How the Reality of Investing in Real Estate Compares to my Expectations
I try really hard to provide a realistic view of the various investments that I have on this blog. I do this because I truly believe that there's a way to make your money work for you that fits your specific style, but also that not every type of investing works for anyone. Take real estate investing specifically, clearly I love to do it- but I am also a firm believer that not everyone should jump into real estate, other than their primary residence. This is because there are definitely pro's and con's to this path that wouldn't work for a lot of people - which is completely fine, but I think it's crucial to figure out for yourself, which path you want to take. To help you in that journey of discovery, I want to discuss the comparison of what I expected real estate investing would be like against what it's actually been like for the past three years. So, with that being said, let's jump into this:
It Doesn't Move as Fast
When I was reading books and blogs and forums and anything else I could get my hands on before taking the plunge, I was always able to come across success stories of people who were able to buy 20 houses in a single year and were able to ramp up their businesses super fast! This just hasn't been the case for me, but at least I know why. You see, when Mrs Money Smith and I decided that we would actually buy an investment property, the original plan was to purchase one house with an FHA loan, live in it for a year, then move into another property using the same path. We would then be able to rinse and repeat this method for a few years and successfully build up a small portfolio through utilizing the low down payments required and ultimately own a few houses with not a whole lot of money put into them.
The reason I believe that this didn't work out the way I planned is because of life. When we moved into the house, we went a little overboard and renovated the first floor into something that we fell in love with, (find out about our renovations here). While putting the time, energy, and money into the house has paid off, it took away most of our ability to move away from that house. I look at the fact that we bought that house in December of 2015 and we still don't have a second property, and I now realize that the real estate game isn't something that will move as fast as originally hoped. Add to this scenario, the fact that we moved to CA and have pursued our personal careers in a different path than expected, and we've just been really busy! If we had lots of disposable money, I'm sure we would have purchased another property by now, but we've also shifted our focus on paying down debts that we had, to then be able to save up more for our property portfolio in the future. The short of it is that life just happens, considering we jumped in at the age of 24, with a whole lot of debt, having to figure out life as it comes, I think we're doing pretty well.
It Doesn't Require as Much Cash Out of Pocket
I expected investing in a multi-family home to be a huge money-suck for our wallets, but it turns out that when you buy the right investment you're able to pay for problems with the rent roll. I seriously expected that the first year or two for our house would be cash-flow negative, luckily we were both in well paying jobs and we would be able to survive paying for repairs until we would be able to turn a profit. This was very far from what happened. We were cash flow positive within the first 2 months of owning the first house! Once we had replaced the current tenants with new ones, we were able to bring our rents to market level and no longer had to subsidize our property.
The thing about houses is that they have relatively reliable repair schedules. A water heater generally lasts between 8 to 10 years. A roof generally lasts about 10 to 15 years. These are expenses that I budgeted for when making the offer on our first property, and because they were budgeted for, we were able to get a good price on the home that allows us to put money away each month for those repairs. The first major problem to come up with our first house happened three months into living there. A water heater broke down and started to flood the basement - luckily I was there when it happened and was able to get the water shut off pretty quickly. The repair itself was a relatively cheap fix, but we ended up replacing the water heaters a few months later anyway. The point of this is that other than a few big ticket repairs, (that you can plan for), there's not a ton that can go wrong with a house unexpectedly. This was a great piece of information to discover, as it means that we don't feel the need to keep large amounts of cash liquid in case of emergencies, (though we still keep some).
It's Not as Easy to Run Like a Business as I Want
Everything that I read on the topic of real estate echoed the same thoughts, "you need to run your properties like a business". I told myself that I could be hard to tenants if I needed to be. I told myself that I wouldn't let tenants take advantage of me. I told myself that I would maximize the amount of money that we could pull in on every single property! The fact is that this is so much easier said than done. I know there are lots of real estate investors out there that are able to treat their tenants like paychecks, but for my personality, I have a hard time with that.
From the first tenants we inherited, when I wasn't able to raise their rents to market rates because I felt bad for them and their kids, I've been really soft with tenants. Part of this, I like to try to blame on specifically being in Massachusetts, where landlords are seen in a poor light by the courts, but the reality is that I'm just too human to treat people as just a rent check. My tenants have had issues in the past, maybe not paying rent on the 1st of the month, or requesting something of me that they could really handle themselves. I've always tried to address their issues head on, but I know I've been soft. This has changed over the past three years, and I've learned how to be better at setting expectations with tenants, but it definitely didn't start that way. Having the inherent ability to walk into treating tenants in a way that gets the optimal outcome is exceptional, and one that I don't know if I'll ever completely master, but it's certainly not one that I possessed from the start.
Knowing how to Protect Ourselves is Hard!
