Mistakes on my first deal and how to avoid them!

In 2017 I decided to become a real estate investor, after taking some time to educate myself I was ready to jump into a deal. Two years later I had met an investor-friendly real estate agent and started to receive potential properties to look at. My criteria was a SFR, with only cosmetics issues and my price range was between 100K-180k.  We looked at several properties and a few of them needed some major rehab which I did not have the funds for neither did I want to tackle that on my first deal. 

After a few weeks, we went and saw a property and it was exactly what I was looking for. There was not any major Rehab to do, just the landscape, one of the windows needed a stopper, and a few of the posts on the porch were loose. The appliances were in decent shape and did not need to be replaced. Let's jump into this deal and see the details.

The Numbers

This property is a three-bedroom, one-bathroom single family located in the east-central Florida area. The asking price was 135K and the sellers and I settled on 128K. Let's dive a little deeper below.

Asking price: $135K

Total Capital invested: $18,800

• Purchase Price:$128K
• Loan amount: $115K
• Loan term: 30 years
• Interest rate: 4.5%

Income: $1314

• Rent: $1299
• Pet rent: $15

Expenses: $880

• Garbage: $36 (per quarter)
• Vacancy: $39 (3%)
• CapEx: $39 (3%)
• Repairs & Maintenance: $39 (3%)
• Property Tax: $83.33
• Insurance: $83
• Mortgage: 583.70

Returns

• NOI: $12,208
• CoC Return: 27.68%
• Cashflow: $433
• 5 year annualized: 21.12%

Lessons Learned

What mistakes did I make during this acquisition? Well as a newbie jumping into my first deal, I made quite a few mistakes or as I like to call it “lessons learned”.The first lesson learned that I made was not doing a septic inspection. That's right, this property is on a septic tank and although I did a regular inspection, I chose not to do a separate septic tank inspection. About a year later, I paid for that lesson as the septic line had some issues and I had to pay to get fixed. 

The second lesson I learned was not doing a separate inspection for the well water softener system. That's right the property utilizes well water and again I relied on the regular inspection and chose not to do a separate inspection for the well softener system. Can you see a trend here yet? As you may have guessed, I paid for that lesson; about a week after the tenants moved in, they informed me that the water has a rotten egg smell which is stinking up the house. I found a company that installed a new softener system and that solved the issue.

Let's move onto more lessons, as you may have probably realized in the numbers above I did not account for property management. This is a common mistake that a lot of us newbies make. I am self-managing but as I have learned since making this purchase is that you should always account for property management even if you are self-managing because in the event that you would like to turn it over to a property manager in the future, you want to make sure that the numbers would still work. Luckily if I were to turn this over to a property manager I would still cash flow at $302 a month.

What could I have done better?

Well for one, I would get a separate inspection done for the septic tank and the well water softener system. This would have avoided the issues that arose after the tenants moved in and would have made the tenants move-in process a little smoother, moreover it would have been a little less scary as a first-time investor getting those phone calls. Next, I would have accounted for 10% of the rent going towards property management. Your time is valuable and also you may want to turn it over to a PM sometimes in the future.

Currently, the property is performing well, it is cash-flowing at $469 at the moment with the past rent increase for the new lease. The tenants love the place and they take great care of the place. I hope you can learn from my mistakes and use those lessons for when you jump into your first couple of deals. 

The ultimate reason for making those mistakes was to save money, it was to minimize the amount of cash going out; as newbie investors cash can be very limited for us when we are getting started but remember it will cost you more in the future by saving that money. It cost me more money to get those items fixed when the tenants called me, it would have been wiser for me to take care of them upfront in the beginning, I could have used that as leverage to lower the purchase price or at least I could have come up with a plan to get those items fixed before moving in the tenants. Remember it is always better to take care of the problems now then later!

Good Luck Hunting!