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ADVICE FROM EXPERIENCE

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Newbie Fails

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Remember how I spoke about feeling like a newbie? 

Well, it didn’t end there. In fact, I’m constantly reminding myself that I’m an amateur. In an effort to encourage those of us who are completely green to real estate investing, I’ve shared a few of my most humbling mistakes below. Hopefully, you will be able to avoid some of these same pitfalls. Please share some of your novice blunders too!

 

  1. I learned pretty early that easy work can be made hard if you don’t have the proper tools. When we started building our RE toolbox, we thought it would be easy and cost effective to buy a Mr. Seven Hands  instead of multiple screwdrivers. Boy, were we wrong. This thing is a mess. It’s easy to keep handy, but it’s hard to use in tight places. It tries to fold when you are using it, which is annoying! To be honest, I’m just plain embarrassed at even owning the thing. Can I still call myself a serious investor?
  2. During our first phase of renovations, we felt like complete idiots when we realized how much trim needed to be painted. Our 1920’s triplex is filled with beautiful crown molding, floor molding and tons of detail. After we got a good dose of the time-consuming nature of any paint job, we stopped and looked at our trim work and almost wept. Newbies just don’t know! Paint Lesson #1
  3. Is it a beautiful rainy day outside? If so, do not paint a room with windows or doors open. Paint will bubble when introduced to moisture and humidity. We spent more time scraping and sanding than we did painting on this one. Paint Lesson #2
  4. If you are like me, you aim to get the job done regardless of the circumstances. I get tunnel vision towards the end of a project. So, it’s no surprise that I stubbornly continued painting the exterior of my house, even though temperatures were dropping. Paint Lesson #3, paint peels when it dries during low temperatures. Scrape, sand, and paint again.
  5. I had the electrician over one day to fix a fan, which had apparently given out. So, I ran to Home Depot and picked up a new one. Being the frugal gal that I am, I bought one of the cheapest ones available. Looking back, I’m surprised that the electrician didn’t laugh and walk off the job. Instead, he politely said, “This is for a bathroom. You’ll need to go back and buy one with a fan blade of at least 52 inches…” Duh.
  6. How many of you can install your own appliances? Well, I’m learning. I had to order an extra-long dryer cord not long ago. I wanted to make sure the length was long enough before installing it to the dryer. So, what did I do? I plugged it in the outlet—ungrounded. It tripped all of the breakers in the house and blew a hole straight through the shirt I was wearing, charring my undershirt. Sheesh! I should have known better. I’m turning red just thinking about it. Electrical Lesson #1
  7. I hate popcorn ceilings. So, here I am in the bathroom spritzing the ceiling with water when all of a sudden the exposed light bulbs explode sending shards of glass everywhere! It nearly scared me off of my step stool. Every idiot knows that cool water and hot glass don’t mix, but sometimes I’m brainless. Electrical Lesson #2
  8. Our most recent building purchase has fuses instead of breakers. This is new for us. So, we are tinkering with the fuse box trying to figure out why some of these Edison fuses don’t fit. Then, it hits us. Part of an old fuse is stuck in there! So, my partner goes to work trying to pry that old fuse out… only to realize that we are buffoons. That particular spot required a small-base fuse, not an Edison. So, we had to call the electrician out to fix the mess we made. Electrical Lesson #3
  9. We went from being renters in June to owning 7 units in January. That means that we have 7 house keys, a cellar door key, a storm door key, and a rent box key. Throw in the fact that we have 2-4 copies of each key, and you can see that we are confused! Can you imagine how embarrassing it is to bring a contractor over and then fumble with key after key? It is one thing to feel like an amateur and it’s something completely different to feel like an amateur in front of a professional.

You can bet that we’ve learned from these blunders and made appropriate adjustments. Please tell me I’m not alone. If you are a know-it-all, expert real estate investor, I encourage you to pull from your past. Enlighten us with your former fumbles. It can be humbling for you—and encouraging to us all.

Perhaps Not The Best Way To Collect Rent

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Trying to collect rent with a chainsaw is not going to end up well for someone.  Landlords, don’t do this.  Not even for $17,900.

Self Directed IRAs – A Smarter Wealth Building Tool

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One of the first things I learned about when I was considering getting into real estate investing was the self-directed IRA.  If you have never heard of such a thing, a self-directed IRA is very similar to the more “traditional” IRAs that most associate with their jobs.  The main difference is your investment choices are not limited with a self-directed IRA.  With a self-directed IRA, the sky is almost the limit.

A self-directed IRA is just that, self directed.  You make the choice of where to invest your money.  If you wish, you can go the traditional route and invest in stocks, bonds or mutual funds or you can buy real estate, make loans, purchase options or notes and a whole host of other things.  Like I said, the sky is almost the limit.  This sounded great to me, so I opened one up and have been using it to invest in real estate ever since.

