SS42: Avoid These Mistakes I Made With My First Rental Property

Charles discusses what mistakes he made with his first multifamily rental property.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

Overview

My first rental property was a 3-family property that I still own today.
I lived in one of the units and rented out the other units

What I Did Right

Purchased property on a quiet street
Had the previous owner install new furnaces and had the cost added to the home cost so I didn’t have to come out of pocket to replace them
Purchased with 3.5% FHA debt – 6.5% interest rate in 2006 – refinanced in 2008 and 2010
Was able to breakeven on the mortgage when renting out the other 2 floors
Rented out my second bedroom for a couple of years and actually cash flowed

Mistakes

Bought at the top of the market
Not enough off-street parking
Units are smaller – smaller 2/1 apartments with higher turnover than 3/1 apartments I have a block away where the tenants stay for a few years on average – know what size apartments rent the best and keep tenants the longest
Did not have good contractors or handyman lined up
Did not accurately estimate the cost of the project – did not put aside an adequate renovation/CAPEX budget
Did not have accurate rent comps to know what I could/should charge and what finishes I should be choosing to maximize my returns
I planned on clearing all three floors so I could move into one of them and move friends into the others; this was a pain but; I charged my friends more rent after cleaning the units and making repairs
If I had purchased a renovated property, I would have avoided a number of mistakes

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing how to avoid mistakes I made with my first rental property. So my first rental property was a three-family property that I still own today. And I lived in one of the units. It was the second floor unit, and I rented out the other units to tenants. Now there’s a few things I did, right? And there’s a lot of things I did wrong, but starting off with what I did, right, was I purchased a property on a quiet street. And this is really important if you’ve ever rented an apartment before or rented a house before, and you’re standing in front of it after you showed it or before you show it. And you can watch people’s faces. If it’s on a busy street and you have, you know, loud cars going by, or people hanging out on the street or all the different things that you really don’t want to have, or want people to see when you’re renting them an apartment.

Charles:
So having it on a quiet street is a fantastic way of buying a good property. That’s, you’re going to be able to find tenants that will actually stay. And now this property was a property away from a more, a much little busier street that had a bus line on it, which was also a plus. And but it wasn’t a very busy street and they had some stop signs on it and people didn’t drive that fast on it. So it’s very important purchase a property in quieter areas that are close to commercial, but aren’t actually in those areas next. I mean the previous owner, I had them install new furnaces on two of the floors and I had the cost added to the home costs. So I didn’t have to come out of pocket to replace them. So I think at this time it was like $10,000 for the two new furnaces and they had them installed.

Charles:
And then add to that price. Obviously it’s going to appraise better with new furnaces and have that price, add it to the original sale price. And then I was able to just mortgage it out over 30 years, which means it was very inexpensive to have those new furnaces. And I knew 10 plus years, I wouldn’t have to touch them. Next was I purchased with a three and a half percent down FHA mortgage. So it was a six and a half percent interest rate in 2006, which is crazy when you talk about it now. But I refinanced it, I think in 2008 and 2010. So I was able to drop it dramatically over those two refinance periods. But it was expensive debt when I got it, but that was what was normal at the time. Now I was able to break even on the mortgage when renting out the other two floors.

Charles:
And this is really important because you want to make sure there’s all these different strategies and formulas and spreadsheets and all this kind of stuff for valuing a property, but you have to know what your strategy is for it. You know, if I’m buying a property and I want to break even on two floors or make a little bit of money on two floors and live in one a rent-free and just have to take care of some repairs and stuff like this that’s a different strategy than someone that’s saying, I’m going to buy this three family property and make it 100% rental property. I’m not living in it at all, right. It’s completely different strategies. You’re going to be doing different on it. And the property might be worth more or less depending on the strategy that you’re employing. I actually rented out my second bedroom in this property as well for a couple of years and the property actually cashflow, not too much, but actually cash flowed.

Charles:
So that was a great now into some of the mistakes I made. So I bought in 2006 at the end, it was the end of 2006. It was a top of the market. And there wasn’t enough street parking at this property. It was literally a a driveway with two lanes on it, but you had three units. So how tenants there now are, they might have to move a car or do something, or someone parks on the street. It was a quiet street. I used to always park in the street when I lived there. So it was never an issue. And it gave my tenants the driveway, which didn’t really matter to me. But it does make it a little harder when you’re renting it. Now being close to a bus line ring is one of those things where when you’re talking to tenants, if they don’t even have a car they might be more interested in moving in.

