My First "Deal"!!!!!!!!!!!!!!!!!

Rehabbing, Fix and Flip, Rental Properties
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Hi everyone! First time poster, just found this forum the other day and it is very informative and I hope to post a lot more in the future. Anyway, I am posting today because I am in a very tough situation. To be honest, I am frankly embarrassed to even post this. But, hopefully it can help other investors that are just starting off, and also can help me get an informed unbiased opinion from a myriad of knowledgeable investors.

Here is my situation. I have been investing for about a year now. For the first 7 months I didn’t do a single deal, I was just mainly beating the bushes and constantly looking for something, but had little luck. Then in late November of 2007, I found an ad in my local paper about an investment property for sale that was offering owner financing. I think the deal was advertised something like this, remodeled 5 unit investment property, $220,000, $5,000 down, balance on a note @ 7.0% on 40-year amortization and a 5 year call. I call the number, and find out more information, the property is vacant now was being rented out for $500-$550/Month Etc. So I do some basic calculations, and realize the GRM is in the 80-88 ballpark range.

This looked really good to me. Most properties I was looking at had GRM’s starting at a minimum of 100, occasionally I could find something in the 90’s. Also, of note in the area that I was concentrating in you could easily find GRM’s in the 200 ballpark, and the average being in the 140-160 range. During my first few months I was concentrating on a specific neighborhood in my city and looking at a lot of MLS properties. The neighborhood I was looking in was one of the nicer areas of my city and thus the high GRMs. (My city is probably like every other city where in low income, to war zone areas you have GRMs from 60-90, middle of the road areas you can maybe get something for 90, but the average is probably from 100-130 and nice areas where it is usually at least 140. And of course, there are variations between each of these three main areas.)

I go see the property, and it is not really as advertised. They were in the process of renovating it but the work that is being done is not of high quality. I walk through all the units and remember thinking at the time this is a no go. I talk with the workers there a little trying to get any information that I can. The property was vacant for a few years, owner has a lot of rental properties that he has sold off lately, has about 40-50 more left that he will be selling off, is old and wants to retire. I also was asking about the work and what was done etc.

While I am there, another investor is also looking at the property. Eventually we get to talking and he tells me is a luxury spec. builder, but times are tough right now and he needs to do some other projects. I ask him about what he thought of the property and he tells me it is not as advertised, LOL. (Just of note, I do NOT know anything about remodeling or repairs, I can hardly hold a hammer.) He pretty much says that cosmetically, the sheetrock is horrible, and he would fix that, it needs to be repainted, he would put on vinyl siding, (it has some kind of wood exterior), probably put down new floors, and make any other minor repairs that are needed to plumbing, electrical, etc. Said the roof looked pretty good. Said total repairs to do everything right one time and make it look good was $25-$30K. At this moment, I remember thinking no way.

We kept talking, and I tell him how the numbers look pretty good, that the GRM is in the 80’s and if you run the cash flow projections it is also good as far as cash flow goes. He agreed with me, and said he was considering buying the property and fixing it all up then renting it and putting in tenants at $575-$600/Month and then selling it fixed up and therefore at a higher GRM. He called his sheetrock guy to come look at the property and give him an estimate. His sheetrock guy came and looked at it and gave an estimate of $7,500.

At this point somehow we all started talking about a partnership. The sheetrock guy was Hispanic and was going about how you could get $600 for rent no problem. By the end of our time looking at the property, we had roughly agreed to a partnership with the three of us. We would all put up the same amount of money, about $10,000, ($5,000 for down payment, rest to repair) and then manage the property for two years and resell it. Also, the builder said he could probably cut the costs of the rehab to around $15,000 because he and his siding guy could do a lot of the work themselves. So we could possibly be looking at only putting $6,000 to $7,000 each into the property. I thought this would be a great way to get my feet wet in investing.

First, like I mentioned, I know nothing about fixing up stuff, so I would have two experienced rehab specialists to partner with who could show me the ropes some, and also, to me this property looked like it had very good cash flow potential, something I consider strongly when doing any investment. The builder, sheet rock guy and I had worked out a plan that we would from an LLC and all be equal partners (33.33% each). I was getting excited, and was ready to be in on my first investment. The builder and I exchanged calls over the next couple of days going over ideas, etc. Then after about 2 days I stopped hearing from him. Called him a few times with no answer, and left him a couple of voice mails but never heard back. Even tried calling the drywall guy but never could get in touch with.

