Friday, October 12, 2007

Tex Mess

Finally, my writing has been recognized and I have been offered an assignment to write a regular column! Does it count that it's a newsletter to my husband's customers (I will be telling you about the business we started in a later post)? I'm honored that he is impressed with my feeble attempts to communicate our experiences in print, but I think I just agreed to more work with no pay. Darn!

Work with no pay. Reminds me of my apartment-owning experiences. Only there was pay--us paying them. Speaking of which, I should tell you about our very first "property manager."

I write "property manager" because he really wasn't. Three years ago, we decided to buy houses out of state. My brother had about a dozen outside of California. Remember our "high equity, no (or negative) cash flow" investments? To make an very long story short, we decided to buy three new homes in the booming town of McKinney, Texas, in addition to the ones we owned in California. We found them through an agent who we connected with about a different listing. He had repeatedly visited this Fox and Jacobs neighborhood, but they would not work with investors at the time. Then, when they had some left over from a phase they were closing out, they became eager for investors to pick up the houses. I bet every new development in the country today is more then willing to work with investors now. My, my how the tide turns!

Two of the homes were 3700 square feet and one was 2900. I can't remember exactly, but we paid between $165,000 to $175,000 for each of them. Cheap by California standards, but expensive in Texas (there is no personal tax in Texas, but the property tax rate for that area is a whopping 2.92%). The agent said that we would be able to rent the big homes for $1,995 and the smaller one for $1,795. I asked for rental comps and he provided me with these exact figures from the MLS. With these rents, we would be clearing $1,000 a month total. Well, as we found out later, he was just a bit off.

Anyway, I digress. Since they were new and under warranty, the agent said that he would be happy to find us tenants for free (red flag!) and would probably have them locked in before we closed (wrong again!). Then he could put them on auto pay and we could save the management fee. Well, since we had bought primarily new homes, we were familiar with the process and in dealing with the developer after the close. So this scenario all made sense to us--except for one small detail. We were thousands of miles away.

After the close, the agent seemed to drop off the face of the earth. When we would contact him, he talked a good talk with that Texan drawl that makes everyone sound so sincere and honest (the KY accent does the same thing). He said he couldn't figure out why they weren't renting. Months rolled by. We reduced the rent. Then we started receiving notices from the home owners' association about overgrown landscaping (which the agent was supposed to be coordinating) and dead grass. Uh-oh. How are you supposed to rent a property that looks like a foreclosure?

We had reduced the rent by $200 on each (which brought our net income down to $400/month). The new year came and went, and we were still sitting on three vacant properties. In April, we finally cut the guy loose and hired a real property manager. She rented a big one and the small one within a month for $1,495 and $1,395, respectively. The other big one rented two months later on a six-month lease for $1,650. Now we were under $245 a month.

A year and a half after we purchased them, we sold one of the big ones and the small one, which were occupied at the time, to a friend because our apartments were sucking us dry. Due to the costs involved, we didn't make any money on the sales, but we pulled our investments out. I have to say that I wish we had kept them. The one we have now rents for $1,595 a month, is under newer adequate management, and we are cash flowing a tiny bit every month.

Lessons learned from this experience:
  1. Don't buy super big houses, even if they seem cheap to you. Resale is a killer because you eliminate a large number of buyers by having a listing at the high end of the local market.
  2. Don't take rental advise from a real estate agent--especially if this same agent has something to gain by selling you the properties.
  3. When someone offers to do something for free, you get what you pay for.
  4. Don't buy three houses on the same street at the same time. We were competing against ourselves. We had bought two at the same time in California developments, but never three.
  5. Don't think for a minute that someone (who has already picked up their commission checks) will care for your investment as well as you would. I think this is the third time that I've said this on my blog.
  6. Hold on to a potentially good thing.
  7. I can't think of any more than six.

Being our first experience with property managers, we felt that jumping to apartment management would not be much different. But, in many ways, it was. We learned a bit from working with the two Texas managers, but not enough to own apartments. Unfortunately, we didn't realize that until it was too late.