The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: mavendrill on December 04, 2020, 10:05:38 PM
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Almost 2 years ago I came here considering becoming a landlord and looking for advice.
https://forum.mrmoneymustache.com/real-estate-and-landlording/target-return-rate-for-a-rental/msg2282226/#msg2282226
After thinking about the excellent advice I got, I decided to pass.
User Jon Bon suggested I run the numbers on flipping it, and I didn't at the time.
Anyways, a lot has happened there and its taught me a lot, as someone who sat on the sideline.
First things first - I was originally thinking about offering 5k for the house. Its a gorgeous lot (though it was completely overran with weeds), but the house was a brand new roof (from charity) on top of almost nothing worth keeping - no working water or sewer or electrical, extensive structural damage - a shed existed which the bank later destroyed because it tested positive for meth. The bank probably plowed 10-15k hauling hazardous material out, boarding it up, reboarding it up after squatters got in, and tearing out the shed. Finally they listed it in ~January of this year. It eventually sold for $22k to a flipper who didn't need financing, while other offers that were higher were rebuffed.
Flipper was a pretty nice guy, I got to know him a bit, and he was not a scammer (as far as I could tell) - he pulled extensive permits and rebuilt almost the entire house (ended up replacing most of the rotted joists without needing to replace the 80 year old hardwood floors - this made me nervous but it looked great when I toured afterwards. He redesigned the houses layout (more convenient to remodel when there is nothing left to the house), and managed to turn it into a 3bed 2 bath. A small but nice and modern kitchen, laundry, one great room (pretty small) and 3 bedrooms. Cute place. The work took forever because of COVID (and maybe other things). He bought it in February, and listed it in September. As the summer went on, I kept getting nervous for the guy that it could never even remotely sell for enough money to make him any cash. While prices had been going up in the neighborhood, that model of house was still selling for the 65k-85k range. The day it went for sale I understood - he had listed it for 165k, more than double the typical for that house size in that neighborhood.
It sold in 4 weeks for 163k. (Note - this is not an area of the USA where people get more than asking price ever, so he presumably was very happy to get 163k). I assume he made his money and then some.
But who would buy a house for double the typical neighborhood value? Why it was a sweet old couple who wanted to try getting into landlording. I am assuming they didn't finance and just bought cash (both because I can't imagine an appraisal coming in that high, AND because of whats next). They now have what is essentially a new home listed for rent for a total of $1100/mo with a $500 security deposit. At least they are saving money by having their daughter in law be their property manager (she is new to it too - but nice). This is why I assume they didn't finance, because 1100 wouldn't cover PITI, much less maintenance costs or actually making money. I assume that they are nervous about investments and wanted to sink their money into something more "reliable."
I have learned a lot from watching this house. Landlording is a tough business - I look at that house and I can see 10,000 ways they can lose massive money. They have no upside. They cannot list the house as a rental for what they would need to actually make money on it, and with a $500 deposit they basically have almost no chance of returning it to the condition they bought it in after tenants, so presumably they won't be able to get back their money when they eventually sell (though I am happy for the prospective boost to the neighborhood - I have had 3 realtors come cold calling since it sold).
Similarly, I look at the flipper and shudder. He actually made the money he *presumably* wanted out of the house, but the risk was sky high, and the cash that he had tied up in it for half a year was terrifying. However, there is one important caveat to this - I had asked him about his plans, and he told me honestly and early that this was a plan B. He bought the house hoping he could get the city to let him subdivide the lot (it is a corner lot that is a VERY long and relatively skinny lot), because he would be able to make much more turning it from one lot into 3, but was willing to just do it solo. They rejected him, and he did find his buyer. Nothing about this looks fun to me in retrospect.
But I am a handy fellow. And the idea of having spent march and April demo'ing, planning and building instead of sitting at home sounds quite lovely. I know that the stress of the budget of the project would have eaten me up, and getting contractors out for the stuff I couldn't do would have been a nightmare (especially with covid), but every time I walk by I think about it.