So hear I thought the deal was dead. But, the more and more I thought about it I was thinking maybe there was some hope, if the builder thought it was a good deal, and again the numbers, to me looked very strong. So, after about two days of not hearing back from the builder I went and met with the owner. I met with him and give him a real low offer, in the $160,000 range. I got this number by using a 10% cap rate and a 45% expense ratio. The owner pretty much laughed at that offer, and said he couldn’t accept an offer like that. I then said, ok, I will agree to your price, but I would like to have a 1 month period for my due diligence and I can back out at any time during this time and for any reason. After that time if I decide to go forward I will put down the earnest money and the closing proceeds as normal. He wouldn’t go for that either, but did say he would hold the property for one week so I could make a decision. He even typed up a little form that pretty much said, I will hold this property until this date, etc. This was actually one of my objectives when I was going into to meet with him. I felt if the builder thought it was such a good deal and the drywall guy also maybe I could convince another investor to pursue it with me. This deal was out of my comfort zone when I got started I wanted to buy a SFH, or duplex that didn’t need a lot of work and that could cash flow. That is what I was looking for. But if I could get another investor who was experienced to go in with me I could do a pretty big deal and learn a lot at the same time.

So, that is what I planned to do. I set up some meetings and gathered all my notes I had on the property and met with some investors. The first guy I met with is one of the biggest investors in my city, who is local. I pretty much showed him all the numbers, he asked some questions, and I went over all my thoughts with him on the property. He said it looked to be a good deal, it would take some work to get up and running but other than the numbers seemed to work. I then asked him if he would be willing to partner with me on it. (I think he thought I had only been asking him for advice and was taken aback here.) He pretty much said that at this stage he had other projects he had to concentrate on and felt this deal was too small for him to form a partnership. (He owns many, many properties.)

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Well, since the biggest local investor in my town thought it was a good deal, it gave me some confidence and I felt I would have little trouble trying to find a partner. I felt like I should get someone with a lot of experience rehabbing the property since it needed a lot of work. I called a rehabber that I knew who had about five years experience and rehabbed about one property per month. I called him out and told him about the property, he said he was interested and that he wanted to take a look. I met him out there, and he walked through the property, said he normally doesn’t do multi units but that this looked pretty good and he had been wanting to buy a “buy and hold” property. Said everything looked well, but he wanted a day to think about it and he would get back to me.

The next day he calls and says that he thinks it is a go, and he would like to buy it. (Note: when I first met with him I had talked about partnering up with him pretty much in the same fashion as with the builder.) But, instead of talking about a partnership he said he would pay me $5,000 for finding the property and that he would buy it and I would be off the deal. I asked him if I could think about it for awhile, and he said sure. This was a real tough decsion for me, I remember thinking about this for a couple of hours, and literally going back and forth every couple of minutes.

When he first proposed it to me I thought for sure I was going to take it. But, the more I thought about it the more I went back and forth. I kept having in my mind a conversation I had with another investor who I had met (actually through this property) he owned a lot of properties on this street. He had just kept talking about this fear that he saw in me that I needed to get over to be a true investor. This kept weighing in my mind, along with some other factors (hearing a lot of noise from family members, etc.). And for some reason, I felt like I needed to do this deal. I needed to get over this fear I had, which the investor kept talking about. It didn’t even matter about the money, but if I could learn from this investment I would be successful. I had to conquer this fear that I had, and this was the investment for me to do it with. So after much deliberation I turned down the other guys offer of $5,000 and said I think I need to do this myself. He was upset, but just said it was a rookie mistake and if I change my mind let me know.

I call the owner and let him know I am ready to buy, (I think I still had 3 or 4 days left to do my diligence). He wants to close immediately, (I guess this should have been a sign). I ask to wait until after the holidays, Christmas was only a few weeks away, can we close after the New Year. He tells me he needs to close now for tax purposes; I thought that was reasonable enough. So we close in the beginning of the second week of December 2007. It was probably about a week and a half of total time from when I first called about the property to the closing date. Maybe two. I think my plan going into it by myself was to rent it out, get the cash flow, and make gradual improvements to the property to bring up the value, with the cash flow. I didn’t have $25,000-$30,000 to spend to due the work. So the first week after I got it I cleaned it out, remember it was vacant when I bought it. I clean out everything, and get the place looking not half bad, but still not great. This is right before Christmas, I go out of town for Christmas and let the property sit for a week, and as soon as I come back I put the property up for rent.