Charles:
But usually you’re looking for tenants in this market where this is in central Connecticut. You’re really looking for tenants with cars. It’s usually a sign of a better tenant. Another thing I did wrong was unions are smaller. I mean, there were smaller to ones apartments. So with smaller 200 apartments, it’s not the optimum size. So you’re gonna have a higher turnover in this market than three, one apartments. So a block away, I have another property that I bought a couple of years later, and it was three, one apartments in this property. And people stay for a few years on average. So when you’re, when you’re going into a a market, know what size properties rent the best and keep the tenants the longest. And this can take a little research. It’s not going to be perfect science. But what I found in this market was three ones were a great unit of that, where tenants stayed the longest and even two ones, you keep people there.

Charles:
However, if they had to be a little bigger, these were on the smaller end of a two, one apartment. So keep them in mind when you’re looking at potential properties. Next thing I did wrong was I didn’t have good contractors in handyman lined up. So when I was getting into this property, there was renovation that was required. I didn’t have the right crew available to do it right away. So when I needed something done, I was frantically asking people, calling people, trying to have have people give me their contacts and you know, getting problems fixed. And if you have these contractors lined up beforehand, it would be much, much easier during the rental process. I mean, what I did usually was I lived at the property, but when there’s an issue, if it was something that I didn’t want to handle, I would have a handyman come in and he would take care of it.

Charles:
And he might come in you know, a couple hours a month, take care of this and take care of that. And and that’s how I did it. So I didn’t have to spend all the time doing it. And if I had a handyman from the beginning that I could just call on, give them a list of stuff to do one afternoon a month, it would have been a much easier route to go. Yvan trying to find one and then trying to fix the problem and all this kind of stuff. So make sure you have contractors and handymen lined up before you buy the property. Now, obviously you probably haven’t tested them out if this is your first property, but it’s having them lined up and getting referrals for them would be one of the best ways of doing it. Now, a lot of real estate investors, aren’t going to want to give you a handyman.

Charles:
They might give you their contractors as referrals, but handyman they’re very difficult to come by. Good ones. So just keep that in mind. Next was I did not accurately estimate the cost of the project. So I did not put aside an adequate renovation, CapEx budget. If I had known exactly how much it was going to cost to fully renovate the property, I think I did the whole property over really four years. Really, the first month I got, I think it was the first month I got everybody in or the first 45 days, everybody in probably the first three months to really work out the majority of the kinks. And then I think over four years I went through and I was changing, you know, hot water heater here. I changed, I replaced the roof and I was doing stuff little by little throughout the project throughout the years.

Charles:
If I did it again, I would do it all at once. If the item required immediate attention, but that’s something that just keep in mind next is I did not have accurate rent comps to know what I could and should charge and what finishes I should be choosing to maximize returns. So this is something that’s easily done today. We can go on to you know, Craigslist or one of these other websites and you can see what people are renting and you can see what the finishes they are that they have where the units are located. You know, what kind of I wouldn’t say amenities, but what kind of additional conveniences are being offered with the unit and then you can change, increase or decrease what you were planning on charging for rent. And you also know kind of finishes if you’re looking through all the neighboring properties in your neighborhood and you see none of them have stainless steel, they all have white or black appliances.

Charles:
Okay. So I shouldn’t be putting stainless steel in here. I probably can’t get my money’s my money back on it. Maybe I’ll put nice black appliances in here and do that kind of a package on the units. Next was I planned and clearing all three floors, so it can move into one of them and then move from friends into the others. So this was about a mile and a half from the college I graduated from. I had friends that had not graduated college with me and they wanted a place to stay. And so what I had to do is I, you know, I, it was, it was really a pain to move out all the floors. I had to do some repairs, but I charged my friends more rent after cleaning and clean the units and making the repairs that rewired in those units.

Charles:
But it was a lot of hassle. It would have been much easier for me to find a property that had, you know, one tenant a month, a month or one tenant that wasn’t in there you know, one vacant unit and move into that. But I’m really, if I purchase a renovated property, I would have avoided a number of mistakes now with a renovated property. It’s very, to know that there’s going to be things that just because it’s been turnkey or someone tells you it’s turnkey, or it looks turnkey or, you know, you bought it from a flipper, which I’ve done before. They’re still, you know, it’s still important to notice what hasn’t been changed or what might’ve just been done makeshift, right? Hey, there’s probably some serious problems that have to not serious problems, but there’s needs to be some issues that were literally just painted over here or you know, they fix these windows, but they’re going to have to be replaced.

Charles:
And just knowing that going in and then knowing how immediate it is as well. I’ve purchased a property before and I knew, okay, in five years, within five years or so, or I’m going to have to, or I should be changing the windows in this property. And that was something that you know, going in and you say, well, it’s not a problem now when those open windows close, but you know, that’s the goal is I have to do this. I have to do that, but these items are immediate and these are something that can be done in 3, 4, 5 years down the road. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar LLC exclusively.