When I was still in the “working” world, I had several of the more traditional type IRAs with investments in stocks and mutual funds.  And they were doing OK.  Before I went into full time investing, I set up mu self-directed IRA and began contributing immediately.  There were a couple of reasons for that:

  • It is easier to set up when you have a job and job related income.
  • Once I quit, I could no longer contribute rental income towards and IRA (rental income is passive income and is not allowed to be placed in an IRA).  So I was able to build up a little bit of a slush fund so to speak.

After I went into investing full time, I discovered another advantage.  Since I was no longer employed, I could now roll over all of the funds from my other, job related IRAs into my self-directed IRA.  This action created a nice lump sum for me to invest with.  But be warned, the companies managing your IRAs do not like to let you leave.  They erect many barriers and roadblocks.  Just be persistent and you will win.

Today I have several rental properties held by my IRA.  These were purchased with the cash I had saved and rolled over.  I looked into leveraging this cash by getting a loan, and while it is possible to do, you may shoot yourself n the foot due to something called Unrelated Business Income Taxes (UBIT).  So talk with a trusted CPA before you do that.

I strongly recommend any real estate investor look at the potential of a self-directed IRA.  The returns can be phenomenal and potentially tax free!  You just need to find a custodian to help you get set up.  I use Equity Trust and have been very happy with their service.  But shop around as there are several custodians out there.

If you do set up a self-directed IRA (and I hope you do), here are some tips for you:

  • Keep some cash inside it for repairs and maintenance.  You cannot co-mingle your own funds with IRA funds.  Any repairs needed to a property held by your IRA must be paid for by your IRA.
  • Invest jointly with your spouse.  You can, for example contribute 50% towards a property and your spouse can do the same out of their IRA.  It is a good way to make your dollar go a little farther.
  • Mix things up a bit.  Buy some rental properties.  Make some loans.  Purchase an option.  Spread out the risk.

So look into a self-directed IRA.  Trust me; you will be glad you did.

Anyone got a good self-directed IRA story out there?  Had a huge tax free return or score a big deal?  Let us know with your comments.

 

The Building Boom Is On!

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In apartments that is.

I have been noting that rents have been going up all over the country.  Vacancy rates are also historically low.   

These are conditions that make it nice to be a landlord.  But these conditions are also good for apartment builders.  Builders are responding to the increased demand for rental units and the incentive of increased profits through increased rents by building new apartment complexes all over the country.  Here are just a few examples in San Jose, Philadelphia, Charlotte, Nashville, New York City, and Dallas from the past week alone.

If you are in the apartment building business or thinking about getting into it, now is the time.

I wonder if an apartment building boom is in the works?  Will it bust someday?  Time will tell.  

The Squeeze Is On!

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The squeeze is on!  Rents have definitely been on the rise in the last few years.  I wrote about rising rents here.  Problem is, everything else is going up as well as the graph below from David Stockman’s ContraCorner.com demonstrates.

 

I had a suspicion people were going to have a hard time paying all of these inflated prices, now there is some proof.

A recent article in The Guardian demonstrates my concerns.  People are cutting back to be able to afford the rent.

The high cost of private rents is forcing some tenants to cut back on heating and food, according to a poll, underlining the pressure rising housing costs are putting on household finances.

A survey of 1,000 tenants commissioned by the campaign group Generation Rent found two in five had reduced their energy bills, while a third have skimped on food to cut costs. The group, which is calling for reforms, including a national register of landlords and more affordable privately rented homes, said that the number of people facing problems is rising as the number of tenants grows.

Yes, this article references the UK, but you can bet the same thing is going on in this country.  It will not be long before people start “cutting back” on the rent or calling for “reform” of the rental property market.  Stay tuned!

Final Update – Property Reappraisal Challenges 2013

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I began this journey almost one year ago on March 31, 2013.  It started when I received my property reappraisal letters from our local property assessor.  Here in Tennessee, property assessors have to reappraise all properties every four years to adjust values due to fluctuations in the real estate market.

Due to the continuing weakness of the real estate market following the collapse of the bubble in 2008/2009, I was expecting an overall decline in value.  Imagine my surprise and shock when the property assessor actually proposed an overall $500,000 increase in value!

No way was that going to stand!  The assessor was just plain wrong and I was not going to take a $15,000+ hit in property taxes every year because if it.  I challenged the property assessor on many of my reappraised values and I wrote about that process here, here and here.

How did all of that it come out?

It came out well.  That $500,000 increase was reversed and worked out to an approximately $5,000 decline in overall value.  You can fight city hall sometimes!

So what have I learned by going through this?

