[Today we our happy to present to you a reader story about investment property. Accelerating FI is a huge topic in the personal finance world; considering buying real estate property has been a popular option for many bloggers out there. We present to you a full-picture of what it is actually like (emotions included) of possibly taking that option!]
I was ready to hand over a $30,000 check* to close on a two-unit home with tenants living there.
By all rights (based on my simple understanding of investment properties at the time), this was a great first investment property. The city I live in is experiencing a lot of growth, and the rent would start coming in the day I signed the closing documents. The neighborhood was not a through-street, had well-manicured landscaping, and had many families with small children that enjoyed playing in their front yard. It seemed quaint, and the market suggested I’d receive well over 1% of the value of the house in monthly gross rent.
Only 9 days after entering the contract to purchase, I asked my realtor to draft another document that would cancel the contract.
I’d already spent hundreds** on the house; why was I walking away?
But first, some back story…
Old city (~10 years ago):
When I first rented an apartment in this city after college, there were plenty of farm fields and large, empty lots. A small strip of grocery stores and restaurants served as the center of the city. I still remember driving the U-haul truck with all of my belongings passed this barren main road and thinking that this city was ‘out of the way’.
This city used to be considered rural outskirts 10 years ago, with quiet farm houses spread throughout the crops.
New city (present day):
Today, this city is now seeing the construction of entire neighborhoods where properties start at $300k.
The small strip of grocery stores and restaurants has expanded into a whole complex of chain restaurants, stores, banks and brand-new apartments. A new city hall surrounded by family-friendly green space and luxury restaurants is the center piece of this burgeoning city. The construction is non-stop; new buildings are appearing all the time.
The city has a fresh branding strategy that has people eager to move here.
After living here for two years as renters, we decided to call this city home for the long-term. My girlfriend and I saved up enough to put a 10% down payment on a small ranch, and pulled the trigger.
Going through the house purchase process was new, exciting, and a little stressful, but we closed with no issue.
Since our new house was only a few minutes by car, we casually moved our belongings over the period of a week and all of a sudden, we lived in a house!
Shortly after moving to our new house, we discovered the idea of financial independence (and the Duke of Dollars Roadmap).
While being naturally frugal, we definitely had room in our life to cut back on our spending. With some focus, we dialed back our spending on restaurants, Amazon and entertainment. As ChooseFI mentions~, making dozens of small decisions to spend smarter started to help us accumulate extra cash. We dumped this extra money into a low-cost index fund and started to work towards our financial freedom.
Much of our effort in our early FI life was focused on finding these inefficiencies in our spending and correcting them. Our minds were focused on learning many core concepts behind FI. Blogs offered thoughts on being more frugal, earning more income, paying less taxes, and a dozen other strategies to get ahead financially.
Learning about investment properties:
The initial effort to change direction in our financial lives was huge and exhausting.
Our life had grown to be this large mass that wanted to keep moving in one direction. Just as physics suggests, shifting the momentum of a mass takes work! But as we found ways to change our life for the better, we found we had more mental capacity to explore the next level of FI.
The hard decisions to cancel recurring bills, dial in our grocery budget, and set up automatic investing were already complete. We realized we were entering a less-glamorous phase of FI called ‘keep working and saving!’.
At this point, my mind started to wonder: “how can I get to FI faster?”
Again, the internet provided numerous articles of alternative investments that had higher gains. Why not try investing in real estate and see 15% annual returns?
Being scared but excited to try something different:
My passion for home projects has helped me turn our ranch into a cozy home.
I figured this passion for home projects could help me as a landlord, maintaining a property that people would pay me to live in. The more reading I did on land lording, the more enthusiastic I got about the idea. It sounded great; front the cash for a home, deal with a few forms to get tenants living there, and then collect rent checks.
Of course, the idea of land lording is scary. I (thought I) had an appropriate appreciation for the level of work and risk involved, so we started the search for a second house.
I embraced my nervousness as a sign of growth.
Going through the house search process again:
The house search process started just as I remembered; provide the realtor with some basic criteria for your next property, and wait for properties to appear on the market. We chose to follow a fairly traditional way of purchasing a home.
