The best teacher is experience.
The best plans never survive contact with the enemy, or so the old saying goes. You can plan out an investment, pore over a spreadsheet for hours trying to calculate risk and return precisely, and talk to experts about what could go wrong. Due diligence is important.
And yet sometimes the best way to learn all of the ins and outs of a project is to just move forward, learn from what happens and the mistakes you make, and reinvest that knowledge into your next project.
Prudent Plastic Surgeon has made some mistakes, some self-inflected, some not, and reflects on those in this postmortem of his latest real estate investment.
In June 2021, Selenid and I bought our third real estate investment property. It is now about seven months later as I write this. And let me tell you, we gained some tough real estate lessons learned from this property. But like all hard lessons, we are better off from learning them.
I want to share and go through all of the mistakes that we made and the lessons that we learned.
Investment property and teacher…
A Refresher on the Property
It is a three-unit property in the city of Buffalo with three bedrooms and one bathroom in each apartment.
It was an off-market deal brought to us by our investor agents with an asking price of $202,000, which was our purchase price.
The expected cash-on-cash return based on our initial evaluations was over 35% as shown here:
You can read my full insider analysis of the property here. Also, if you need a refresher, this is my guide to screening and analyzing investment properties the right way.
However, we did make mistakes with this property that have taught us some very hard lessons. Needless to say, our current cash-on-cash return is not near that predicted. But, most importantly, we have righted the ship and have the property running smooth and cash-flowing well. In fact, that’s really why I want to share this story – to show that no investment, especially in real estate, needs to be perfect. Everything is a learning experience!
Here we go…
1. Buying a property with tenants
This was a big issue and something that we will not do lightly or at all in the future.
All three units of this property had current tenants when we bought it. We, therefore, inherited the tenants. We had assurances from the prior owner that tenants were “good.” We were also shown documents providing evidence that they were current with their rent.
Time, however, showed that we were too trusting. Only one tenant was paying rent actively. Two were not. They ultimately applied for emergency aid for rent which we still have yet to receive but is, in theory, in the works.
That’s a problem.
But even more so, two of the tenants (one paying, one not) were just not good tenants. They did not take care of the apartments and were disrespectful.
We worked hard to rectify the situation, even offering cash for keys. However, they would not leave or try to meet our new standards.
This made things very difficult.
2. No inspection clause
We were very eager to get this property based on our estimates. Our agents also relayed to us that the seller would not sell with an inspection contingency, which is something we generally include in our offers as a rule.
This should have been a major red flag. But we looked past it…
Upon taking over the property, there has been a myriad of issues that had to be dealt with:
- Leaking bathtub in 1 unit
- Rat infestation in basement
- Broken plumbing
- Tons of broken cabinets, molding, doors, etc. throughout 2 units
This was all well hidden during our walk-through and “self-inspection.” Big mistake on our part.
3. Using the same buying and selling agents
I love our investor real estate agents. We’ve become true friends. However, we made a mistake using them as our buying agents for this property. Because they were also the selling agents.
I certainly don’t think they did anything malicious.
But there is definitely an unconscious bias involved when the same agent is representing the buyers and the sellers.
Could this have led to some issues being overlooked? Maybe. But ultimately the buck stops with Selenid and me. We should have noticed more issues and taken the identified issues more seriously.
Regardless, this was another mistake that taught us a tough but necessary lesson.
How We Fixed These Mistakes
These mistakes were obviously bummers. But we didn’t let them sink the ship and we never gave up. That’s the important part.
We also learned a ton from them that we will take forward as we expand our real estate portfolio.
1. Inheriting tenants
This is something we probably won’t do again in the future. We would ask the seller to offer the current tenants cash for keys or use another strategy.
Or, if we do inherit tenants, we would do a lot more due diligence on their behavior and payments.
In this case, it took nearly six months before the two troublesome tenants left. Remember, one of these troublesome tenants was not paying and the other was. This was a tough process. It took long conversations on our part and a lot of understanding and empathy which was not always returned. Ultimately we chose to wait until they left on their own accord.
The third tenant was not able to pay until just this past month. She had work issues and applied for emergency aid which has not yet been received. But she is very nice and respectful and has worked with us. So we elected to keep her and it has worked out.