  • Be Prepared – You have to sharpen your pencil and do your homework to justify your opinion of a property’s value.  You cannot just walk in and say the value should be X without justification.  I saw many do this and just get turned away.  Being prepared means you have to use solid comps of actual sales in the immediate area of similar properties.  If you do not have access to some sort of property sales database, get one.  Also, ask the assessor what comps they used to justify their value.  It is public record, they have to tell you.  Knowing their data can give you a real leg up later on.
  • Take Pictures – Take lots of them.  Take pictures of the property inside and out, adjacent properties, the street view, whatever you think might help your case.  Make copies and hand them out at your hearings.  They really do help explain your position.
  • The Process Will be Frustrating at Times – There will be many layers to go through.  Hearings with this person, meetings with that person, collecting data, phone calls, etc.  You will get frustrated at the bureaucracy.  Keep the goal in mind.
  • Stick to Your Guns – You are a real estate investor; you know what the value of your property is.  After all, we investors have to know what the values are or we would go bankrupt.  Plus, after you have done your homework, you have the data to back you up.  Don’t take any deals.  Stick with it.
  • Persistence Pays Off – Throughout the appeal process, the assessor’s office tried to make deals (which makes me wonder about their original appraisal in the first place but that is another story).  Sometimes they would see things my way and we would agree.  Other times they would suggest meeting me halfway.  No way!  Keep going forward.  Eventually they will often come around.  I only had to take one property all the way through the process (where I won!) so be persistent.
  • It Will Take a While – Remember, I started this process almost one year ago. My last update was on June 23, 2013.  I just finished everything up last week.  They are in no hurry to give you a tax refund and there is nothing you can do to speed the process up.  Just be patient and ready when your time comes. 

Let me wrap this post up by saying that this process was not difficult and I think anyone can do it.  Give it a shot next time you buy a property that you think your local assessor has overvalued.  Finally, let me give a plug to the staff at the assessor’s office.  They were at all times cordial, helpful and never adversarial.  I do appreciate that. 

Rent Too Damn High?

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Looking for a cheap place to rent?  Then this article from Apartmentguide.com may be able to help you.  In it they outline the top ten cheapest metro areas in the US when it comes to rent.  There is some other interesting info in there as well.  Check it out.

Don’t Spy On Your Tenants

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Landlords – if you put hidden cameras all over a tenant’s apartment like this guy did, you are going to go to jail.  Don’t be that guy and respect your tenant’s privacy.

How Nextdoor.com Can Benefit You

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I’m a millennial. Naturally, I’m registered on at least 6 different social media sites—all for different reasons. Each social media site provides a unique platform. Facebook keeps me connected to family and friends. LinkedIn provides me with professional visibility, and Pinterest keeps track of products that appeal to me.

So, which social media platform is best suited for the real estate investor? Nextdoor.com

Nextdoor is a social media site that connects people within specific neighborhoods. In order to register on Nextdoor, you have to first verify your address to proving your residency in the neighborhood. You must use your real name.

The site allows for neighbors to exchange information about block parties and community clean-ups. Neighbors can buy and sell items between each other, and they can report break-ins and burglaries instantly. Good neighbors make good neighborhoods. I enjoy the camaraderie that this site provides.

While, those are my personal reasons for using Nextdoor, it has benefited me greatly as a new investor as well.

 

Example #1:

I marketed a vacant unit in the area on Nextdoor. Within 24 hours, I had an application submitted based on a neighbor referral. No multiple showings; no craigslist chaos. The applicant is now a wonderful tenant. I would rent to her a million times over.

 

Example #2:

I posted an inquiry about a property, stating that I was a real estate investor. Within minutes, I began receiving messages from other real estate investors in the area. These investors provided me valuable information about the property. Plus, I am now connected to other well established investors who farm in my area. This pool of investors are my competition—as well as potential mentors.

 

Example #3:

I was working in a unit when I discovered that I needed a reciprocating saw. I’m a new investor. I have yet to purchase a ladder, let alone a reciprocating saw. So, I posted on Nextdoor asking if anyone would lend me or rent me their saw. Within 30 minutes, a neighbor was at my doorstep, saw in hand. If that’s not neighborly love, I don’t know what is!

 

Example #4:

Many of my neighbors know of me, even if we haven’t met yet. They know which properties I own, and they appreciate my investment in the area. This neighborhood-wide recognition will undoubtedly add to my credibility as an investor. Recently, the neighborhood association newsletter editor asked me to participate in an interview, which I happily obliged. Companies are told to market their brand. As investors, we have to take advantage of opportunities that allow us to market ourselves!

 

I encourage all new investors to consider unlikely resources, like Nextdoor, when developing your RE portfolio. I also encourage me tenants to register on Nextdoor as well. If my tenants are grounded in the community, surely they won’t want to move. At least, I hope not.