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, postlets.com, 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.

Geitner Can't Sell His House...But Should He?

Check out this article on ABCNews about Treasury Secretary Tim Geithner and his inability to sell his home. Most people probably just read this article and try to make some joke about how Tim Geithner is running our nations treasury but he can't even sell his home. But I think by doing that a lot of people miss a valuable lesson in home buying.

After leaving the tony New York City suburb of Mamaroneck to take his new post in Washington, D.C., Geithner put his five-bedroom Tudor home on the market for $1.635 million.

That was in February. By May, he cut the price $60,000 but still got no takers. A few weeks later, May 21, the home in New York's Westchester County was reportedly rented for $7,500 a month.

"Mr. Geithner's house is a textbook example of what is happening in the market here," said Leah Caro, president of Bronxville-Ley Real Estate and president of the Westchester Board of Realtors. "Many sellers are bringing their houses on [the market], finding that they don't have a buyer for it, making price adjustments in hope of luring a buyer into the marketplace. In the case of Mr. Geithner, he had to move. And renting was his best option."

That valuable lesson is that when it comes to real estate it is a lot easier to make a poor market decision than a poor overall decision. I love real estate and the benefits it has to offer, even in times like these. In fact I am in a very similar situation to Mr. Geithner. I just found some tenants for my condo, as I will be moving to Boston come this weekend. There are many people who would have sold and either taken a huge loss on the sale price or tried to command more than the market is willing to pay and would have lost money with the property sitting vacant. Geithner and I decided that renting was the best option for us. He likely paid someone to take care of it for him. I on the other hand have been working my ass off alongside my partner in crime to get my place rented out for the last two months (read here). People ask me if I regret buying and I have to say I really don't Yeah the last two months have been a stressful hell, but the learning experience has been priceless. I must say as I sit here on my air mattress in the living room with my computer set up on a makeshift desk of boxes, touch up paint still drying on the wall, I am extremely fulfilled with what Heidi and I have accomplished. I am not naive enough to think that everyone should own property and everyone should be a do it yourself landlord: to each his own. But for me it was a great decision, even with my Timothy Geithner like situation. More to come on my landlording lessons learned soon. I really liked the following passage because I think it illustrates the inherent flaw in peoples hindsight way of thinking.

"I don't think anybody is in a position to say that he overpaid, or anybody overpaid, when he bought his house because market value is market value," Stiefvater said. "Back in the those days, everybody was overbidding -- I'm not saying overpaying, but overbidding -- and getting into bidding wars and multiple offers escalated the sale prices to what I think was higher than market value."

At the time everyone makes the decision that they think is the best decision. If you get down the road a bit further and it turns out you were 'wrong' then just change your way of thinking now and adapt and overcome. If that means taking a loss on rent while the market recovers so be it. You are still getting a write off, depreciation expenses, someone else paying your mortgage and building your equity. Not to mention priceless experience. More to come on my landlording journey...I promise.

Real Estate Investing: A Dialogue Amongst Friends

Here is another interesting back and forth (mostly forth on my part) between a friend and I. This friend is extremely smart, an awesome dude, and a very entrepreneurial person. Throughout the existence of BadskiBlog I have preached that there is no one set investment advice. That is why it is so important to know your goals and your strategy for achieving those goals. Because it is those goals that will dictate which investing advice you will take, and which you will leave for the next guy. Just because my friend and I do not have the same world view on this topic does not mean that I am right and he is wrong or vice versa. I would argue that we are both right given our goals and investing strategies. I have included my friends contributions in italics

http://finance.yahoo.com/real-estate/article/107122/Is-Your-Home-a-Good-Investment?

Guys,

See above link. Part of this discussion is why I am not big on buying homes unless you plan to live there for a long time....

Love Forever,

BK

Reese,
I just posted a blog post on the index yesterday. I think what the article fails to address is that the majority of the benefits of
being a property owner aren't Annual Return. And that return is skewed by not taking into account Cash on Cash return. If you buy $10K worth of stock, how much is that stock worth at that moment? $10K.....not a trick question. If you buy $10K worth of property how much is that property worth? It could be worth $100K or even $200K depending on financing. So if the price of that $100K property appreciates by the 1.5% the article claims after factoring the CPI then it would be worth $101,500.00. Not a great return. But you have to look at cash on cash return. You only put in $10K of your own money. $1,500 is a much more significant portion of $10K than $100,000; it's actually a 15% cash on cash return.

