I love telling people that I have been a Brandon Turner copycat when it comes to my real estate investing career. While our experience searching for real estate is a little different, our stories are quite similar because I followed what Brandon coined the “stack method.”
The stack method is self-explanatory: first, you buy one property, then two, four, six and eight more, but you start small and gradually expand over time. In hopes you can avoid (or at least laugh at) some of the mistakes I made, here’s how I used the stack method and my biggest failures along the way.
Property 1: SFR: Too cheap to pay rent, so it’s a move
My first purchase was driven by a combination of scarcity mentality and desire to be frugal. I found a promising house in a solid neighborhood, but it was priced well above what I was willing to pay. Luckily, that same house finally came up for online auction, and after several clicks, not sure what I was doing and scared to death, I ended up being the winning bidder.
I didn’t know that owning a home outweighed investors’ highest offers. Additionally, I was able to use conventional financing, where cash is typically required at auctions.
During the renovation process, I took on tasks like tearing up old pink carpets and attempting to sand hardwood floors myself. It turned out to be a tedious and frustrating experience. I also made the mistake of renovating the kitchen and knocking down a load-bearing wall while I was still living on the property. To make matters worse, I decided to redo the roof without permits, only to discover a constant leak on the porch when it rained.
So what are the two morals of this story?
- If you haven’t done something before (i.e. buying a home through an online auction), talk to someone who has done it before.
- Doing everything yourself is No the best approach. It is mentally and physically exhausting.
Property 2: Vacant lot and two units: total bankruptcy for the developer
After going from virtually zero liquid cash to more than I’d ever had, I decided to go all-in on my next venture. Due to my naivety, I thought renovating a two-unit building and building a single-family home from scratch would be easy. First things first: I had to renovate the existing building.
Unaware of low down payment loan programs, I pressed ahead with conventional financing, depleting my savings for the deposit and rehabilitation costs (zero cash, again!). Never write a contract with a 10% security deposit payment on a property that is not safe, sanitary and protected; Those are the three components that banks consider for conventional financing.
Oh, and by the way, I waived my financial contingency, which were my non-investor-friendly agent’s ideas. By the grace of God and the angles of the appraiser’s photographs, the bank approved my loan and the deal was finalized.
A family friend completed the HVAC work and recommended an electrician to me. However, trying to be a cost-saving genius, I decided to hire an electrician based solely on his low price and his excellent reviews on Google (which I believe were all fake).
Well guess what? His offer was shape and when I refused to pay more, the utility pole mysteriously disappeared. No joke: he fell out the back of the building! I reluctantly coughed up the money to finish the project, feeling quite defeated, but completed it anyway.
So what are the two morals of this story?
- Work with an agent who understands investments to help you mitigate risk.
- Trust references on Internet search engines: Being cheap can be expensive.
Property 3: Two-unit BRRRR done right
With each new property, I gained valuable information, honed my skills, and built my network. Before purchasing my third property, fortunately I got my real estate licenseand I was finally able to take advantage of the FHA low down payment loan.
Plus, since I had my license, I was able to use my agent commission for the down payment. This meant my out-of-pocket down payment was only $7,000 for a $450,000 two-unit property.
This property was an MLS deal and since I represented myself, I was able to act quickly and establish a fantastic relationship with the buyer’s agent. These two factors changed the rules of the game. Unlike my previous project, this property needed a cosmetic makeover, which meant less work and a faster overall process.
After updating the kitchen cabinets, countertops, bathrooms, flooring, paint and fixtures, it was time for the fourth R of BRRRRR (buy, rehabilitate, rent, refinance, repeat). Knowing that the appraised value had to line up perfectly, I used a tip I had learned from several Bigger Pockets Podcasts. I met with the appraiser armed with a comprehensive list of improvements and a comparative market analysis (CMA) that supported the value I was seeking. He assessment I went right back to the money.
So what are the three morals of this story?
- Get your real estate license. You can save/earn money and act fast.
- Bigger is not always better. Sometimes less can lead to more (and with faster results).
- Don’t underestimate the power of the tips and tricks you hear on podcasts – they work!
Property 4: Newly built single-family house from scratch
So, I had that vacant lot through the purchase of property 2 and by default I thought the next step was to build something on it. Little did he know the incredible lessons he was about to receive in the realms of zoning and permits.
Here are some “zoning fun facts” I learned:
- If a previous developer submits plans and they are approved, it is considered a type 1 zoning change. This means that any new developer (me in this case) had to build something similar to the proposed plans. Unfortunately, I learned this after I had invested $9,000 in the design of a two-unit building. Fagot! There goes that money!
- When two adjoining city lots are combined (which was also my case), both the vacant lot and the existing building must be zoned appropriately for the vacant lot to be buildable. Well, the previous developer tried this, but the legal zoning change document measured from the main street 24 feet away, which resulted in my lot and the building next door being rezoned instead of my building. Please indicate a zoning change for my existing building.
- In order to execute a zoning change, your building must comply with all current setbacks. Of course, many older Chicago buildings do not meet adequate setback requirements for easy rezoning. This meant that prior to the rezoning of my building, a front setback variance was necessary. So, add a couple more months to the zoning fun.
After addressing all the zoning issues, and 16 months later, the timing couldn’t have been more perfect. This huge project became the catalyst to drive our business forward and test our systems and processes.
And guess what? We sold our fourth property eight months later for a whopping $1.1 million!
Property 5: 19-unit multifamily using a 1031 exchange
Before we get into this deal, if you don’t know what a 1031 exchange is, read this excellent article that goes over everything you need to know.
I realized that going alone limited my growth potential. Recognizing the need to have like-minded people by my side, I made a life-changing decision: I invested significantly ($6,000) to join a mindset mastermind, where I surrounded myself with motivated people. This one decision opened my mind to the impossible.
A crucial lesson I learned was the power of sharing your goals and intentions with others. After completing property 4, I had cash on hand and Capital gains postpone. Spreading the word among my friends, I discovered a 19-unit property off the market.
Even though I only had half the down payment, a member of my mastermind group stepped in with the rest. By offering full price, the transaction was seamless.
For six months I tried to be a property manager, but soon realized that my strength was being a general contractor. Managing a 19-unit property in a class C neighborhood was a different ball game. It made me wonder if my time would be better spent developing our business. The easy answer was yes. Goodbye, property management.
Here’s the truth: your time is incredibly valuable. I have known for a long time that I undervalue my own time. To level up faster, I had to believe that my time was worth more and make strategic decisions accordingly.
So what’s the point of all these stories? My hope, at least, is that you have eliminated two things:
- You get what you pay for. There’s a reason things are less expensive.
- Learning from others and not going alone is the best way to avoid mistakes and scale quickly.
- Time is the most precious resource we have. Be mindful of how you spend it and the value of the tasks you are working on.
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BiggerPockets Note: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.