It takes a couple of weeks, but I finally get my first tenant. He moves in for January 1st. I make a big mistake here, and do not do any sort of screening, just base everything off feel. And, I would be the first to admit I have made some pretty huge mistakes with this property. But things start off pretty good. By about the third week of January I start to get kind of worried because I do not have another unit rent, but by the end of January I have everything rented out, and all at the price I projected of $550, except one which I rented for $500, because the lady asked and I felt she was nice. So I wanted to give her a break. In January I have my first big problem, the main line clogs, and one of the units gets a lot of the water in it. Well, I don’t know who to call so of course I call the most expensive person (Roto Rooter). This sets me back $540, but I chalk it up to the property being vacant for awhile.

This is also when I start getting lip form my first tenant. He doesn’t pay the rent for when February comes around. And gives me all these excuses, but I being the nice guy, “work with him.” So things are going ok, but obviously not as well as planned. I some small payments from my first tenant, and my other tenants have paid on time. So for January, I was down some, but that was mostly due to the fact I had to get the property snaked and had to buy appliances. February I was probably up some. (Another huge mistake I made, I never kept any books on the property, and actually if some was has a good bookkeeping system, please recommend me something.) March begins and goes alright, all the tenants pay, (some late though) except for my first one who will make a $50 or $100 payment here or there. So for March I am probably doing pretty well.

But, then April comes around and that’s when things start to go straight downhill. And it’s not like things were going good up until April. Throughout the February and March I would get calls from tenants complaining about minor cosmetic things. And I had to do a lot of minor repair work. But, anyway, by April I have filed eviction papers on my first tenant, but this time he was about a month and a half behind and owed about $650 to me. But the next payment was coming up and it looked like there was little chance I would get that. Then, I start getting a problem from one of my other tenants, they are paying. Then, the real fun starts. The main drain clogs again in the second week of April. I get some new guys this time to fix it, but it still costs $500, mainly due to labor, they were out there for like 6 hours, where roto rooter was out there for like 1 hour. Then I get a call two days later it clogged again. All in all, this happened 6 times in a three week period and I probably spent about $1500 dollars trying to get it unclogged. (I do keep all the receipts I have for any payments I make.)

Finally I got guy that was snaking it who said the problem was where the line tied in with the city’s line. The city comes out and takes a look at it and they find the problem. There is a rock of some sort stuck in my line, but out in the street. I actually get very, very lucky here and the city is responsible for getting that out. So from April 12 about to May 1st about, I have to unclog a line 6 times costing me about $1,500 (not to mention the $500 I spent in January) for a damn rock in the line. Obviously, April was a real bad month; all in all I was down about $2,000. Other than that I was probably about break even up to this point, maybe a little behind, ($1,000 or less). During April I did not receive any rent from the two of my tenants, costing me $1,100 had to make a mortgage payment of $1350, and had to pay about $1,500 to snake a line, and probably another $250-300 in misc. repairs. That equals $1600 in rent - 1,500 - 1350 - 300 and about $200 in insurance. So a loss of about $2000.

Meanwhile my non paying tenants are still in there. Finally on May 12th I am able to get my first non paying tenant out of the property, he squatted, and the sheriff had to get involved. All in all a 6 week process from the time I filed papers to the time he left. Not to mention I was not able to touch any of his things for 10 days after the sheriff left. (This was all junk, and he trashed my apartment, even though when he was staying there he treated the properly fairly well.) In late April I filed eviction papers on my second non paying tenant, I got the court date in May and of course they were a no show and I won. May 15th (I think) I was able to file the second set of papers (Because of course they didn’t leave), but when I go to file them I learn that these tenants have filed an appeal, and I have to wait till I get a court date for that. So I filed on these tenants on April 25th and they are still in there not paying some 5 weeks later.

