Ep. #2 - The Book & Townhouse That Started My [... and Landlord] Residential Rental Real Estate Investing Journey

Welcome back! Episode No. 2! So, I didn’t scare you away last week, or are you finding me for the first time this week? Either way, thank you for listening to the …and Landlord podcast. I want to help you secure your financial freedom through residential rental real-estate. In other words, being a landlord. If you are already a landlord, I want to help you do it at your highest level, so that it increases your wealth without decreasing your day-to-day enjoyment of life because of the feared problems with tenants, toilets, termites and other troubles such as rent not being paid on time that can become all too real if you’re not running your rental properties as a business. And that’s what I’m all about; the business of being a landlord.

So, before we get started, how did you like that shorter intro? It was a little bit too long, so I cut it down from last week. It’s about a third of the length that it was before.

So, last week, I mentioned briefly the story of how I became involved in real-estate, and I wanted to elaborate a little more on that story this week. As I said before, I was on a cruise ship. It was a seven day cruise. I was with some great friends and family members, and I was having a great time, and I brought along the book ‘Rich Dad Poor Dad’, something I was going to read in my spare time. And prior to that, I had been interested in real-estate off and on for years, but I always had some reason that I didn’t do it. Some excuse that I made, and to an extent, it had to do with the landlord horror stories that other people I said had vomited all over me. That’s how it felt. And so, when I was on this cruise, I was reading that book. Each chapter was building a fire within me. And by the time I got done with that book, I could not wait for the cruise to be over, so that I could get off that boat and start looking for my first rental property, because at that point, I had made up my mind that real-estate was going to be my future.

The book ‘Rich Dad Poor Dad’ is a must-read for anyone who is wanting to increase their financial intelligence. And the book is not specifically about real-estate. It’s not necessarily a mindset book. It’s not really a motivational book. I wouldn’t even say it’s the best written book, but it put a voice to something that I had been looking for. If you know something isn’t right, but you can’t quite explain it, can’t quite get the words together to explain what it is that’s not right, and then you come across a book that, basically, lays it out for you, and makes you say “yes, that’s it”, that’s what ‘Rich Dad Poor Dad’ did for me.

It basically put a voice to the feeling that I had all along that my understanding of finances wasn’t what it really needed to be to benefit myself and my family. That book put it into words what I had been feeling all along. So, it’s completely possible that you could read ‘Rich Dad Poor Dad’, and think “huh, nothing really to it.” It has to hit you at the time in your life where you are looking for that thing that you can’t quite put into words, and then you read the right book at the right time, and that’s it. Well, that book, for me, was ‘Rich Dad Poor Dad’, and for a lot of investors, it’s ‘Rich Dad Poor Dad’, but I’ve met many people who have read the book and they didn’t do anything with the information.

So, I hope that that’s not you, because I suspect that you wouldn’t be listening to a podcast like this if you weren’t seeking that kind of information. So, it’s probably exactly what you need to read. But in full disclosure, I have met many people who read the book, and literally were like, “huh, nothing much to it.” And they moved on, and their life didn’t change at all. Whereas me, and countless other people, read it and they were never the same from that moment forward because they completely changed their mindset on how they looked at money and investing. So, if you’ve read ‘Rich Dad Poor Dad’, and it really didn’t do anything for you, there was no spark, it didn’t ignite anything new, it didn’t drive you to do anything different, you didn’t find it to be all that special, try it again. Maybe on a second look, it will do something that it did not the first.

For me, it was a transformational book. I count that as one of the best things that I did, especially for me because I never really read books in that manner before.

Prior to ‘Rich Dad Poor Dad’, I had really never read a mindset book, a self-help book, any of the, basically, business how-to books. I was a computer programmer. I would go out and read a book on how to program PEARL, or how to program PHP or ColdFusion. I would go out and get a book that specifically taught me how to do one thing, and did so quickly.

But the idea of getting a book that was going to teach me how to think, I had never even considered doing that, and I kind of thought it was beneath me a little bit at one point. But when I became less egotistical, got over myself a little bit and realized that there was something out there for me to pick up from the writing of people who are doing already, at a high level, what I want to do, it changed my life.

So, try it. If you’ve already, try it again. I think it’s a critical book for any real-estate investor to read. And really not just even a real-estate investor, anyone who wants to have a better understanding of money, they want to increase their financial intelligence, it’s a book that you should read. After I read it, and I got off that boat, I immediately started looking for my first rental property.

So, that was the end of March, the beginning of April, 2015, and I got with the realtor, and told him the criteria of what I was looking for; basically a rental property that was under $100,000.

