Real estate cheerleaders want you to think that real estate investment is all unicorns and rainbows and crystal clear, sparkling rivers of easy cash flow.
But you follow The Mortar Blog to hear the truth.
You want to know from a pro what it’s really like, the good AND the bad.
You want to go into it with your eyes open, know what could happen, and maybe even avoid some mistakes that others (including me) have made.
Today, I’m going to talk more about my first deal it, the deal that keeps on giving, and giving, and giving . . .
. . . me heartburn. And nausea. And headaches.
This deal has had everything that could go wrong go wrong.
During due diligence, there was a potential environmental issue. Fortunately, when we did the Phase II environmental, there was nothing. But now I wish we had found something and I had exercised my right to cancel the deal . . .
Next, our management company put the wrong manager on site, supervised by the wrong regional manager, and occupancy started to fall.
When that happened, turnover costs rose – a double-whammy that killed profits.
I had to stop paying distributions to the investor and paying management fees to myself. I thought that would be temporary, but the situation has gone on for three years because . . .
Occupancy went back up, but tenant quality didn’t. So we had constant churn and lots of bad debt and no profit.
Then, the property manager wasn’t paying attention to vacant units during the summer, there was a water leak inside a vacant unit and . . .
. . . black mold took over three vacant units. They had to be rebuilt. That took time because the property had no cash.
Then, the property did not make its debt service coverage ratio (DSCR), and the bank took over the bank accounts.
Finally, we got the DSCR back up to where it was supposed to be, but then one problem after another . . .
. . . Water main breaks. We had several. Every time we started to get cash flow back on track, we had some unexpected capital item to deal with. We had 3-4 water main breaks over a short span of time. Each was enough to soak up any profit that we had from the property.
Finally, those were out of the way, and we looked to be back on track. Then, a month ago, we had a tenant-caused fire. Three units down, and the insurance company is holding up the insurance proceeds because they think the contractor they hired is padding the estimate.
And then, this morning, another tenant-caused fire! Probably someone forgot to turn off the electric stovetop and left for work. Another six units down! And in the news for a fire at the property again!
This is the dark side of owning property. Sometimes you get a property where things just go wrong, even when you do everything right.
We did our due diligence properly, with proper engineering reports, etc., but that did not show us the problems with the water mains underground.
We hired a reputable management company with lots of resources at its disposal, but they put the wrong people on the property.
We replaced them with a better management company, and then tenants cause two major fires in a month.
There were mistakes I definitely made, too. One was not capitalizing the property enough at the start. It was my first deal, and I was so concerned about investor returns, that I tried to raise as little as possible. I should have raised money for a reserve fund, which is something I do now, and advise my students to do in my basic multifamily real estate investing course.
Another mistake I made was to leave the first manager in place too long. I believe everyone should have a chance to fix their first mistake, but it wound up costing me. They made more mistakes after that, compounding the original mistake of putting the wrong people on the property. I won’t make that mistake again.
But, sometimes, you just cannot win. You just have to be prepared for this to happen. If you can’t deal with things and bounce back, you won’t make it in this business. You need to be resilient.
But sometimes it just feels like your resilience is tapped out.
What can you share with our readers to show them the potential downside of real estate, or mistakes that they might avoid?
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Feature post photo by Bernadette Gatsby on Unsplash.com