This is where I stand today. I have 1 vacant unit, from that guy that I evicted that the sheriff. I had a maintenance crew give me an estimate of $700 to turn the property. I have 3 units that are rented, but at this time none of my tenants have paid me any rent. (Note I set up my rent due on the 20th to go with when I pay the mortgage on the 25th. Another mistake, I know. But these tenants are not actually a month behind but going on two weeks. ) Usually, I think they will pay, in fact a couple have said they would but, a lot of them seem very frustrated with the situation. Are not happy with the units they have rented etc. Then I have one occupied unit with a non paying tenant. Overall, I am down close to $5,000, (This includes the money I have spent on appliances, which could be looked at as in investment, etc.) I invested $5,000 into the property.

May was the first month I did not pay my mortgage. January-April I paid on time every month. I went and talked to the previous owner and told him about my situation. He told me pretty much to stay in touch with him and we would see where we are next month. Basically, I want out of this property. But, the unfortunate situation is the prices have come down so much in this area since I bought it because of foreclosures. I probably paid a little over market value when I bought it, but at the current time the market value has dropped probably in the ballpark of $30,000. I have made a long list of ways to solve my problem and I have thought of everything from firesale, to bite the bullet. I talked to a prominent investment broker in my town and see if he had any interest in listing it and he pretty much told me he would have a lot of problems getting me out of it for the price I am in there for.

Here is what I do know; I do not want to have another month of having to fund -$2,000 in cash flow. I have done some other investments since I bought this property and those have funded my negative cash flow for the time being. But, I do not want to continue doing that. If this was a stock, I would just sell it and take my losses. Obviously, you cannot always do that with real estate. I also, do not want to go to foreclosure. There is a possibility I can get the owner to do a deed back. But, that is not guaranteed. What I do know is this property has sucked out a lot of life and energy from me. I have literally been on stand still the past month with this property. I had started implementing marketing campaigns that were beginning to see some results that I have had to put off completely. And in the meantime I have stopped looking for deals completely. I have wasted way too much time worrying about this situation.

As everyone knows, finding deals is the number one thing in this game. I have not been doing that. The sad thing is I think overall this will make me a much stronger investor in the future, but I hope to be able to see the future. This could, unfortunately put me out of business before I ever really get going. I do not think that will happen, because even if I do let the previous foreclose, which I think is the worst possible scenario it will not force me to quit this business, I believe in it too much. But, it could make things a lot more difficult for me going forward.

Anyway, that is my first deal!!! (Hooray), and wanted to see if anyone had some opinions and maybe (hopefully) some solutions. Again I have thought of a lot of possible scenarios, but I have just been playing ostrich the past couple weeks, almost frozen in what to do. Maybe someone can help me out…

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SOrry everyone, I kind of got out of hand with my last post. Just kept typing and typing. My original post was suppose to be the first two posts on this page, but it was too long. If you have some time please read them. Thanks.

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Gee, ya think???

Keith

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Real Estate Fan:

Thanks for sharing this post. I didn’t mind at the length of it. Don’t dwell on your mistakes, and never give up! As i’m sure you already know, you didn’t buy this one cheap enough. If you happen to be in NC, pm me ok??

If your not totally burned on the property, try this. First go back to the owner and see if you can’t work out a loan modification. I can’t believe i’m saying this, but I think your best bet is an interest only payment with a balloon as far away as you can get it, like 10 years, on a 40 am. and no prepayment penalty.

Next go the the local library and check out as many books as you can on home repair. Also get the book landlording by leigh robinson if you don’t already have it.

Instead of paying those crazy costs to snake a drain, invest that money in tools. Get an old truck if you don’t already have one. I would become best friends with your rehab buddy. Only buy the tools as you need them of course.

Next, when you screen, do a credit check at www.mrlandlord.com and go down to your courthouse and don’t leave until you figure out how to get a background check done. Don’t forget to also check for judgements. PM me and I’ll send you my screening requirements, never budge from them, NEVER!

Good luck man, and don’t ever give up!

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Let’s start at the beginning. Your first HUGE mistake is that you don’t understand cash flow issues.

Here is how I would have evaluated this deal:

Gross rents (5 X $550) = $2,750
Operating Expenses: $1,375
NOI: $1,375

Mortgage Payment ($220K, 30 yr, 7%): $1,464

Cash Flow: $89 LOSS (Ouch!)

