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My First Project "learning experience"

Discussion in 'Lessons from Success/Failure' started by Poudda, Dec 18, 2007.

  1. Poudda
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    Poudda New Contributor

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    Summary of my first “learning experience†in real estate:

    Purchased a townhouse condo in 2002 for $103K as a primary residence. Home was 4 bedroom (very small rooms) 1.5 bath, with unfinished basement.

    I put down $7,000 of my RSP savings (401K for US reference) under a 1st time homebuyer plan (ie: allowed to withdraw from the plan without paying taxes provided it is paid back within X # of years).

    My financial situation at the time wasn’t all that great:

    Income $45K / year
    Mortgage $800 / month
    Condo fees $300 / month
    Utilities/taxes $400 / month
    Car payment $500 / month
    Total $2,000, and I think my take-home bi-weekly was about 1,200 maybe 1,300

    So that left me with about $400 to $600 for living expenses (food, gas, insurance) and whatever was left was fun money. It was a bit tight.

    Assets Liabities
    House 103K Mortgage 86K
    Car 15K Car loan (LOC) 15K
    Stuff 5K Equity 22K
    Total 123K Total 123K

    I decided to rent out a room (take on a boarder) for $300 per month. I used that for fun money.


    Part 2 - Getting in the game, kinda

    I read RDPD soon after purchasing the house, maybe even before I picked up the boarder. I lived there until 2005, and by that time the situation had changed. The original boarder had moved out and I advertised his room for $350. I got lots of calls, but most didn’t pan out because the rooms were REALLY small (9X9).

    I finally picked up this one guy who turned out to be a really good roommate. He was recently divorced (oddly enough so was the first boarder), and really just needed a place to crash.

    He eventually introduced me to an acquaintance of his who was really down on his luck. His wife was having serious alcohol and drug problems and he wanted to get his two kids (two beautiful girls 5 & 8) out of there, and I had the room. I wrote a letter to his social worker stating that I had two available rooms for them, which would rent out for $450 per month. This would keep the social workers from taking the kids away, you see.

    So now I was brining in $800 per month extra (all under the table), which was really good as I was finally able to start paying down my line of credit (car loan).


    Part 3 - disaster

    Things were working out really great. I had a full house – 3 bachelors, 2 dogs & 2 kids. It was the perfect scenario for a sit-com. Then a friend of mine came to visit one weekend after not seeing each other for about a year and we were engaged by the end of the weekend.

    She lived in Alberta, and I was in Ontario so there were some decisions to be made. In the end, I resigned from my job packed up my car and drove out to Alberta with my fiancé.

    I left the two guys living there with an increase in rent to $600 each which somehow I calculated to be break even on the house. In winter, I would have negative cash flow due to utilities, and in summer I would positively cash flow to cover for the winter utilities.

    The two roommates stopped getting along because one of them got stuck doing the cleaning. It got worse and worse each month until finally they decided that the guy with the kids would leave.

    The existing tenant didn’t have enough to cover payments, and the other tenant left without paying for his last month’s rent. Existing tenant found another roommate, but that didn’t work out, then found another which started working again.

    Unfortunately by the time this was resolved, summer was over and we were back in winter, negative cash flowing again. I missed all of the positive cash flows that I needed in order to get through the winter without putting money into the house account. My wife wasn’t impressed, but at least rent was being paid.


    Part 4 – the last straw

    Skeletons have a way of catching up on a person. The new tenant after getting his life in order had his accounts frozen by the government for non-payment of child support in March 2006. This was not expected even from him because he was under the impression that when he and the girlfriend split, that he would have nothing to do with the child. Seven years later, there was a change of heart.

    So now I was out rent again and my original tenant was tired of chasing down people to pay him to pay me. I went to Ontario in early July (my wife was 7 months pregnant), kicked out the tenants and sold the property. Son was born a week after I got back.

    Sold the property for $140K, and that was the only good thing about this project since the gains out-weighed the losses.

    Incidentally, my wife purchased her starter house in 2003 for $105K and sold it in 2006 for $205K. With these two gains we were able to purchase a larger / newer home for $275K. And it’s where we are living now.
     
  2. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    So are you out of the real estate rental game?
     
  3. Poudda
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    Poudda New Contributor

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    I'm still in.... It just took a while (about a year) to convince my wife that it's still a good idea - it really helped that our friends got themselves into the fastlane this year buying, renting and selling rental properties.

    We bought 2 rentals this year, and once I've finished Vollucci's book, I'll be looking at apartment buildings.

    What I learned from the above experience (in no particular order):

    1. Never rent to friends - it's okay to like your tenants, but it's a business relationship first.

    2. Cash Flow is king - I will only buy if the property has good cash flow first. I'll worry about gains later.

    3. Tenant screening - this is so important and I'll probably never again rent to someone who is "down on his/her luck." I still have to streamline the screening process to make it painless for all.

    4. Having a supportive spouse makes all the difference

    5. Plan plan plan for everything

    6. I'm sure there's more - maybe I should write it all out.


    PS: Thanks for the Rep ATW!
     
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  4. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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    rep + to you for the lessons learned bit.... that is the thing to carry forward.

    Every experience - good or bad - has lessons.... and it is learning and remembering those lessons that help push you forward.

    We actually formally incorporate lessons learned into our planning and goal setting.
    We have a 3 ring binder labeled, "_____ Family Business"

    In that binder, we have sections for

    • "family mission statement"
    • "goals"
    • "plans"
    • "lessons learned"
    • "net worth - where are we and where are we going?"

    We review lessons learned and add to them every time we do an update in the notebook (about quarterly). It really helps us as we evaluate new situations or deals to look back on what we have done and what we have learned.
     
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  5. yveskleinsky
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    yveskleinsky Bronze Contributor Speedway Pass

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    I love the 3 ring binder idea! Lessons learned are so key. I consider myself lucky if I get curve balls early on- that way I can make the necessary changes without it costing me big time. I am going to run with your idea ATW. Sometimes I get so frustrated that I'm not exactly where I want to be, and I forget how far I've come.

    ++ rep
     
  6. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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    The binder has evolved over time... and become central for us. I forgot another section.

    • Ideas

    Into that section go all our... not-ready-for-yet-but-might-have-time-someday ideas.

    And... it really is nice - and fun - to look back on where we were mentally, financially (net worth), what kind of goals we were setting. It helps us see how much we have grown.

    And... having our mission statement in the front really helps us stay centered on what the "real" point is.
     
  7. Poudda
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    Poudda New Contributor

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    Thanks for the rep!

    I never really thought of this project (I call it Project 0) as a failure.

    It was stressful at times, and I was divided between selling it or keeping it and finding new renters and hiring on a property manager. In the end, it didn't cash-flow so we sold.

    I like your idea of having a "Family Planner" in business plan format.
     
  8. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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    hiring a property manager has been key for me in a situation like this... hand it over to the PM and you are not emotionally caught up in the problems. Let them handle it.... and free yourself up for other things.
     
  9. Poudda
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    Poudda New Contributor

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    I agree completely. I should add that to lessons learned. Both of the properties we recently purchased have a property manager. I'm now learning how to manage the managers. For the most part, I don't even have to think about the properties.

    Edit - that's not entirely true - am having issues with management company and may have to switch to another company or to a caretaker. I'll know more this week and maybe it's a topic of another thread - how / when to fire a property manager.
     

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