While we have a diversified retirement portfolio mix of Roth and Traditional IRA’s and a 401k, we have decided to get into another form of retirement investments. Real estate investment. As someone who has been engrossed in the real estate investment world with other investors for the past couple of years, I have learned a lot. So much so that we decided to take the plunge on our own. This is solely to diversify our retirement investments even more with the hopes of early retirement through passive income. However, we just made our first mistake!
As someone who wants to be armed to the teeth with information, a lot of research has happened in the past few months to gear up to our first dip in the pool. We have spoken to other investors, listened to hoards of podcasts (Bigger Pockets is one of my favorites), networked at FinCon and our local TREIA meetings and read a ton of blogs. On top of all of this, we have decided which type of investors we plan to be and what our target market is and why. Let me just say that this takes a lot of time and energy because there is so much information out there, which is not any different than purchasing a primary residence.
Once the initial research was done, we had to work on financing. That is a completely different article all together because unless you have a lot of your own cash lying around to play with, creative financing is where things end up going. One way or another, we worked out our first round of financing so that we could purchase our first investment property. At this point, we knew that we were ready to pull the trigger.
After talking ad nauseum and narrowing everything down, we reached out to our real estate agent (who is a very integral part of the team we are creating!) to let her know that we were ready to start looking. She was more than happy to help, even though the target market we are looking at is about an hour away from us. This is still close enough to us so that we can roll by and check on properties randomly, but the ROI is much better than where we currently reside.
Now, most investors that I have spoken with purchase properties “site unseen” and go based on pictures, disclosures and gut instinct. Or so I am told. We are a little bit more nervous about this style of purchasing because I have seen a lot of houses that certainly aren’t all roses and sunshine!
Therefore, we went to this city multiple times looking at properties. We didn’t find anything on our first few trips that would suit our needs. This is because we are open to doing minor repairs to get the property rent ready, but we are not open to total rehab nor are we fix and flippers. Each investor has their own style, and what we are is buy and hold investors.
So after these first few trips we ended up finding a property that had been on the market, but we didn’t look at it on any of our trips because it was over the price point we are looking at. However, the seller lowered it enough to fall within our parameters, thereby triggering our interest. The pictures all looked really good and the area of town was decent so it shouldn’t be too difficult to rent. The price reduction apparently triggered a bidding war amongst investors, so we threw our hat into the mix. Because we were willing to close when they needed and we were cash buyers, we won the bid!
But, this was completely site unseen.
We had 2 weeks from the time that we went under contract until we closed and we wanted to get an inspection and see the property first. Our inspector is awesome and agreed to go down there to do the inspection (another integral part of our team!). I would meet him while he was down there along with the property manager that I was considering.
Upon arrival, the outside appeared to be as advertised. The inside, however, was a completely different story.
This property looked NOTHING like the pictures!
It was an older house, so there was plenty of potential to make it something really great. However, that would take somewhere between $40-50k and that was NOT in our budget. Nor are we interested in fixing and/or rehabbing a property. That is not the business model we decided upon.
I spoke with my inspector and property manager and we were all in agreement that this property was not as advertised and I would simply have to pull out. The only way I could stay in would be if they reduced it to almost nothing and basically gave it to us, but I would still have to fix it. And we simply have no desire to do that.
So now we are out the $500 Due Diligence that we paid. However, in my opinion since this house was not as advertised at all, that should be returned, but I know that isn’t how it works. Although, it should because that is just downright sneaky!
And on top of that, we are out the fee for my inspector. However, being the nice guy that he is, he agree to cut the fee in half since he didn’t have to actually write up the report or file anything. But he still needed to be paid for his time to go down there and do the inspection, which is completely understandable.
That being said, we are now out $750 for an investment property that wasn’t even within our set parameters and have to start from scratch. Needless to say, we are not pleased and a bit stung.
But, we try to learn from our mistakes so that we don’t repeat them. What we learned is that we simply cannot purchase a property site unseen, like many other investors do. We have to take the time to actually walk the property before we put an offer in so that we can make a more educated decision.
After all, these properties are supposed to be long term investments for us and we want them to be good, stable properties in highly rentable areas. So we are just going to have to put in more legwork on the front end to ensure that is the case.
Keeping in mind that real-estate will either appreciate or depreciate over time because of many factors, it’s also worthy to note that the purpose of the property may change over time. But the beauty of having a stable estate is that future generations will be assured a place to stay even after we’ve long gone, in such a scenario, quitclaiming the property as a gift to your next of kin could also be a good investment to their future.
Hopefully this lesson will stick with us long term and help us create a better investment portfolio. It still just stings that the lesson had to come at the tune of $750.