it happens and you have to have it towed (after you explain to the tenant they can’t store it there while they repair the home to “flip it”), you don’t expect someone to do something like that. You can’t make this stuff up! It’s best to learn from others’ experience rather than your own. Most things are costly to learn yourself. You will save not only money but also your peace of mind and maybe even your marriage by learning from the mistakes of others.
property improvements and using a property manager, it cash flowed strongly. The property manager is the best in the area, and I use them personally. The property manager had two tenants lined up for both units right before a cold snap overtook the country. As you can imagine, even with the heat on, the very low temperatures caused a water pipe in an exterior wall with little insulation to burst. It flooded both newly remodeled units, causing significant damage. My client lost both tenants, had to pay the holding costs until the units were repaired, and because the furnace was flooded and ruined, the city required two furnaces and separate meters to be installed according to the new code. Insurance should cover most of the repairs, but it won’t pay the $7,000 for the second furnace, the new meter, and the duct work. Lesson Learned: Even if you buy a property well and use the best property manager locally, disaster can strike if you are not prepared for the worst case scenario. This is also a reminder to have solid cash or credit reserves for situations like this.
Worse, it can put you in a negative cashflow position. Hopefully, you have strong enough cashflow to cover the increases as I did, or you can try to refinance the debt with a fixed home equity loan instead of floating rate debt like a line of credit. Sometimes, floating rate debt will allow you to pay to limit the amount the interest rate can increase, say with a bridge loan, to try to limit the effect of rising rates. Lesson Learned: Get out of floating rate debt as soon as you can or limit the amount the interest rate can increase, if possible. NO. 3 If you are buying a property with the intention to add value and flip it, make sure it will cashflow as a rental if it does not sell quickly. Knowing your numbers is extremely important. What will the after-repair value be? What will the holding cost be if it doesn’t sell quickly? What is the market rent for this property once it’s fixed up? Knowing this information is particularly important in a softening or slowing market or if you have floating rate debt. I was fixing up a property in a slowing market that saw the value drop and market rent drop as well. To carry this property, I had to rent the house by the bedroom and also rent the garage to increase the cash flow to cover the holding costs. This was not fun. Know your numbers and the local market. Lesson Learned: Before buying a property, make sure you have multiple exit strategies (e.g., renting) if it does not sell quickly. NO. 4 If you buy a property in a cold climate like Michigan, keep the heat on if you have a vacancy in a unit. This lesson comes from someone else’s experience, but it definitely got my attention. I recently helped a client purchase a duplex. Even after doing some
TOP 4 LESSONS FROM MY EXPERIENCE
Here are the most impactful and, in many cases, most expensive lessons I’ve learned in real estate investing. NO. 1 Getting started in real estate investing can be as easy as renting the house you lived in. My first rental was a starter house I had lived in for several years. It was bought with minimal money down. The interest rate was more favorable than I could get buying it as an investment property. The payment was less than rent, and it cash flowed. Had I kept that house, the rent would have gone up over the years, and the payment on the mortgage would have been more or less fixed. Plus, I used the equity from this house to buy my next two investment properties. Lesson Learned: If you can, keep the houses you have lived in and turn them into rentals. NO. 2 Be careful using floating rate debt like a home equity line of credit to help finance your real estate investments. As we have seen recently, on debt that is fixed to the fed funds rate like a home equity line of credit, the interest rate goes up dramatically if the Federal Reserve raises rates. This can quickly make the payment on the debt increase and reduce your monthly cashflow.
APPLYING THE WISDOM GAINED
Yes, as a real estate investor you do have to continually seek out and improve your professional development and keep up on current market conditions. However, there are some things that only experience can teach us—and it’s best to learn from others’ experience if we can. •
Jeff Roth is the founder of Arbor Advising, a real estate consultancy in Ann Arbor, Michigan, dedicated to growing and securing your wealth. They
help clients invest, buy, and sell in Michigan. You can contact Jeff at jeff@arboradvising.com or visit www.arboradvising.com or subscribe to the weekly newsletter at www.arboradvising.com/subscribe.
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