He came back with the listings of what was available then, and set me up on a search, and eventually around May, we came across a townhouse that was for sale for $64,900, and I put in an offer. The offer I put in was $60,900, so $4000 below what they were asking, and they accepted it. Now, the history of this townhouse was that it was originally listed back in January of 2014 for $74,900 as a short sale. And then it dropped to $69,900 in February. It dropped again to $59,900, in April, and it went contingent in June, but didn’t sell. Then it went contingent again in October, but again, it didn’t sell. Then, it was cancelled in December, 2014, after having spent 136 days on market. but that was a short sale, and so, it apparently got foreclosed upon after that because it was re-listed in January of 2015 as an REO, as a foreclosure, for $69,900. It went contingent with someone in March of 2015, but didn’t sell. So, right when I was on that boat, or getting off, somebody had this property under contract. But for whatever reason, didn’t buy it. Then it dropped to $64,900 in May. Days later, I came along.

I looked up the history of the property. I knew that not a few months before, it had been listed for $59,900, so I gave them an offer of $1000 over, and they accepted it. And so, I closed on that property at that price of $69,900, basically $61,000, on July 13th, of 2015. It had spent an additional 124 days on market for a total of 260 days on market. And it was a two-bedroom, one and a half bath, townhouse, just over 1300 sq. feet, so, pretty large. It did have an HOA fee of $144 a month, so that’s a pretty steep HOA fee. And there are many reasons why you want to be cautious of investing in properties that have HOA’s, the condos in townhouse communities. There are several things with the HOA communities where you can come back to be bitten. I’ll go over that in more detail some other time.

The critical thing to note here is that the very first property that I got, the property that started it all for me, and was a great investment, it sat between 2014 and 2015 for 260 days. That would not likely happen today. And in all likelihood, if the same property were to go on market today, even at $120,000, it would probably sell within a week.

That’s just the difference in the market right now. So, just be aware of that. 2015 was a special time, but don’t let that scare you away, because times like that always come again. There will be another time where you can buy properties significantly below its value.

At the time of that purchase, the tax value of this property was something like $89,000, and it was going for far less than that. Now, this property is probably valued at around $125,000, but like I said, don’t let that discourage you. The HOA fee has gone up a little bit. I think it’s $155, or $157 a month now. But when I originally bought it, and got it rented out for $880 a month, it’s now renting for $920 a month. But I could actually go higher. I have two identical units at the same location that are rented for $960 a month. But the reason I have this one rented for $920 a month is my very first tenant ever, who was the person that I put into this property, she’s still there today, and she’s a great lady. No problems with her whatsoever. I picked a perfect tenant on my first outing, and because of the fact that I’ve had no vacancy and no issues all this time, it’s a no-brainer that I should give her a good deal, so that she has every reason to stay for years to come.

Now, when I got this property, even before purchasing it, I had estimated that it was going to cost about $3000 to get it rental ready. I was wrong. It actually cost three times that amount. I spent about $9000 getting this property rental ready. Just the cleaning and painting and landscaping cost a certain amount, but also ended up re-tiling the floors in the lower and upper bathrooms, putting new vanity tops in both. And then there were plumbing issues that were not anticipated.

Now, in hindsight being 20/20, I probably could have gotten all of this done for closer to $6000, but I made a few mistakes trying to build out my team, paid a little more than I should have for a few things, didn’t have the ideal team members in a few cases, and I caused some of my own problems.

For instance, I was trying to tighten a loose toilet, and I cracked it. Who knew you could only put so much force on porcelain before it cracks? Evidently, everyone except me, so now I’m paying to put in a new toilet, when the old toilet was fine. It was just a little loose. But I got through it. In the end, everything worked out. My wife was even there, helping me to some of the cleaning on this first property. And just for the record, she hasn’t helped me do any cleaning on any property since the first one, which isn’t a bad thing because as I progressed in my knowledge, I realized that there are just certain things that I did not want to be doing myself. And so, I outsourced it. Not to mention, the property that I bought right after this one, was disgusting, and there was no way that she was going in there to clean that one.

So, I bought this property in July of 2015, started the rehab of it doing some things myself, and trying to build team members for others. I thought it was going to be $3000 a rehab, it ended up being $9000. And I got it listed as a rental as soon as it was in a condition suitable enough to take pictures. I took them myself with my cell phone. It turned out pretty nice. And it took a little longer than I thought it would to get the property rented.

The tenant did not actually take occupancy until October of 2015. And like I said, she’s still there today, but it took a little longer to get it rented than I thought it would, even though it got lots of attention. And that initial rent was $880 a month, and it was a cash-flow positive property even with the $9000 additional, because I bought it for basically $61,000, put in another $9000 in rehab. So, I essentially had $70,000 in the property, but it was rented for $880 a month. Even when accounting for the $144 a month HOA fee, I was still above the 1 % rule.

