My First Rental Property was a FAT Failure

Michael QuanHow to, Income, Investment, Misc, Real Estate, Taxes8 Comments

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This past week I opened escrow on my 5th investment property and things are going smooth.

However, whenever I enter a transaction for a rental property, I get some humbling flashbacks from my first investment property.

You see, my first rental property was a FAT FAILURE.

Due Diligence

Part of making real estate a great wealth builder is getting a good to great deal upfront. And in order to do so, this requires some thorough due diligence.

I had read all the books, built a good base of knowledge, and thought it over many times over.

In late 2009, Las Vegas home prices had dropped as much as 65% off their recent highs.  So, I decided to target my rental property search there.  By this time, some of the properties listed on the MLS were priced to cash flow with my minimum criteria (20% down payment with 80% financed for 30 years at a 5% interest rate).

I was super excited to see this happening finally, but other investors had taken notice as well.  Full-on bidding wars erupted on most of these properties.  In fact, it wasn’t until my 11th offer that one was finally accepted.  I was stoked!

The purchase price was just $123,500 for a 3 bedroom, 2.5 bathroom home in the newer Southwest part of Las Vegas.  Rehab would be minimal at $6000 (carpet, paint, landscaping, etc.).

Here was my analysis:

RH Analysis 1

 

Rental comps (comparisons) in the area were conservatively going for $1000/month.  So, it definitely penciled out as a good investment.

RH Analysis 2

Surely, I was good to go!

Closing Time

By the time it came to close the deal, I was itching to get this first one under my belt.

I felt confident that I could perform the minor rehab quickly and I’d be off to the races!

And, I did just that. I replaced some flooring, repainted, and handled some minor plumbing issues.

I even started calling different property managers (PMs) in the area. But then my world came crashing down quickly…

What Do You Mean?

As I was interviewing different PMs, one of them told me I couldn’t rent out the home.

Clearly, he was wrong I thought. I even saw listings on Craigslist and other rental sites for a neighboring home!

And yet, he was 100% correct.

Remember that “due diligence” I thought I had performed flawlessly? Well, I had failed to real through ALL of the fine print in the CC&Rs (Covenant, Conditions, & Restrictions).

CC&Rs are the rules that govern the community your property is a part of, and most commonly seen with condominiums, townhouses, etc.

RH RestrictionsThere is was though. In plain black and white.

I can still remember that awful feeling when I realized what I was reading.  You know, that burning sensation when you can feel your blood boiling from all your emotions trying to escape?

“You’ve got to be kidding me!?” I couldn’t rent it out!  What!???

There Must Be a Way…

Well, I tried to get around this rental restriction for over a year.

I spoke with countless property managers, attorneys, the even the HOA directly… no luck.

In the meantime, we’d take a few vacations out here every couple of months. But it was hardly a vacation when we didn’t have any furniture.

Thankfully I had a very understanding and loving wife who trusted that things would work out.

We never were able to rent out the home because the penalties would have crushed me and ended up with a lien on my home.

But, the story has a happy ending…

Persistence Wins

I’m a big believer that those who are persistent ultimately become the winners.

And although I was not able to rent it out, I had purchased the property at the right time.

As 2014 rolled around, I was able to sell the property for $170,000.  It was the right time to get out because I was able to walk away with my initial principal intact.  (Although it may seem like I walked away with a profit of $46,500, I didn’t.  I had to pay taxes on the “gain”, plus account for all the prior debt service (i.e. loan payments & interest) and misc expenses I had been paying along the way.

That was an incredible lesson that I’ve never forgotten, and it makes me a better investor today.

I also persisted. And instead of getting pissed off and writing off real estate as a bad investment category for the rest of my life, I used the knowledge I had gained from this transaction, and I bought the house across the street which wasn’t a part of the same HOA community.

RH3

This home didn’t have any rental restrictions and I purchased it just a few months after my FAT FAIL.

Today it cash flows every month; I get tax benefits annually; and it continues to appreciate well beyond when I purchased it (icing on the cake!).

Always, always do your due diligence COMPLETELY.  But, NEVER lose sight of your goals no matter what kind of setback you encounter.

Readers, do you have any real estate or investing horror stories?  What did you learn?

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8 Comments on “My First Rental Property was a FAT Failure”

  1. Thank you for sharing the story, Michael. I had no idea there can be actual clauses in the real estate contract that says that you can’t rent out the rooms. It goes to show that you have to read every single thing in the legal language otherwise, you have no idea what you’ve agreed to.

    Don’t want to give away your first born as payment!

  2. Hello Michael, have you tried doing Out of State Turnkey Rental Property? Would be curious to hear about your opinion.

  3. Wow, that’s a pretty bad outcome for sure. Hard to imagine getting through the entire process only to find out that you can’t rent the property. It’s good that you posted the story. I’m sure a lot of readers weren’t even aware that those types of restrictive covenants can even be put in place on a property. It’s easy to assume that when you “own” something you can do whatever you want with it, but that is indeed not always the case.

    1. Yeah, assumptions can get you into a lot of trouble really quickly. Even though I’d never heard of a full on rental restriction didn’t mean it didn’t exist!

      I lucked out that I was able to get all of my money back.

    1. Hey Justin, unfortunately I didn’t. As I understand it you need a minimum of 14 days of rent in a given year to qualify. Since I couldn’t rent it out at all it was considered a second home.

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