in it this time.

We called RotoRooter, and they came out to snake it again. But unlike the plumber we called the last time, they also sent a snake with a camera down there, which revealed that the last 6 feet of septic pipe, located under our driveway, just before the septic tank, was almost completely crushed. There was so little room in that section of the pipe for waste and household materials to get through, that they were surprised this didn’t happen sooner.

Cost of RotoRooter video scope and clean out: $600.

Now, we had a “hazmat” situation on our hands. A basement flooded with sewage — talk about a health hazard! We had to find an environmental company to do a professional cleanup. Cost: $5,000.

The last piece of this nightmare was for us to hire a contractor to excavate the crushed pipe under our driveway, replace it, then fix the hole in the driveway. It turned out that the pipe was made of wood fiber and tar, which was very common in the mid-20th century — it is hard for me to believe people actually thought it would be a good idea to use ground wood pulp (one step up from cardboard?) and tar for sewer lines — but it doesn’t change the facts. As an aside, this type of material (known as “Orangeburg”) was commonly used for nearly a century in the Northeast region, so you’ll also find it in NJ and in other parts of the NYC Metro area.

Cost to replace crushed pipe and repair driveway: $1200.

Lesson #4: Spend an extra few hundred dollars on a sewer line video scope during your inspection (aka “due diligence”) period, which could save you thousands later.

If we knew enough to do that during our inspection period (or if our agent had advised us), we could have saved almost $7,000 by requesting that either the seller repair the crushed pipe or give us a credit towards the repair, which we could have made right after closing.

To summarize, in the span of just a couple of months from mid-summer to early fall of 2019, we incurred the following unexpected emergency repair costs:

• Central air furnace replacement: $7,500
• New well: $9,500
• Septic pipe backup, basement flooding, and emergency cleanup and repairs: $6,800

Total: $23,800

Lesson #5: Sometimes, when it rains, it pours.

Was this string of very unfortunate and expensive events bad luck? Definitely. But could something similar happen to you on one of your properties? For sure. And while your property may not have well water or a septic system, maybe your roof will spring a leak during a heavy storm and flood your house or rental property. Or maybe your old boiler will go bust in the middle of a bad cold front, and you’ll have to shell out $7,500 to get a plumber to replace the unit. Or maybe a really bad rain storm with strong winds, like what we’ve experienced recently in the Northeast, will lead to flooding in your finished basement, damage all the Sheetrock, flooring, and mechanical units, and you’ll discover that you didn’t have flood insurance coverage.

The Turning Point:

So after all these very stressful and expensive real estate investing lessons, did my wife and I give up? Well, actually, yes we did!

The honest truth is that after the summer and early fall sequence of debacles, we were so exhausted by and fed up with our Catskills log home and so drained financially that we actually went as far as putting it up for sale with the Realtor we bought it with a year prior, got an offer accepted, and the only thing that saved us from losing it right before the pandemic broke out and the Catskills market blew up was the fact that the first-time buyers we were under contract with got spooked when their home inspector mentioned possible mold in the basement.

The deal ended up falling through, which turned out to be a blessing in disguise, and not only because we were guaranteed to lose money on it. The failed sale provided us the space to reflect and talk to each other. Julia and I were sitting inside our log house as the end of 2019 was approaching. We were both enjoying the views from our windows, having morning coffee on the covered balcony overlooking the mountains, and reflecting on how crazy the year had been for us.

In less than 12 months, we had purchased a log house in the Catskills Mountains and became Airbnb hosts without any experience. Not long after that, we closed on our 2-family “house hack” in Bayonne, NJ — moving into it with two little kids and living through a hot summer of renovations, including a lot of DIY. And as if that weren’t enough “action” for a single calendar year, I had also gotten my NJ real estate license and dove in full time. Two properties, a big move, renovations, long-distance Airbnb hosting, a career change. Were we masochists?

Is it any wonder then that when sh*t hit the fan upstate we were so tired and stressed that we were willing to let it go at a loss less than a year after purchasing it?