Leverage can work the opposite way as well but how many houses go out of business? Not many. And as I always say with both stocks and property, you only lock in losses if you sell.

After you look at the income potential from renting out a property, the tax advantages, and the control you have over the present value of your investment I think that property is a really good investment.

I do however agree completely with Reese that some people shouldn't own homes unless you live there for a while. The situation I am in getting moved to Boston has put me in a tough spot with my condo. However, I feel that I have the business sense and the stamina to become a landlord and continue building equity in my property. Each person's situation is different. Good read.

Housing Crisis Update

I read a few articles the other day (here and here) talking about the state of housing in our country. Home prices fell 19.1% in the first quarter compared to the previous year, the largest decline in the 21-year history of Standard & Poor’s Case-Shiller Home Price Index series. The national index covers almost all homes sold throughout the United States and is reported quarterly, while the 20-city index reports sales in 20 major metro areas and represents a cross section of the national market. The 20-city index comes out every month.

Paul Dales, U.S. economist for Capital Economics in Toronto, pointed out the massive home price gains from 2000 to 2006 have now vanished. Home prices have fallen back to 2002 levels in nominal terms, according to Case Shiller. But they’ve returned to 2000 levels when inflation is accounted for.

“We’ve had 6 years of massive appreciation wiped out in 3 years of sharp declines,” Dales said.

Home sales are improving, a sign that a bottom could be near. But home prices are likely to continue to fall for some time. Some cities have already overshot pre-boom price levels. Detroit, for example, is already at 1995 levels, even before inflation is accounted for.

"All 20 metro areas are still showing negative annual rates of change in average home prices with nine of the metro areas having record annual declines."

What does this mean for you? It depends. For those who are looking to purchase a home this could be a very good thing. A necessary correction of sorts that will allow you purchase a home that does not make up an unreasonable amount of your overall spending. For those who are already homeowners it probably hurts a little bit more. But as I have said in previous BadskiBlog posts, losses and gains are only realized when you sell. As long as you can continue to pay your mortgage or have enough of an emergency fund built up in case you suffer the misfortune of a layoff you should be ok. The sky is not falling. The markets will correct themselves even if it is long, drawn out, and painful. I am learning first hand the difficulties associated with a market decline. Couple in a forced move in the military and I am getting a crash course in becoming a landlord. As an optimist, I am putting my head down and learning all I can as I work through this market. Who knows it may be the best thing to happen to me?


S&P/Case-Shiller 20-city home price index
Metro area 1-year change (%)
Phoenix -36.0%
Las Vegas -31.2%
San Francisco -30.1%
Miami -28.7%
Detroit -25.7%
Minneapolis -23.3%
Tampa -22.4%
Los Angeles -22.3%
San Diego -22.0%
Chicago -18.6%
Washington -18.4%
Seattle -16.4%
Atlanta -15.7%
Portland -15.3%
New York -11.8%
Charlotte -9.3%
Cleveland -9.0%
Boston -8.0%
Dallas -5.6%
Denver -5.5%
Composite-20 -18.7%
Source:S&P/Case-Shiller

Landlord Chronicles - An Update

Just checking in to give an update on how things are going on my newest undertaking; becoming a landlord. As for lessons learned thus far, I would have to say the biggest lesson is that your personal network of friends and connections is one of the most powerful things you have access to. If you don't know someone who can help you with something chances are someone you know knows someone.

In my last post I detailed about how my primary concern was marketing my place. Well I have a hockey buddy named Bob who owns his own photography business. The company name is Lorusso Studios and if you ever need anything regarding photography I strongly recommend his work. I got Bob to come and shoot some pictures of my place. They turned out great and are serving as the basis of my marketing push which will hit the web full force on Monday. Click here to see my Postlets profile which can be inserted into any classified ad or social networking site. I think it really makes the home stand out amongst a myriad of postings on different sites. I knew the Postlets profile was a great start but I didn't feel as though it told the story of our home, so I created a blog just for our place. The blog allows me to direct potential rental applicants to a site with multiple pictures so they instantly know whether my rental is for them or not. Its like promotion and potential applicant screening all in one. I know when I was searching for our place and other rental properties I didn't even think to check out a place without a picture. The more pictures the better. People love information and a picture is one of the quickest and easiest ways to tell someone the story of your property. I have made it easier for people to gain access to my property's story.

