Wednesday, August 12, 2009

Landlord Chronicles - Lessons in Real Estate Investing

It has been a while since I updated you all on my first rental property progress. Part of the reason is that I have been busy with the move and whatnot, but another part of it is that I really didn't have much good news to report until now. In my last post on my landlording journey I spoke a bit about how networking helped me, and in my initial post I spoke about how my primary concern was marketing. Well it is safe to say that since those posts I have gone through a lot of experiences and have learned quite a few lessons along the way.

One of the biggest lessons I learned was about negotiation. I spoke previously about how when I got the news that I was moving and I realized that I was going to become a landlord my primary concern wasn't laws and leases, but marketing. Well I think that was the right strategy; to an extent. In fact I think my wife and I did an awesome job marketing. Over the past two months we showed our place over a dozen times and got calls about it almost daily. This was with an entirely free marketing campaign. We used a military housing site, craigslist,, and a few signs and flyers. The problem was that I wasn't thinking ahead. I wasn't thinking of step two. I was only thinking of getting as many people in the door as possible and hoping that one would seal the deal. When I was taking a professional development class for Air Force Contracting we watched a cheesy movie about a couple of brothers and their quest to buy a minor league baseball team. The movie was hilariously bad as far as acting goes, however it had amazing lessons on negotiation. It talked about setting anchors and having BATNA (best alternative to a negotiated agreement) and a reservation price or the lowest amount you would settle for.

Well obviously I didn't turn my education into action after watching this movie, because I would have saved myself a hell of a lot of stress and trouble had I discussed these things with my wife at the outset. At the beginning we had time on our side and a pretty nice condo to offer. As time went on we had more and more people walk away and we had to lower our price more and more. I set my anchor fairly high asking for $1700 a month in rent. We had a nice young couple come on day two who were extremely interested in the place. They wanted to negotiate rent and me being the rookie that I am, told them that the property had just been put on the market and I wasn't going to budge on the price yet. Well multiple showings later and a few years of my life lost to stress and we eventually ended up getting $1575 a month in rent. As time dwindled away the BATNA that I never set was becoming more apparent. My BATNA was me floating a mortgage in New Jersey while paying rent in Boston. Not a very good BATNA. I did the right thing by setting my initial anchor high at $1700 a month, however my wife and I had never discussed a reservation price. If we had, we likely could have gotten the first couple in back in May instead of showing the place to multiple other people for the next few months. In fact, there is a chance that I could have gotten more in rent had I been willing to budge and give a little while we were asking $1700, or even $1650.

This brings me to my next lesson learned which is the the power of the market. The market will bear only what the market will bear. Because I listed my condo at $1700, does that mean I am going to get $1700? Obviously not. With the rental market as soft as it is, many renters were willing to sacrifice what my condo had to offer, quality, in order to seek out a cheaper rental. Even though I was a little disappointed with the amount of rent I ended up getting, I really do have to say that it is reasonable given the size and location of my condo and the other condos available out there. Although this lesson is not entirely new to me, it certainly is different when your monthly cash flow is on the line. Easier said than done.

In order to avoid writing a real estate investing novel I will break up some of these lessons learned and add to them at a later date.


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