Hunting Happiness

I posted many details of our first investment property and getting a lease-option tenant placed in a generally positive article here. But it wasn’t all fun and games; there were some negative issues that had to be dealt with as well. Some of them are probably obvious and others not. Some were listed in the book “Buy Low, Rent Smart and Sell High”.

1. Hazard Insurance. You’re probably thinking this guy is an idiot, of course one has to pay hazard insurance on an investment property just like a primary residence. And indeed, I was expecting that and had even included that in my detailed analysis spreadsheet. What I did not know was this. If the property is going to be unoccupied (i.e. repair and improvement work is being done before it goes “on the market”), that puts it into a special class of insurance that all the standard home insurance companies won’t touch. In fact, it is specialty insurance and only a handful of companies write policies. Because of this there is little competition and prices are insane.  As in primary residence purchases they usually require prepaying the first year. In our case, this meant $2,000 up front (about $700 was expected), and a higher mortgage payment than anticipated (about +$100/mo) during the renovations. Now on the bright side most of these policies will issue refunds for the last 75% of the policy if you get it rented out quickly. This was not mentioned in the book and was definitely a shocker.
2. Crazy Prospective Tenants. This one may be more obvious but the extent and range of folks we dealt with shocked even us — both SomeGal and I have had a wide range of life experiences including dealing with all types of people in different environments. One family seemed normal until they submitted their application. They wanted a total of 14 people including 4 adults and 11 children to live in this very modestly sized home. We declined their application. Another prospective “family” involved a husband trying to win his estranged wife back. He was convinced that they would move in as “roommates” and eventually become romantic again. He was so sure that he kept me on the phone for more than an hour during the initial call and he kept SomeGal at the showing for nearly as long.  We declined their application.  Actually, we tried to convince them not to bother applying but they insisted.
3. Buyer agents. While we didn’t receive a lot of calls from agents looking to represent us, we did receive a handful of calls from agents representing buyers that were interested in our property. While this was not our ideal situation, we were willing to pay one side of a commission (3%) for a quick sale at market value. The shocker was how unprofessional agents were when it came to returning calls and/or responding to emails.  If they wanted or needed something, they were always available and returned emails or calls quickly.  If they didn’t need something, multiple calls or emails would go unanswered.
4. Water pressure. The water was off on the house when we inspected it and after we bought it we discovered insufficient water pressure on the second floor and had to install new water lines. We bought the property as-is but enough below market that we could afford the hit.  Even though we had a “who knows what” repair budget, having to spend it cut into our cash and our potential future profit margin.  Obviously in the future we will be on the lookout for this specific item.

There were also some issues many real estate investors have to deal with that we didn’t:

1. Seller Agents. I’ve heard horror stories of realtors circling like vultures, with some landlords receiving dozens of calls a week claiming to be able to rent out or sell a property. We did very professional looking signs and advertising, so I think that cut down on a lot of it.
2. Contractor issues. We thankfully have an outstanding construction manager/general contractor who has a great team and who we trust and is extremely experienced. So although property #1 needed some fairly serious work, this was not a big head ache for us.
3. Section 8 housing. Out of dozens and dozens of calls from prospective tenants, only one mentioned Section 8 vouchers and even then the lease payment was above their budget.

As I mentioned in the first post, the experience was positive overall, fun, and increased our net worth. We are actively looking for more properties.