So whats my lesson learned from this?
1)Real estate is only for certain personalities and I don't have it. I am a big believer in trying to involve myself in virtuous capitalism - situations where everyone should be happy with every deal. In this house The previous owner was miserable, the bank that foreclosed lost big money, the flipper did fine and the buyer's naivete is going to be a profound source of regret, as well as presumably lost money.
2) People say real estate is about location, and while I don't know about everywhere, I do believe there was no way to make this house a win win in this neighborhood at this time. Location trumps everything.
3) The risk and the journey could be really fun in real estate.
4) I am still interested in real estate, but it has to be an extraordinary deal.
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You seem to really know your local market and the players in the real estate game. How is it that you got to know so much about all the parties that were involved with this property?
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Seems like you live in a small town and are very plugged in. I share your desire to try investing in real estate, but like you I have a very serious fear that I would get in over my head, and the headaches of bad tenants and the like.
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You seem to really know your local market and the players in the real estate game. How is it that you got to know so much about all the parties that were involved with this property?
Its in my neighborhood, I have young kids who play outside and go on walks a lot, and I am a very outgoing and chatty person. Further away I never would have known this - which is part of why the experience was so interesting and informative for me.
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In the eight years we've been married, DH and I have purchased four houses to rehab. We flipped two of them and did the other two with the intention of keeping them as rentals. We've made money on all of them, partly because we do a lot of our own work. DH is a painting contractor by trade and has extensive remodeling experience. He also has a lot of contacts in the trades.
We watch the market constantly. We can't believe how thin some flipper's margins are. If the numbers don't make sense, we're happy to sit on the sidelines, which is exactly where we've been for over a year now. This is not how we make our living, it's just a fun side gig. We don't have to be in the game unless we want to.
This is a great post. The knowledge you've gained just by being interested and attentive is priceless. Thanks for the update!
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I love your story Mavendrill! Thanks for sharing.
On biggerpockets, they joke that everyone knows someone who has been waiting on the sidelines since 1972 because the prices were too high :)
If you really do want to get involved, don't be afraid to take a low risk/low reward shot. It sounds like you are in a VLCOL so there should be opportunities. Although, it sounds like everywhere in US is currently overpriced so I don't blame you for waiting (I am too).
Couple of random thoughts about your story:
1. The flipper got extremely lucky. It was widely expected that COVID would have negative effects on real estate. I'm willing to bet that, if the flipper knew that a month later the country would be locking down due to a pandemic, he would have not purchased. Not only did COVID dramatically increase house prices, he also found the best sucker in the world to buy his flip. I repeat, this is not a skill, this was major luck.
2) subdivisions in my area are clearly defined. Perhaps it is different in your area, but someone most likely didn't do their homework if they purchased with the intent to subdivide into 3 lots and couldn't even split into 2 lots. This makes the flipper even luckier, again.
4) Your numbers don't make sense, if comps are 65k to 85k, there is no way it would sell for 163k. Your comps must be severely off. It's important that you know how to assess homes/comps if you want to join the game.
Best of luck!
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I wouldn't beat yourself up over this one. It sounded like a tough property with plenty of risks. It was handled by a capable flipper that had experience, options, and the cash to make it happen.
When I was brand new to real estate a property came my way that needed EVERYTHING. It had been vacant for years and years and cats had taken over the house. I passed because of my lack of experience and I was smart to do so. I'm sure someone else made plenty of money on that one but it wasn't for a beginner.
I would keep your options open for real estate. I think you learned that a heavy duty flip or renovation is beyond you right now and that's ok. Keep an eye out for something that only needs some cosmetic work, or house hack, or a move in ready rental. There is still plenty of money to make on all of the above. Each has it's pros and cons, and each will have it's own way of making money. Hitting singles is a great way to start in real estate, as swinging for home runs might carry more risk than you can handle.