If only there were a time machine that would let us go back and warn ourselves of the common mistakes newbies make when they first invest in real estate. Because time machines don’t exist… yet… we’re going to give you the next best thing! Dan is going to go through and list out all of the mistakes to avoid when you first start investing in real estate.
How do you avoid losing money on a lousy tenant base? Where do you find the help to run the operations of the business, once you’ve closed on the deal?
Find out on this week’s bonus episode of Multifamily Investing Made Simple!
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Tweetable Quotes:
“The first thing I wish I would’ve appreciated more was that you cannot change the location of a building. No matter how much you fix it up, it’s still gonna be on the same block and in the same neighborhood.” – Dan Krueger
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** Transcripts
I Wish I knew
[00:00:00] Dan: So what are the top things? I wish I would’ve known on my very first deal. That’s what we’re talking about today.
Hey, what’s going on guys? Dan Kruger. And Victor’s. And today we’re gonna talk about some of the top things that I wish I knew on my very first deal. Uh, so a little background, little context here. My very first deal was a six unit apartment building in St. Paul, Minnesota. Uh, I did not syndicate this deal.
I didn’t have partners in it. Uh, this first deal was just, uh, me using my own money and doing it. All myself. So this might be a little bit different than some other people who are, are, are syndicating deals. So what I’m gonna be talking about today is a single owner operator, uh, situation. And what I wish I would’ve known going into that.
So the first thing I wish I would’ve appreciated more was that you cannot change the location of a building, no matter how much you fix it up, it’s still gonna be on the [00:01:00] same block. And in the same neighborhood, I went into that first property thinking that I could get, uh, rents up. The the, the top of the market for that entire area.
And I’m not just talking about the block, but, uh, the entire neighborhood, I thought if I make these units really great, I should be able to get top of market rent. What I neglected, uh, to consider, which didn’t really become apparent to me until after trying to lease a bunch of these units and getting feedback from potential residents was it was in a, just a really weird, awkward location.
It was on this awkward little corner, kind of at the end of a block. It just wasn’t that easy to get to parking was a pain. And that was a, a big issue in trying to lease the units at the rents that I was trying to get to. I couldn’t really compete with other properties that had a much more aesthetically, a pleasing block or better parking.
So it didn’t really matter what the units looked like inside the building. Just the location, uh, was a big hindrance on that first property. Now it ended up being a good deal. Um, very successful deal. Producing about a 42% [00:02:00] IRR over the course of three years. So it, it all worked, but I definitely underestimated the block context, the, the, the surrounding buildings and just the, the nuances of the neighborhood that I had no control over.
I wish I would’ve known on that first deal was that you need a rock star team. Now on this first deal, I thought I was going to outsource to third party management and everything was just gonna go swimmingly. Well, it didn’t on a little six unit building that had a very rough tenant base and had a lot of upgrades to be done.
I needed a project manager and your run of the mill property management group. Who’s gonna manage a little six unit, uh, for somebody is not gonna be that. And so I tried to dump all of this work on these guys. And within about four or five months, I realized that. Things just were not getting executed.
And why would they for a 6% management fee and a little six unit, they’re getting a couple hundred bucks a month. They’re not gonna spend all day every day. There’re managing contractors and, uh, doing all the things that need to be done to, to move this project along. So about five [00:03:00] months in maybe six months in cut ties with the management company and I completely took over, it was not passive.
I went into this thing thinking that it was going to be passive. So the bottom line here is that you need. To have a rockstar team. If you are gonna be doing value, add deals, you need a project manager. If it’s not you, you need to get one. Whether it’s a partner, an employee or a contractor, you need somebody who’s executing and, and keeping track of those projects as they’re being executed.
You also need. A leasing agent. It could be you, it could be somebody else. You’ve gotta have somebody with that skillset. And it’s very rare that everybody’s gonna have all the skillsets needed here. So in a perfect world, you’ve got a partner or you’ve at least got a good, uh, set of contractors that you can work with to execute.