After learning our lessons with this one, we imagined we could move towards more complex deals. The houses started to appear in our inbox and we spent our evenings after work touring them.
We saw abandoned flips, deteriorating centuries-old farm houses, fully-occupied quad-plexes, and everything in between. The search was fun and we eventually stumbled across a likely candidate.
The house fit our price range, had room for curb appeal improvements, needed a fresh coat of paint in one unit, and would be earning healthy rent checks every month. The excitement kicked in!
The investment property offer:
We decided to draft an offer to purchase. We priced low to accommodate for the age of the house, and sent the offer across. Despite the house being on the market for over 30 days, someone made an offer on the house at the same time!
We adjusted our price^ because we felt this would be a great first property, and submitted a counteroffer. We received notice of the accept offer the next day. We were going to buy another house!
I promptly called our house inspector and schedule something for later that week.
The day prior to the inspection, I had trouble sleeping.
Up until this moment, the idea of investing in real estate seemed almost like investing in Vanguard. There was a little more homework to do, like researching and visiting properties and convincing a bank to provide me with a mortgage, but in the end, I was just writing a large check.
But the day before our inspection, it clicked: I was about to go visit a very real piece of property that had very real tenants and very real maintenance.
What if the house flooded? What if a tree fell on the roof? If someone fell off the deck? These were just a few possible issues that were about to become my responsibility.
I was still excited to push through this uncertainty. I know that being uncomfortable is healthy; it means you’re learning and changing. Discomfort lets you know that you’re shifting the momentum in your life.
In this case, I was shifting my financial momentum by purchasing a large, tangible asset. The following day, we stepped foot on the property with a very competent inspector, and began the hunt for problems.
The inspection started with the upper unit, which had been renovated in the last few years. The unit had central air and heat, pleasant floors, and a modern feeling kitchen. With a few starts along the way, we finished the upper unit inspection with the normal minor issues: a GFCI outlet here, a clogged air vent there.
We then proceed to our next item to inspect, which was the basement. I was anxious for this part of the inspection because we noticed some water damage on the basement steps, indicating some moisture problems in the basement. The feeling of the inspection shifted dramatically; the inspector was finding issue after issue with the basement. The moisture turned out to be the most minor symptom of the house’s issue: foundation movement, negative grading, a leaky asphalt roof, and a broken gutter that was flooding the soil next to the foundation wall. As the issues racked up, we did the numbers in our head and realize this could be a $30,000 mistake if we proceeded.
We consulted our realtor and decided at that moment that these major defects changed everything. We asked her to draft a notice of defects that would break us from the contract to purchase through our inspection contingency. We thanked the inspector for his time, but ended the inspection right then and there.
Taking a pause:
As we work through the process of recuperating our earnest money, we have decided to take a pause in pursuit of owning a real estate asset. The inspection helped me realize that becoming a landlord means owning a depreciating asset that needs maintenance.
I’ll reevaluate my options as an investor, but will likely look towards more passive sources of income. I know that many real estate investors say that unless you want to buy yourself a job, you should look at leveraging property manager’s services.
Investment property reflection:
With the long build-up of excitement of being a real estate investor, the unexpected let down of the inspection hurt. For a moment, it felt like a failure. With my research and reading, I felt confident in being able to find a real estate deal that would help us reach our financial goals.
It felt like this could be a significant moment in our life, when we started adding non-paper assets to our balance sheet. But alas, the significant defects derailed this ideal vision, and brought me back to reality. In the end, I spent $275 for a very real lesson about real estate, which was worth every dollar.
In the meantime, I’ll continue to explore new ideas of expanding my income. The discomfort I felt in learning something new reminded me that life’s most exciting moments come from trying something new. I’ve decided to write this blog post, and also pursue a side hustle that I’ve put together. I’m sure that if I keep pursuing, I’ll find something that helps me get to FI faster, and makes me excited at the same time.
*my entire life savings!
**the full house inspection was going to cost me $375, but the inspector, who I really enjoy working with, didn’t think it’d be fair to charge me full price since we stopped the inspection early. We agreed that $275 was a fair price.
~compounding marginal gains!
^which in retrospect was not a great decision. Our math checked out with our offer price, but I shouldn’t have felt any emotional attachment to the house.