Now, that assumes that you actually have any renters AND THIS BUILDING WAS VACANT AND NEEDED REPAIRS (which you say you know nothing about). I find it ironic that you said you estimated your operating expenses at 45% when in reality they were infinite since you didn’t have ANY renters initially.

How you ever thought the cash flow would be good is beyond comprehension. And for the record, the other investors you talked to don’t appear to know what they’re doing either. (Sorry to be blunt, but I assume that you’d rather hear the truth than a bunch of motivational b.s.) You have made all the mistakes that cause the vast majority of newbies to fail in a short period of time. All of this was preventable if you had just become educated on the REALITY of the rental property business before you jumped in.

Even having made these mistakes, you would probably have still survived relatively unscathed if you had started with a SFH. SFH’s are far more forgiving and much easier to sell when things go wrong.

I would bet that the previous owner knew that this property was a BIG LOSER and that’s the reason he sold it to a newbie on terms. Certainly no successful investor would have bought it at that price! That’s one of the perils of working with multi-family. Generally, the owners of multi-family properties are more sophistocated than that of SFHs and they want to sell at retail and will only buy at a BIG discount. You fell right into the trap because you weren’t educated!

I don’t have any great suggestions for you. There is not always a good outcome in the real estate business. In fact, the norm is a BAD OUTCOME for the vast majority of newbies. (do the gurus mention that?) Obviously, if you could get the previous owner to take back the deed in lieu of foreclosure, that would probably be your best outcome. At the present time, you’ve got the worst of all possible situations, which is a building with tenants, none of whom are paying. In addition, you’ve got a building that needs rehab in order to attract quality tenants and you don’t have the money to do the rehabs. Finally, you’re upside down on the property.

If you get out of this mess, I would STRONGLY suggest that you do whatever it takes to learn the basics of the business BEFORE you buy anything else.

Good Luck,

Mike

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You are paying for your real estate education. You will not forget the lessons learned by buying that property.

Get “1-Minute to Real Estate Riches” book by Mike. (See above posts). It’s one of the best hard-core landlording primers I’ve seen. Follow the advice!

Have a heart-to-heart talk with the former owner. I would even ask for a 3-month deferment of payments so you can kick out the deadbeats and do what repairs you need. Also try to re-structure the loan, interest only, etc. until it turns around.

Don’t give up! I have purchased and sold property and lost money. I have done bad deals. I have bought high and sold low. It’s just part of the process of learning. Education costs money–those lessons were learned.

Question: Why are your tenants so disgruntled (other than the sewer problem)? Are you responding quickly when they call? Not having plumbing is huge. Are you keeping the property clean outside? Are you working on it? Just wondering why they won’t pay if the plumbing is fixed.

Furnishedowner

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Thanks to everyone who responded, (except kdhastedt). I’ve read everyone’s post and will respond to each one when I have some time. I know my situation look bleak, but a few of you have already given me some helpful ideas. Thanks again.

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Hey, I just said what everyone else was thinking! LOL…

If it takes three posts to make your case, it might just be too verbose.

Keith

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One of the things I love most about this website is the honesty of the posters. Generally if someone gives bad advice about a situation, you can expect someone to set the record straight very soon after. People around here tell it like it is and have a wealth of different experiences. Don’t get offended by someone’s satire on here. We’re all trying to make each other better and more well educated. Keith (kdhastedt) spends a ton of time on here mentoring others and making sure the board conforms to the rules. And no one receives any special pay except for the gratification of helping someone else. Welcome to the board!

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OK. I don’t really have any sound ideas to get you out of the mess you are in but lessons can be learned from this mistake. One, you are into the property with the former owner for only 5K. I would try and work some terms out with him and deed it back to him as it may prevent an actual foreclosure and will be less than a blemish than a foreclosure. Or even better, come up with some cash and give him money to take it back and forgive the remaining note since he is carrying it anyway and the deed is still in his name.

Lessons,

  1. Did you have an actual inspection by a trained unbiased professional evaluate this property for you? Use the findings as a negotiating tool.
  2. When you do a deal, do it on YOUR terms. Don’t let some punk owner asking to WAY to much for an AS IS property to push you around
  3. Take 5K on any deal you don’t have to get your hands into. Especially as a newbie, you still would have walked away with some knowledge
  4. As Mike stated, I have no idea how you determined cash flow on this property. Yes the deal could produce a small amount of cashflow IF, and this is a big IF, the building is relatively new and requires little work, you are experienced in property management and your vacancy rate is less than 3% with some quality tenants who actually pay. There are many better deals than this out there
  5. Screen. Always. Don’t allow tenants to push you around because they will
  6. This seller knew he had found a sucker, don’t be the sucker
  7. Do your due diligence… always
  8. There are much better deals out there. Find them, this wasn’t one of them.
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Again, thanks to all who responded. I hope to respond to every one shortly.

