Real Estate Investing: What I Didn’t Know DID Cost Me
My first real estate investment deal followed about sixteen years of way too much thinking about it, and zero years of educating myself on how to do it properly.
When I was in college during the early 1980s, I read Robert Allen’s best-selling book about real estate investing, “Nothing Down”. By the end of the book, I had resolved to become a real estate investor. After all, I had started helping my uncle put in drain fields during summer break at the age of eight, worked for another uncle painting houses at the age of 16, and then hung drywall for about three years before going to college. I may have been an electrical engineer, but I was also handy in construction and knew that I could do my own rehab work if necessary.
Then, after living in a townhouse for twelve years with a growing family, I read Robert Kiyosaki’s entire “Rich Dad, Poor Dad” series and decided that it was time to upgrade and invest. I purchased a 1,296 square foot brick rambler two blocks from my townhouse and decided to finally fulfill two long-time dreams:
- Rehab a home for profit while living in it
- Build my dream home – a log cabin (this was mistake number one)
I acquired the property for $365k on January 12, 2004 and (mistake number two) only then began to plan my rehab. I designed the house myself (probably another mistake), ordered my log package, and then began looking for contractors.
My log package cost about $65k, which I purchased with a credit card to get the mileage points. The logs arrived on April 29 and my crew showed up by May 7, when they promptly started tearing the roof off to the sound of rock and roll blasting at top volume. My new neighbors were less than amused.
By May 14 the roof trusses were being installed, and the log cabin was under roof by the end of the month with a whopping 3,744 sq ft of living space. My electricians, plumbers, and HVAC contractors then began their battle over who had to work where first, and I started my own personal side battle with the electrician. Before the job was over, I had to fire the electrician and finish that work myself. Once the proper inspections were completed, I began hanging the drywall myself.
Spending got a little out of control as we didn’t yet have a plan or budget for the tiling, other floor coverings, and kitchen. I envisioned low cost, but instead we went top of the line. It all turned out fine except for a leak in the master shower, which took more than a year to resolve. I finally fired the original tile guy and replaced him with a new one.
We were moved in by early August with the upstairs complete, aside from the stairway railing, so that I could sell the townhouse and get back down to one mortgage payment. Without a financial plan, my singular focus was to reduce the pressure of having two mortgages by getting rid of one.
With the house still in a state of construction, I had an appraisal done so that I could move from a temporary construction loan to a mortgage. The appraisal came in at $850 because the house was unfinished (no living room, basement, or front porch). The appraiser said that he could not give me value for the unfinished work but encouraged me to get another appraisal when the house was finished, estimating that the appraisal on the finished house would likely come to be about $1.2M!
Motivated by the appraiser’s optimism, I started to think about selling the log cabin and finding another place for us to live. But in the end, emotional attachment got in the way. After all, we were building our dream home.
Then 2008 came and the $1.2M value evaporated overnight. In 2011, after surrendering the idea of a $700k profit, we sold that house for $725k, making away with $210k. The profit on the townhouse, which sold for $418k, had been $246k, meaning we effectively lost $36k on the exchange.
Lessons learned:
- Don’t build your dream home until you have the cash to pay for it.
- Don’t build a Log Cabin in a Cape Cod town. (If we’d built a Cape Cod rather than a log cabin, the value of the property would not have taken the dip that it did. We could have had a bidding war that would’ve maintained value instead of having a single out of town cowboy bidding against himself.)
- Don’t live in or become attached to an investment property. Always be ready and prepared to sell for maximum profit when the opportunity presents itself.
- Arrange your contractors in advance as a part of the plan before you buy the property. Put them to work as soon as you have possession and permits.
- Get architectural advice and optimize based upon the neighborhood, environment, and market.
- If the market takes a bad dip when you want to sell, rent instead. Values will return, and rent should be able to cover your mortgage.
- Establish a realistic fixed budget for the entire project and stick to it.
Had I had access to the education I know possess, I could have learned these same lessons in advance, and avoided dissolving years and hard-earned cash on a “dream house” I ended up selling that should have been an investment property.
Moral of the story: Don’t make the same mistakes I did. Get educated before you begin so that you can make the best use of your time and maximize your return on investment (ROI) year after year.
Re-reading this for the first time in a while, I still like what I said. Either no one else it reading it, though, or no one else likes it.
Which is the case?