I Just Bought My First Investment Property, What Should I Watch Out For?
February 24, 2011Well this blog closes out my “series” on investment property and I find it fitting that I share some of the frustrations, missteps as well as some of the successes we have encountered in our first investment deal. Now I have to let you know that this is only our experience and what my wife and I went through is certainly not always the case, but if I can pass on some things we have learned so that you can be aware then this blog will serve its purpose. If not, well at least it gave me an opportunity to hone my writing skills!
I’ll never forget one sentence I read in all the real estate books that I inhaled. It was something to the tune of “You WILL make mistakes.” Well I figured, sure we will but they will be minimal and certainly won’t cause either one of us any stress (stop laughing!). Boy was I wrong! (Note; that was my first mistake, not taking the fact that there would be major mistakes seriously enough.) That said, the trip ups listed below were definitely a learning experience for both of us and might I add, provided some interesting fodder for our dinner time conversations.
1. Be comfortable with your realtor: So I didn’t practice what I preach here. We were recommended a realtor by a good friend of ours and I figured that this agent must be good knowing our friend. WRONG!! This individual was all about the commission that was going to come their way. My gut told me something was wrong but did I listen? Nope. We actually ended up doing most of the negotiations directly with the seller, in effect doing the agent’s job. I also found out that there was some urgency to the sale as the property was a 1031 exchange (meaning the seller had to buy a like property within a certain time frame). You would think our realtor would be privy to that little nugget of information.
What we learned: Be patient in choosing your realtor.
2. Really look at worst case scenario: In an earlier blog I talked about some financial analysis I did prior to buying our property. I used what I thought were very conservative scenarios; 3% appreciation on property and a 50% vacancy factor. While this may be appropriate for normal real estate market conditions, it did not jive with what our reality was. Two years ago we had three “30 day notices” come in during the month of November which was a 75% vacancy factor. As far as appreciation, well anyone living in CA (or any other state for that matter) knows what has happened to real estate values.
What we learned: Really consider worse case scenarios.
3. Ramp up the inspection: This was a situation where we should have considered the age of our building in addition to what the standard inspections provide. We did do standard inspections but with an older building you often have to go deeper to find issues. A problem that we hadn’t thought about was any mold issues. Now we were lucky in that our mold issues have been minor but they still exist and it is a cost we have to absorb as well as make sure it doesn’t rear it’s head again. We also should have done a more in-depth termite inspection. Just because a building is “fine” at the point of inspection doesn’t mean that there isn’t a threat in the future.
What we learned: Don’t skimp on your inspections, especially with an older building. Also ask about likelihood of something occurring based on current conditions.
4. Don’t underestimate the time commitment being a landlord: Are you familiar with Murphy’s Law? I can’t tell you how many times I would leave on a business trip and as soon as I got to my destination my cell phone would ring or I would have an email with a tenant describing an issue that needed to be rectified. This would take time away from things I would rather be doing and what was particularly bothersome was making sure I followed through on the work being done. I initially did a lot of repairs myself but that got old real quick. So now I’m reliant on a list of people that I can call for various things. That makes it a little easier but in the end it still takes time.
What we learned: As you consider the time it takes to do repairs and maintenance, multiply it by 3! And be prepared that you will get calls at the least opportune times, like your vacation.
5. Understand the snowball effect of repairs: This one ties in to the above. We would get a call about a sink that’s not draining. Easy enough to fix right? Just snake it and be done. HA! Sure you first get to snake it and then you find out that there is a busted washer and the entire plumbing is rusted out or whatever. Bottom line is that what sounded like a minor expense has now morphed into a great bottom line for some random plumber!
What we learned: Be realistic about expenses. In a newer building a sink that cannot drain is probably a minor issue but in an older building (ours was built in the late 70s) there may be underlying issues that need to be fixed.
So that’s a smattering of the mistakes that we’ve learned from. Hopefully that helps in what to expect and what to prepare for. I’ll leave you with this though, while we have made some blunders along the way, we’ve also done a lot of things that are correct and that is why we still have our property. By the way, anyone need to rent a 2 bedroom/2 bath unit?