Keith, I was just kidding (if you were), I realize it was a long post and therefore I took no offense to your comment.

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Yes, I was kidding…thus the “LOL”

Keith

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John, thanks for the reply. As I now realize I have definitely overpaid pay for this property. I am actually on a 40 year am., and I guess that is as close to interest only as you can get. A loan modification would help, I was thinking if I can get him to agree to give me a few months , (I’m really hoping for 6) without payments and then to tack those payments on to the end of the loan. What are your thought about that? I will have to read the book, haven’t heard of that one before.

Not screening was obviously a big mistake, and really there is no excuse for it. Just inexperience I guess. It will defintely be a lesson learned.

To be honest, I have really become disillusioned with this property. I want to do the honorable thing and turn it around and pay on time like I agreed, but to bring this property to where it needs to be it will take a lot of time, money and energy from me, and with already having missed one payment I don’t want to be in the position where I spend the money and then it is all for nothing.

Thanks for the encouragment.

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propertymanager,very good response. I have read some of your posts in other forums and have really enjoyed your insight. I would have to disagree with you however, with regarding your assessment that I don’t understand cash flow issues. I do understand those. It doesn’t take a PHD in finance to understand cash flow. This is a very easy calculation. Gross Income - Operating Expenses= NOI
NOI - ADS= Annual cash flow/ 12= Monthly Cash Flow (Hopefully I got this right, and didn’t just embarass myself). Now, I would agree with you 100% that I don’t understand real world cash flow issues. I didn’t go into this property blindly however. I made estimates what I thought the income would be and I made estimates on what I thought the expense would be. In my worst case scenario, I was still projecting positive cash flow of about $100/ Month. (Looking back on this, this is really bad. My worst case scenario was mainly because I was running it on lower rents, but I thought $550 was achieveable).

But, my middle of the road estimate is as follows

Annual Gross Scheduled Income= $31,500 (I am scheulded for $32,400, but as I know that means nothing)

Annual Vacancy & Credit Loss= $2,520 (8%, This was a way low projection, but at the time I thought it was conservative)
Insurance= $1,400 (turns out to be a little low, I am paying closer to $1,500 for insuracne annually, but againt at the time I thougth this was conservative)
Property Taxes=$1,500 (this is accurate)
Repairs & Maintenance ($3,000, I am approaching this number and have had the property for about 6 months, this is mainly due to the drain line)
Supplies & Misc.= $2,500 (This included such things as equipment to buy for fixing things, legal costs, advertising, etc.) If you count the money I spent on appliances I am well above this.

So total expenes would equal $8,400 and throw in vacancy & uncollectable rent I am at $10,920. This gives an NOI of $20,580- Annual Debt Service of $16,033= $4,547/12= $378.92 monthly cash flow.

Just a note, I am actually on a 40 year loan, and my payment is $1,336, not that it really makes a difference.

Your obviously a very successful investor and the way you buy properties is very effective. And clearly, the property that I bought should have been evaluated by the standards you use. I guess, the point I am trying to make is I think you are a bit rigid in your evaluations in analyzing properties. You cannot just say someone doesn’t understand cash flow because they do not evaluate everything on a 50% expense ratio. The reality is I would love to buy properties using that formula, my problem isn’t that I don’t understand it, but I have had trouble finding those properties (that could be a topic for a different thread). Also, the investor that you questioned has been in the business over 30 years and I would venture to say he owns more property than you. (Sorry, if it sounds like I am trying to make this a pissing match I am not). Again, I guess my point is that you can still buy properties without those rigid standards and still be a good investor. This property was the rule and not the exception. But, I would venture to say if the property had been recently renovated and was in good shape, this is not that bad of a buy.

Here’s my problems. I haven’t collected anywhere close to the rent I had projected, and my expenses are higher then projected, mainly due to the drain, but also the property not being of good standard.