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2. We have had to fix a LOT of stuff
This is mostly because we didn’t do an inspection beforehand. Most notably, we have enrolled in a monthly extermination program that has resolved a rat issue.
But, once the two tenants moved out, we had to do significantly more repairs before being able to rent it out again due to the damage that had been caused. In fact, our initial estimate of $2,500 for repairs increased to an actual total expense of about $16,000!
Again, we needed to do more due diligence, which we will with the next purchase. And in all but the rarest cases, we will include an inspection contingency.
And remember, we self-manage, but it really is doable for two full-time professionals! This is how we do it…
3. Same agents on both sides of the transaction
This is not something we will be doing again, despite our love for our investor agents.
An Update on the Property’s Cash Flow
Through six months of ownership, the property cash-flowed a measly 3.4%.
But it’s a different story now!
In the past month, we have had the two tenants move out. We repaired everything as needed and re-painted everything. Then we had both units thoroughly cleaned.
Next, we advertised them, and within a week, we had both rented out for $1200 and $1250 per month, respectively.
Our other tenant also began paying her $1200 rent this month.
Based on this, our new cash flow is 29.4%! Not too far off from our original estimate. Here are the full details:
The Moral of the Story
When you start investing in real estate, you need to define your criteria and rules for investing.
As you gain more experience, you may be tempted to change or alter these rules. But remember that you made them for a reason, and keep following them.
Mistake 1 above is a hard lesson that we had to learn. But mistakes 2 and 3 were somewhat self-inflicted, because we broke our own criteria and rules.
But rest assured, we plan on following our rules from now on!
The other important takeaway is that real estate investing, like anything else, is not perfect. You will make mistakes. And that’s ok. The important thing is that you don’t let these mistakes discourage you from keeping on. Take the lessons to heart and move forward!
This property will bring us passive income each month and accelerate our path to financial freedom, as I wrote about here. That is well worth it!
If you want to learn more, check out this real estate guide for physicians!
You can also network with other physician real estate investors in our private Facebook group.
What do you think? Any mistakes have you made investing in real estate? What real estate lessons learned did you take from these mistakes? Let me know in the comments below!
6 thoughts on “3 Real Estate Lessons Learned from Our Last Investment Property”
How the heck do you only pay $650 in property taxes per year?
Is this is an awful neighborhood? Or were those old grandfathered numbers from an old low assessment? Will those drastically increase now that you’ve purchased at a higher price and made improvements?
As the proud owner of a pile of rentals I think the biggest miss is expecting profit in the 1st 6 months. 😛
I think it doesn’t matter how many houses you buy, somehow the 1st year will be painful. When I buy I’m just enacting things (tough talks with tenants, renovations, repairs) to make the 2nd year and onward a winning equation 🙂
Thanks for sharing your story and your mistakes. I always cringe when I hear someone self managing properties. Dealing directly with tenants is just not what I prefer to do. I’ll gladly pay management 6% to deal with tenants directly. I’d rather spend time with my family. But kudos to you for self managing. Your returns are higher and that’s the reward for self managing. I’m glad you got this property straightened out. Good luck and enjoy the high cash on cash return.
Seems like the author used Semi Retired MD’s COC calculator, but yet linked to his own Facebook group and real estate course as opposed to giving some sort of credit to SRMD. They might appreciate a shoutout.
I sold my LTR and now only do STR.
I do less repairs and no eviction hassles and I use the property. It makes the same returns as the LTR for far less hassles!
I’ve never heard anyone say that short term rentals are less hassle than long-term rentals. Can you elaborate?
It seems to defy common sense. Long-term rentals are pretty simple. You rent to somebody and you collect the rent. You do occasional repairs as needed. Short term rentals require tons of interaction with multiple sets of tenants and potential tenants, constant cleanings, moving in and out, etc. Most likely the same overall of all amount of repairs/maintenance.
I think I would only do short term rentals if I got paid a serious premium. Otherwise it just wouldn’t be worth all the hassles.
We’ve never tried short term rentals, but we’ve been renting duplexes for 20 years now. We have five duplexes worth about $2.2 million. I would say that, at most, I spend 40 to 60 hours a year in total managing these properties myself.