On a, on a deal like this next thing I wish I knew on that first deal was that it can’t be passive unless you’re a limited partner on a syndication, or you are specifically a very passive partner in a JV joint venture. You’re not just gonna go and pick up a low property on your own higher property management company.
And say, [00:04:00] okay, they’re gonna take care of everything. This is a passive investment. I actually remember telling somebody early on in the first couple months of owning this property that, oh, you know, I don’t do much on the property. I’ve got a management company it’s totally passive. That was entirely wrong.
It was not passive. Things were not getting done properly early on because the management company just was not incentivized to do all the work needed to be done. Um, but, and then when we got rid of them, it was all me. So it was probably the farthest thing from passive. You can be passive in real estate.
If you’re LP in a syndication, or if you’ve got a partner, who’s agreed that they’re gonna do all the work and you actually trust them to do that. But if you’re gonna go and pick up properties on your own, like I did, it is not passive. It’s at least a part-time job. If not a full-time job. Next thing I wish I knew was that you need to do an extensive lease audit.
When you’re doing your due diligence on a property. Now I check to make sure that there were leases. Uh, this was my first acquisition, like I mentioned before, but I really underestimated how much you’ve actually gotta dig into the background checks and the [00:05:00] applications and the income verification. Cuz had I done that, I would’ve found that those things did not exist at this property.
Yes. We had tenants in the building. Yes. There were leases that were signed. But it should have been a major red flag that there was no background check or income verification included in these tenant files. Within a couple of months of taking over the property, I realized that we had a very rough tenant base.
There was actually only one. Resident out of the six units that actually had a decent job and was paying his rent. And he’d been there for about a decade. Everybody else. It was just riff RAF shenanigans, illegal activities, and almost nobody was paying the rent. Gotta make sure that the people in there are qualified, that they can actually afford to live there.
And they actually have jobs, legal jobs that are, uh, supporting them and able to. Enabled them to make their, their rent payments last but not least. Uh, this, this final lesson came from when I took over the management and was doing the management and the leasing on my own before I hired my first employee.
Uh, [00:06:00] it’s a lot better. To have a vacant unit than a bad tenant. When I got in there and I started trying to lease units for the first time, I was so excited to get people into that building because I needed the income to, to pay for the mortgage. However, I really underestimated how expensive it is to have the wrong tenant in a building.
So I, uh, over enthusiastically welcomed pretty much anybody in that agreed to apply and fill out, uh, a lease. I learned very quickly after that, that if you get, uh, less than ideal tenant into a building and they’re either into some illegal activity or just don’t have the money to pay their rent, it takes a very long time and a lot of money to actually get them out of that unit.
I had to go through my first eviction on this property and it’s actually the first of only. I’d say three or four in all the years we’ve been doing this. We’ve not evicted many people, but on this first building, I did have to evict somebody. It was a really bad experience. The resident actually vacated.
We, we had to go to court, we had to do the whole thing, [00:07:00] pay all the money. And I actually had to go back with the sheriff because I never got the keys. Uh, this resident just went silent. And so there’s this period after the eviction is filed and the judge says, okay, yeah, you gotta get out. You. I think it’s either 28 or 30 days to vacate the property.
If they don’t do it. By that point, you go back with the sheriff and we went back with the sheriff, literally everything was still there, old food in the fridge. Uh, I think there was still a TV on actually, but it was very clear. No, it had been there for a long time and here’s the kicker. They actually left their cat.
In the unit. So when, when you add up the legal fees, um, all the time, and then the storage costs and then the, uh, eventual cost of dumping, all of their stuff, getting all their stuff hauled away and dumped, it ended up costing upwards of probably six, $7,000 and taking over three months to execute. And if I had just let that unit sit vacant for a couple weeks longer and got a good tenant in there, it would’ve been a completely different situation.
So that’s gotta be one of the most, uh, important lessons I learned. On that first property you’ve gotta screen and you’ve [00:08:00] gotta keep a unit vacant until you find a qualified resident. So I hope this enlightened you guys into the world of real estate, and I will see you guys in the next.
