In June 2021, Selenid and I bought our third real estate investment property. It is now about 7 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 lessons that we learned.
First a refresher on the property…
It is a 3 units 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 is what we bought it at.
Expected cash-on-cash return based on our initial evaluations was upwards of 30% 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 screen and analyze investment properties the right way.
However, we did make mistakes with this property that have taught us same 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!
3 real estate lessons learned from this investment property
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 3 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 tenants 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 have 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 out 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.
Let’s now talk about how we fixed these mistakes and what we learned!
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 out real estate portfolio.
1. Inheriting tenants
This is something we probably won’t do again in the future. We would ask the seller offer the current tenants cash for keys or use another strategy.
Or, if we do inherit tenants, we would do a bunch more due diligence on their behavior and payments.
In this case, it took nearly 6 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.
2. We have had to fix a LOT of stuff…
…because we didn’t do an inspection beforehand. Most notably we have enrolled in a monthly extermination program that has resolved the rat issue.
But, once the two tenants moved out, we had to do a ton 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 upon buying the property increased to an actual total expense of about $16,000!
Again, more due diligence was needed on our part and will be enacted with the next purchase. And in all but the rarest cases we will likely 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…
…is not something we will be doing again. Despite our love for our investor agents.
An update on the property’s cash flow
Through 6 months of ownership, the property cash flowed a measly 3.4%.
But, it’s a different story now!
In the past month, we have the two tenants move out. We repaired everything as needed and re-painted everything. Then we had both unit thoroughly cleaned.
Next, we advertised them and within a week had both rented out for $1200 and $1250/month.
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 out 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 later 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 a bit 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 these as real estate lessons learned 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!