In 2018 I was making good money and decided to invest in real estate. Like many others I had been an ardent follower of the Bigger Pockets podcast and had decided to follow my own version of the 'stack method’.
I had planned to first buy a SFR (single family rental) in a tertiary market, then a duplex, a triplex and finally a fourplex.
Once I had this little empire of 10 units, I’d planned to sell and do a 1031 exchange for a 10 unit building.
Why not 5 or more units from the start, you ask? Anything 5 units or more is considered 'commercial’ property so it’s subject to different financing requirements.
I was planning to use the equity built in the initial properties (with some clever renovation) to buy subsequent ones.
I bought that first SFR: a 4 bed 2 bath in Jacksonville FL and learned a TON of lessons that I want to share.
The mortgage was around $800/ month and I rented it for $1100/ month ($200 shy of what my enthusiastic real estate agent had told me it would command).
I kept the property for 2.5 years and it became such a headache I just sold it last month for $20,000 more than the initial purchase price.
- Old houses break all the time and this ruins your cash flow. My house was built in 1956. I literally got calls about HVAC issues, plumbing issues and mold all the time. After 2 years of collecting rent, I about broke even. No real profits because of costly repairs.
- Contractors rip you off. I bought a house out of state and because I had a 646 area code and a British accent, contractors ripped me off. I’d guess that I spent on average 50% more than locals on repairs because I’m not physically there. They were slower to act and charged more.
- The income is not passive at all. I decided to self manage to learn the business and also save a few bucks. It is a LOT of work. Tenants think landlords are fat cat millionaire slumlords at their beck and call to fix every minor issue. My tenant asked me to replace ALL the wooden flooring in the living room with only 3 months left on her lease because an HVAC leak caused some light bubbling and discoloration on the floor. A leak she took 2 weeks to tell me about. The cheek. This was one of many instances.
- You will likely have nasty surprises awaiting you at move out. The tenant is the only one reporting issues to you. Nobody else has eyes on the property for the whole lease (2 years in my case). If they decide they can live with a broken cupboard door, mold or a poorly draining sink, you won’t hear about it until they move out. Then you’re stuck with a fat bill to repair a bunch of things at once, where a lot of issues could be dealt with more cost effectively if addressed immediately.
- You’re relying on the tenant’s word. I was then told by the tenant that they had ‘toxic mold’ all over the house. The Oscar worthy phone calls had me thinking the house was unlivable. Withholding of rent and lawsuits were threatened naturally. Florida gets humid: a $400 mold inspection yielded that it was non toxic and that the filthy tenants just needed to air the property once in a while. Very frustrating.
- Margins can be tight on SFRs. There are SFR deals out there making $2000 a month cash flow. These are few and far between in my experience and I shoot for $200–400 per door as per BiggerPockets wisdom. Without the economies of scale of say 20 units, you can run very tight margins. When my local taxes were reassessed and increased my monthly payment to $950 from $800, all of a sudden my net cash flow shrunk to basically nothing. Add that to all the money I spent on repairs and this was liable to turn into a loser of a deal. Luckily I got some solid appreciation in the 2 years so I could get out without losing money.
- SFRs are hard to sell because there is a MUCH smaller investor marketplace than there is a homeowner marketplace. I wanted to sell my house in the middle of the second year with the tenants still living there. However everyone looking to buy in that neighborhood wanted to live in the property not buy it rented out. As such, since I had to honor my lease obligation to my tenant, I was unable to sell. So then I had to wait until the tenants moved out and then try to sell quick so I wasn’t on the hook for mortgage with no rental income for too long. Luckily it was a quick sale.
- Property managers don’t care about one SFR because they make their money on VOLUME. A property management firm cannot survive on the revenue from your $100–200/ month fees (assuming 10% of rent). So the firm ends up managing upwards of 100 rentals to rack up those fees. As a result you’re left with a manager that’s stretched super thin and doesn’t have their eye on the ball. If you don’t have tenant issues you’re paying monthly fees for rent check collection. If you do have issues, managers still have to seek your approval for any repairs. They also use their preferred vendors, who may or may not be the best or most cost effective. I’m not shitting on property managers… just SFR ones. It’s just not worth it to them. A property manager of a 100 unit building however will be a proper professional and you do get value. Scale is key.
- You could suffer a ton of vacancy if you leave it to tenant placers. I found a tenant placement firm that had a ton of great Google reviews. Fast forward 4 months and I was still paying mortgage with no tenant. I got desperate, fired the guy and placed tenants myself… within a WEEK. Turns out the guy was just using my house to chill or party in. I found empty bottles of Fireball whisky in the trash and couldn’t really find any evidence of him having shown the place to anyone. I thought a fee of the first month’s rent would be sufficient motivation but I guess not. Careful with these firms as vacancy is a cash flow killer — I was out $2,800 on mortgage before I started making a dime!
- Your tenant’s standards can differ from yours VASTLY. My lesson here was to be more prescriptive in future but… I asked for the lawn to be maintained to a reasonable level. I learned that was nowhere near specific enough as they decided to turn the yard into a jungle filled with dog poop and overgrown, dug up or dead plants. $4,000 of landscaping work needed when they moved out. I learned people have different standards of lawn care and that frankly tenants will never give a shit.
Undeterred, I’m happy with my experience, having now refocused on finding much larger properties to invest in. A lot of the aforementioned pitfalls can be avoided with economies of scale: more units in one structure.
I hope my experience gave you some useful insights and didn’t put you off property investing, it is rewarding and learning curve.