After working my way through some of the sexier aspects of my new venture like taking the pictures, marketing, etc. I knew that there were some details that I needed to tend to. Once again a few good buddies led me to the answers and resources I was looking for. My buddy Eric has a brother in law who has quite a few rental properties and he had his brother in law call me. We talked for a bit and he was extremely helpful. He even shared his lease agreement with me, which I thought was pretty cool because a lot of experience goes into building those things and he has never even met me. I also touched base with an old roller hockey buddy back in Oregon who I knew did a bit of real estate investing. I asked him if he has any tenants and how he screens them etc. He put me in touch with another roller hockey kid's girlfriend who works at a credit/background screening company. I called her up and that issue was solved. It's pretty amazing how small the world is becoming.

So far it has been a great learning experience. Pretty stressful, but a good experience regardless. I will continue to post updates down the road to landlord land, and if you think you have any leads to fill my property let me know!

My Next Venture - Becoming a Landlord

With news of my impending departure from the Garden State came the news that I am now taking on a new venture, that of the landlord. I guess it is time to put my proverbial money where my mouth is. I have long been a proponent of real estate both as a homeowner and an investor. Having faced high rental rates when I moved to New Jersey, it was a no brainer for me to buy a condo. Even though conventional wisdom always says not to buy if you aren't planning on living in the property for at least 5 years, I cringed at the thought of throwing so much money away on rent when I could spend a few hundred dollars more and own.

My timing wasn't the greatest and although I didn't buy at the peak I bought far from the bottom (if we have reached a bottom). But as I have said on BadskiBlog before, losses (and gains) are only realized when you sell. I don't want to realize a loss so I am not going to sell. It's that simple for me. Will I break even or better yet make money renting my place? I am not sure. It depends on the rent I can command and my refinancing analysis. Hopefully I will have time to update the status of this recently acquired venture and thoughtfully justify my decisions as I go along. Regardless I am willing to take a few hundred dollar a month loss while building equity and avoiding a much larger loss by selling. No one likes to lose money, especially me. However I am looking at it like this: I am paying $200 a month to have someone else pay the majority of my mortgage and continue to build equity in my place. Once the market recovers I can sell and realize a gain, or I may just hold onto a cash flowing property forever. Only time will tell.

My first concern with my new venture wasn't leases, tenant laws, or pet policies; it was marketing. I started thinking back to my mindset when I purchased the condo and to how I feel when I enter open houses or other people's homes. I don't think about square footage and room sizes, I think about the way home makes me feel, the story it tells. I am convinced that most people purchase homes based on the impression they get from the first five minutes they are in the home. If you think I am crazy you are wrong. There is no other way to put it, you are plain wrong. Over the last three years Heidi and I have continued to go to open houses throughout the neighborhood to see what is on the market, how much they are going for, and to steal a few decorating ideas. This practice has validated my first five minute emotional decision theory. I have probably gone through 50 condos with the same exact layout over the last three years. Over those three years I have seen all those condos with the same layout command sale prices with ranges upwards of $40,000. How can this be? They are the same condo! The answer is the story that condo portrays. People want to envision themselves in a home not a condo. They want to envision their lives in their new home. The easier you make it for them to envision their life in your property the higher the premium they are willing to pay. When I look back I could have bought a horrifically decorated condo with terrible furniture and ugly carpet for thousands and thousands of dollars cheaper than I paid for mine. But I didn't. I bought a condo from a young couple with similar tastes to mine, who probably lived a similar life to mine, whose home told a story that I wanted to live. I am trying to figure out how to paint that picture for a lucky renter who will enjoy my condo as much as I have.

My first step seems simple and easy but I am convinced it will make a difference. I am trying to set my marketing apart. One way I have found (thanks to Jessica for the help) is using Postlets.com. Postlets.com is a service that spices up your posts on Craigslist and other sites that allow html posting. I am also having my friend who owns his own photography business (check out his awesome site here) come by to take some professional pictures to provide every detail the prospective renter needs to choose my property as their next home. All things being equal, which post would you rather pursue? The standard Craiglist notepad-esque format or the professional organized information packed Postlets template? The answer is simple. I am also considering setting up a blog just to promote my rental property. People want information and I am willing to put in the extra time and effort to prove to them that my lovely home can become their lovely home. I will continue to update as I progress along in my new venture and hopefully I find a tenant soon who is as excited to live my story as I was when I bought it.