In the past 5 years, I’ve been fortunate enough to have purchased and rehabbed quite a few properties in and around Philadelphia. 90% of them were full gut renovations that were either sold or rented out. Below are 6 of my biggest takeaways from the past 5 years about investing in real estate (and in particular, rehabbing 1-4 unit properties).
1. Passive income is not passive.
This one is a great place to start. Many people who aim to build passive income envision building up a rental portfolio, hiring a property management company, and living out their lives on the beach. Once you own a piece of real estate and get it up and running, you can sit back and watch your bank account grow and deposits come in month after month. Right?
Wrong.
Managing properties takes time, effort, and constant problem-solving. The amount of time and effort depends on the type of property you have and its condition, but it’s often more than people think. If you’ve ever owned rental houses, you know that something goes wrong at least a few times per year.
“But Rodney, isn’t that what property managers are for?”
Correct– you can definitely delegate 100% of the headaches and maintenance to a property manager. Unfortunately, this creates another problem: property managers don’t care about your personal profit. Your toilet stopped working? A/C went out? Roof is leaking? Expect to pay at least 25-100% more to have the problem fixed if your property manager is handling it. Why? Because they don’t have any incentive to negotiate prices. Their main incentive is to get someone to fix the problem as quickly as possible.
No matter how many or few properties you have, you always have to keep the closest eye on your profits just like any other business. In other words, you have to manage your property manager (if you have one). They need to know that you’re watching them or profits will start to slip away.
2. The real estate business is all about people, NOT properties.
Although real estate isn’t a typical brick & mortar business, building and maintaining relationships is by far the most important aspect of the business. Relationships matter at every level – from the seller that decides to sell you their property at a discount because they like you to the plumber that will take your call at 10 pm on a Sunday and handle that sewage pipe that just flooded.
Without being able to build rapport and develop relationships with partners, lenders, sellers, wholesalers, contractors and more, I would never have been able to buy ANY of my properties. Every single one started with a conversation and trying to understand the other person’s scenario and how I might be able to help them.
3. Rehabbing properties is not as simple or easy as it looks on TV.
In my adult life, I’ve never had cable, so my only experiences of watching the HGTV shows have been at family gatherings, but every time I shake my head at how easy they make it look. Rehabbing properties takes MUCH more effort than people give it credit for. If you think you’re just going to hire a contractor and show up when the job is done, you’re in for a surprise.
Similarly to how a property manager needs to be managed, a contractor also needs to be closely watched and managed through the process. Also, YOU need to be able to control your emotions when working with contractors because more than half of them (in my experience) will never finish a job on time or on budget. Planning for this in advance (e.g. having a contingency reserve) is crucial and there are always change orders and extra costs with rehabs.
4. Resourcefulness is (almost) everything.
Being able to problem-solve means everything in business. The bigger the problem that is solved, the more money that can be made. For example, let’s say you find an amazing opportunity through a relationship to buy a 50 unit apartment building that’s in foreclosure. You happen to know the hard money lender who just foreclosed on the property and they are looking to sell it for $1,500,000. You’ve done your research and you’re sure it’s worth $2,200,000 even in its current condition. Here’s the problem: it’s December 22nd and the lender needs to close by the end of the year for tax reasons. You only have $10,000 in your personal bank account.
Could you figure out how to come up with $1,500,000 in a week? How would you do it? Do you have the network right now to get it done?
You may not believe it, but this type of situation happens every day. Someone’s motivation changes and an opportunity arises. The most successful people that I know in the business are the ones that have built the relationships so they hear about these opportunities first, then they put their thinking cap on and figure out how to get things done.
5. Bigger is not always better.
If you’ve ever dreamed of going big (e.g. owning a skyscraper, a hotel, a $10,000,000 house, etc.) this one’s for you. Most large commercial buildings are owned by partnerships, institutions, or family offices. It is possible for a small-time investor to become part of a large project and have a piece of ownership, which can be very lucrative if done correctly. However, the risk of owning a minority share in a large endeavor is that your decision-making power is also limited.
Picture this: you’ve been investing in single family houses with your own money for the past 5 years and have built up a nice little portfolio of a few houses in your neighborhood. You happen to find a big lot where a 100 unit apartment building can be built and decide to partner with a big-time developer in town who has the team to get it done. You own 10% of the project and work on the project for the next 36 months until the building is up and running.
All of a sudden, it’s July 2022 and the market changes. Rates have gone up, the rents are less than expected, and the building went way over budget. The developer’s financial partners want to get out and get their money back so they sell the building immediately at a slight discount to get out while they can. After everything is said and done, you didn’t make any profit at all and just lost the countless hours you put in over the past 36 months.
This is another scenario that happens a lot when the real estate market shifts. The above example may have been a very profitable deal for everyone if it were held for 10 years but sometimes bad decisions are made, and if you only own a small piece of the partnership, there’s not much you can do about it.
Real estate is an amazing business overall, but comes with its share of risks. As long as you know what you’re getting into and have the right group of people around you, it’s very likely that you’ll succeed over the long-term. Happy investing!