Like you said to get the quality of tenant I need to bring the property back I will have to upgrade the property. This will cost money I don’t have. So there are not a lot of answers for me.

I agree, my best bet I think is a deed back but other then that things look bad for me. It will be something I will have to learn that not any guru could teach me and I will have to step up to the plate and deal.

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I guess, the point I am trying to make is I think you are a bit rigid in your evaluations in analyzing properties.

Don’t you think it’s a little ironic that you think I am a bit rigid in my evaluation, but using your evaluation, you’re losing your butt? I don’t think you really understand what has happened to you.

But, my middle of the road estimate is as follows

Annual Gross Scheduled Income= $31,500 (I am scheulded for $32,400, but as I know that means nothing)

Annual Vacancy & Credit Loss= $2,520 (8%, This was a way low projection, but at the time I thought it was conservative)
Insurance= $1,400 (turns out to be a little low, I am paying closer to $1,500 for insuracne annually, but againt at the time I thougth this was conservative)
Property Taxes=$1,500 (this is accurate)
Repairs & Maintenance ($3,000, I am approaching this number and have had the property for about 6 months, this is mainly due to the drain line)
Supplies & Misc.= $2,500 (This included such things as equipment to buy for fixing things, legal costs, advertising, etc.) If you count the money I spent on appliances I am well above this.

This is where you made the big mistake.

Let’s look at the math. By your calculation, Taxes and Insurance are each 5% of the gross (scheduled) rent. So, we’re at 10% right off the bat.

Then, you ommitted management, which normally runs 10% (unless you’re working for free and fuel is free where you live). So, we’re up to 20% so far.

Next, let’s throw in some vacancies. In an extremely good market, 5% would be a GREAT vacancy rate. In a mediocre market with relatively low income tenants, 10% would be about normal. In a fairly bad market, vacancies could easily be 15%. In the 5 years I’ve been in business, I’ve seen all these vacancy rates depending on the condition of the market. Let’s use a middle of the road estimate of 10%. So, now the expenses are at 30%.

Once the property is stabilized, about $50 per unit per month would be a good rate for maintenance, which is another 10%. Now, we’re at 40%.

Capital expenses (not technically an operating expense) should run about 5%. (45% at this point).

That only leaves 5% to cover advertising, legal expenses, evictions, damage done by tenants in excess of the deposit, etc, etc, etc. That brings you to 50%.

All of this assumes the property is stabilized with properly screened tenants; proper management; no deferred maintenance, etc (clearly not the case with the property you bought).

So, you see the 50% operating expenses weren’t rigid at all. Again, you made the EXACT SAME MISTAKE that most newbies make by underestimating the expenses and unfortunately this is the mistake that drives them out of the business.

The reality is I would love to buy properties using that formula, my problem isn't that I don't understand it, but I have had trouble finding those properties (that could be a topic for a different thread)

It’s always hard to find properties at a great price, however that’s totally irrelevant. You still have to find the BIG discounts if you want to make money.

Also, the investor that you questioned has been in the business over 30 years and I would venture to say he owns more property than you.

That’s very possible, but you need to understand how this investor has become successful. It could be he inherited a large fortune and is able to sustain the loss on his properties. Or, it could be that he bought his properties slowly (over a 30 year period) and was able to absorb the negative cash flow until the properties were paid off. Or, he could have saved and paid cash for the properties, which obviously increases the cash flow. Or, he could have bought his earlier properties at a HUGE DISCOUNT and the cash flow from the eariler properties is supporting the negative cash flow from the later purchases. You don’t seem to have any of these circumstances and buying a negative cash flow property is not working for you!

Here's my problems. I haven't collected anywhere close to the rent I had projected, and my expenses are higher then projected, mainly due to the drain, but also the property not being of good standard.

The drain is just a normal expense. Next time, it will be something else. For example, today I had to replace a refrigerator when it was fried by a lightning strike that affected one of my apartment buildings. Fortunately, I got off better than the tenants. One of the tenants had 3 TVs fried. Another had a computer ruined. Being the cheapskate I am, I only paid $80 at the used appliance store to replace the refrigerator. However, you get the idea. Stuff happens and it is absolutely normal. If you don’t account for these irregular expenses, you simply won’t make it.

Good Luck,

Mike