So as we sat inside and admired our log house and the views, I grabbed a notepad and a pen and made two columns — one for benefits of keeping and the other for benefits of selling. Within 30 minutes, it became very apparent that the benefits of keeping the log house far outnumbered the benefits of selling it. And, of course, we didn’t have a crystal ball and could never have anticipated the impact COVID-19 would have on the real estate market in the Catskills just a few months later!

It was only after we carved out time for thoughtful reflection and put aside emotions that the path forward became clear. We were not only going to KEEP the log house, we were also going to make improvements to it and eliminate or streamline anything that was a source of stress. For example, in addition to spending about $24,000 on the emergency repairs I outlined earlier, we were also frequently irritated by some of our guests complaining about the old hot tub we inherited from the previous owner. Sometimes, it was too hot. Other times, too cold. Sometimes, the water turned green from a chemical imbalance. Yet other times, it lost power all together. And the worst part was that these complaints always seemed to come after 10pm, usually after guests would check in Friday night.

So Julia and I made the wise decision to decommission and get rid of the hot tub, because that was the #1 source of headaches, aside from emergency cap ex. Were we a bit concerned that it would negatively affect demand and bookings? Sure. But we knew that our log house offered much more than a hot tub and felt confident that we could actually deliver a better experience with certain improvements even without it.

So we took it off our listing description and found a few guys who ran a bed & breakfast a half hour’s drive from our log house. They agreed to pick it up (which saved us a $600 removal fee I was quoted), and Julia and I helped them lift and roll the monstrosity into their small, vintage Chevy pickup truck. We had to stand the hot tub up vertically in the truck’s bed for it to fit, and they strapped it from all sides. I had doubts that they would be able to actually drive that thing away, but the little truck pulled away and we waved a grateful goodbye to the truck’s occupants and a good riddance to the hot tub. (As an aside, I later met one of the guys, and he told me that they were enjoying the hot tub at their bed & breakfast, so it turned out to be a win/win).

Fast forward two years: We have made a lot of improvements to our Catskills property, both inside and out, and we are proud to have a 5-star rating and Super Host status on Airbnb. It rents really well and is generating solid cash flow for us. We have also streamlined and automated the booking and check-in process to the point where most of the time, we don’t have to do anything when people book, check in, and check out. We occasionally have to reply to inquiries and update our cleaning person on our booking schedule, but that’s mostly it.

The Takeaways:

In closing, I hope this post didn’t scare you or discourage you. I’m certainly not implying that you shouldn’t buy your first (or next) property. My wife and I are VERY glad we got through that very tough period (and had the funds to do the emergency repairs). And we learned a ton from that experience. I look at the $24k in unplanned emergency cap ex as a semester at a very hands-on school for real estate investors. It was an investment in our education. Because I can assure you, it made us a lot smarter as owners, landlords, and investors.

So while I strongly encourage you to get into real estate if you’ve been sitting on the sidelines for a while crunching numbers and listening to podcasts and watching YouTube, I also want this post to act as a reminder of the importance of having sufficient reserves for unforeseen events. These will inevitably occur when you least expect them, and if you spend your last dollar to buy a property, you’re putting yourself in a really risky situation.

Our real estate investing experience could have ended pretty badly had we not taken the time for sober reflection when the emotional scars had healed a bit. We could have easily been added to the long list of property owners who give up, throw in the towel, and swear off real estate investing as “not for them”. We could have become that couple people reference as a scary case study of why someone shouldn’t buy investment properties.

Instead, we pivoted, made a big mindset shift, realized that the significant emergency repairs we had to perform were non-recurring items, took stock of everything we loved about the house and the area, and then focused on the steps necessary to improve our property as a long term “buy and hold”.

By deciding to hold onto this unique property, we’ve been able to bolster our equity in it significantly, partly due “forced appreciation” through improvements and partly thanks to the “tide that lifted all boats” in the Catskills — the very strong demand from urban and suburban buyers looking for first and second homes after the outbreak of COVID-19. In fact, our increased property value allowed us to do a cash-out refi recently, which will help fund our imminent purchase of two adjacent Bayonne multi-family properties we were able to find as off-market opportunities. Not only that, but our log house is generating a nice annual return for us, purely on a cash flow basis.

Final Lesson: Don’t make investing decisions based on emotions. 

This is as true in real estate as it is in stocks (or any other form of investment, for that matter).