And the 1 % rule is basically that you should be able to rent a property out for 1 % or more if your all-in cost for that property. So, it might all in-cost for this property being $70,000, it’s probably a good deal if I can rent it for $700. Well, I had it rented for $880. And even when you subtract the $144 HOA fee, that’s still $736 a month of rental income from this property, not counting other expenses. But you’re not really looking at other expenses when you’re calculating the 1 % rule.

So, this was a good buy. It met the criteria of what you’re typically looking for as a cash-flow positive rental. And even though, I was three times over on my rehab budget, the number still worked. Everything came out perfectly, and I was able to find a great tenant, even really before I knew how to find a great tenant. I didn’t have my tenant screening procedures and policies, and my lease wasn’t where I really it to be. I’ve come a long way from where I was then and that first tenant still worked out, and I’ll tell you more later in a different episode about the second property, and my tenant in that second property is still there as well.

So, if you’d like to see the before and after pictures and a more detailed write-up of this first deal of mine, I will create a link to it on the show-notes, so you’ll be able to go into a little bit more detail. But, it didn’t kill me, and what doesn’t kill you makes you stronger. It worked out to my benefit in every way, and it didn’t extinguish the fire that had been set in to me originally by reading that book, ‘Rich Dad Poor Dad’.

Now, in between that book and this property, I did read other books, and I came across the website www.biggerpockets.com. And so, that was an invaluable resource, and reading Brandon Turner’s book, the book on investing in real-estate with low and no-money down, it was very helpful because one of the things that occurred when I was trying to buy this property, is that even though I had the money set aside for my 20 % down on this property, it wasn’t seen as properly sourced funds by the lender, because as I said, I’m self-employed. So, the lender was concerned that I was using business funds to fund this real-estate purchase. And for whatever reason, they don’t allow that.

So, what I ended up actually having to do, is something that was suggested in that book from Brandon Turner, which was to use other sources of funds like a home equity line of credit. Or in this case, I used retirement savings. I took out a loan from my wife’s Thrift Savings Plan, TSP, and they will allow you to take out a loan for the purpose of purchasing a home. And so, I used those funds, which the lender would consider properly sourced, and I bought the house using those funds for the 20 % down. And then I was able to use my own funds after the deal had been done to pay off the TSP loan.

So, it’s a bit of creative financing, and I’ll talk more in later episodes of how I used other forms of creative financing, whether it’d be the TSP loan again, a home equity line of credit, lease options. There are several things that I’ve done, including using private lenders, in order to initially fund the purchase and then refilling them out with long-term funding at a later date.

So, that’s just a rundown of what was my first real-estate investment deal. Everything worked out well, and I got a good deal, probably a great deal, on the property. Now, it may be a little bit more difficult than then to get that type of a deal. It is certainly harder here in my area of Durham, North Carolina, but where you live, it may be different. And even if it’s not, that does not mean that great deals can’t still be had.

I purchased a property just in November that I’ll relate at some point, and it also was a great deal, and so, that’s November of 2018. We’re a few months out of that now, but they’re out there. And so, there are systems and procedures and processes that you can put in place so that those deals come to you. And there’s some information that you’ll have to have, and you’ll have to educate yourself on the different methods of creative financing. You’ll have to be able to negotiate, and so there are some techniques and some books that you’ll want to read related to that. But I’ll cover all these things.

This episode is about as long as I wanted it to be. So, I’m going to go ahead and wrap it up now, but we will go into more about all of my deals on future episodes. But I don’t want this podcast to just be about the deals that I’ve done. I want it to be about the deals that you can do, and so I’ll go into different aspects of systems, processes, procedures and things that you’ll need to know and be aware off in order to take advantage of that perfect deal when it comes your way. You won’t find it if you’re not looking. So, you need to be looking. And so, I will do an episode, probably the next episode, about making the initial connections that you’ll have to have with realtors, and the cites and systems that you’ll need to put in place to be able to capture that deal when it comes your way.

I’m also going to be doing an interview next week, and that will be coming soon as well, of an investor who started his journey not too long ago, and has met with great success thus far. And so, I’ll bring those stories to you as frequently as I can, because they’re out there. Lots of people are doing great things in real-estate investing, and I want that to be you as well.

And lastly, the website is done. So, check out www.andlandlord.com. It’s not perfect, and I will be making a few changes and adding a lot of content over the days and weeks to come. But check that out, it also has links to all of the places that you could listen. You may not need that since obviously you’re already listening. But it’s there, and if you’re not listening to this podcast on one of the major platforms, I would really appreciate it if you did. Listen to it on iTunes, or Stitcher, and make sure that you rate, five stars would be great, and provide your feedback.