This really goes into a greater topic, that is the fact that there are just so many opinions on how to protect yourself, that it can be hard to decipher what is truly the best approach for us. When I talk about protection, I'm mostly referencing the legal aspects. Sure, I knew that I would want to conduct a credit and background check on all tenants, and collect security deposits to protect the property. I also knew that I would need to get special landlord insurance to protect ourselves in the event of needing to address something in court. What I didn't expect was that every single person I would talk to about the topic would have a generally completely different opinion that the last.
I didn't realize that I would need to sift through as much information as I have before coming to my own conclusion on the best approach for us. I actually thought that since real estate investing has been successfully happening for thousands of people that it would be baked down to a science. As it turns out, because of individual state laws, and each investors individual expectations, there's countless ways to really make sure that you're protected. I still research ways to make sure that we're covered every few months, but I'm never fully convinced that we're set up the best way.
The Time Commitment is Mostly Upfront
I expected that we would need to do something with regards to the property every week. That turned out to be just completely wrong, and I'm glad it did. We did spend a lot of time in the first few months of living in the property making repairs and adding our own needs to the apartments, but once that was completed the home essentially fell into maintenance mode. The beautiful thing about houses is that they are meant to stand up to the elements and exist for a very long time. Our property in Massachusetts was constructed in 1898, that means that as of writing this blog, the house has been standing for 120 years! Over that course of time, there haven't been too many changes to the property other than mostly cosmetic updates through each of the different styles that a house can assume. We could have very easily purchased the house and left it mostly alone and it would still be doing just fine, as it is today. Now that the house sits in maintenance mode, I really don't have to do too much. That's why I'm able to take care of the house all the way across the country in California! Part of the reason that this is so easy is because we did put a lot of money into making sure that the big ticket items in the house were brand new and functioning correctly, but I believe this would have been a necessary step for any house, regardless of it's proximity to me.
I Cant Control Every Outcome
The unfortunate reality that I had to come to grips with is that mistakes will happen regarding a property and there's just not a whole lot that I can do about them. Sure, there are mistakes that have been made that were my fault, I can take ownership of those and train myself not to fall into similar pitfalls in the future. There are also mistakes that have happened, through other's faults, that I've had to learn to cope with. One such mistake was a contractor installing exhaust vents out the wrong side of our house when installing the previously mentioned water heaters. My initial reaction was one of anger and frustration, I was under the impression that I had set expectations appropriately with the site manager and that there wouldn't be any issues. This obviously wasn't the case and I came home to find that our vents were poking out of the front of the house. This was a huge eyesore for our property and I had some options on how to address this. I could fight with the contractor and get them to fix it, and likely have a hard time dealing with them in the future, or I could plant some bushes in front of the house to block the vents. I went with the second option, which actually turned out for the better as I feel that the bushes have actually added curb appeal to the property.
Another mistake happened when our mortgage holder realized that they hadn't paid the correct amount for property taxes. This wasn't a big deal to them as they decided to just increase our mortgage payment by about $300 for a year. This was a huge deal to me as it was clearly something that would cut into my cash flow each month. Luckily, because we were already cash flowing relatively strong with the property, we decided to let the decision stand and just eat the costs, (but we honestly didn't have a choice).
What I'm getting at here is that even though I expected that I would be able to control each outcome related to the house, the fact of the matter is that when dealing with humans we have to accept that not everything will be considered. What was a simple mistake to the contractor, was a huge deal to me at first, but looking back - I've realized that I need to make sure I set expectations more clearly in the future, and I simply won't work with that contractor ever again. With the mortgage scenario, I've realized that this situation can just happen, and what I need to do is to prepare for sudden increases in monthly mortgage payments, making it even more important to analyze properties correctly. Mistakes are a fact of life, and I've had to learn this as I go.
Real Estate Investing Was Right for Us
These are just a few of the differences that we've experienced in our short time as investors, but I'm sure the list will grow in the future. I have yet to come across every problem that could exist in this game, and I hope that I will be able to grow to meet these challenges as they come up in the future. I still feel that this path was the right one for us, it has enabled us to provide lives for ourselves than I really ever even thought imaginable, and this is just from one property. Over the next few years, our investing efforts will ramp up much more and I look forward to sharing those moments with you. In the mean time, I'll do my best to continue to portray the information in a realistic light that can show both the good and bad sides of my journey.
Now the fun part: What surprised you in this post? I feel that I was definitely much more naive three years ago, but I've realized that many people are in the same boat, no matter what their age or capabilities are. I'm just lucky enough to have started this journey early to give myself the chance to learn as I go and set myself up for more future successes!
Special thanks to Rob for giving me the topic for this article, I really appreciate the fact that you take the time to read this stuff!