How I got into Real Estate as a young U.S. Air Force Officer
As with many real estate investors, I got bitten by the real estate bug after reading Rich Dad, Poor Dad by Robert Kiyosaki in 2003. Though not an instructional text my any stretch of the imagination, it was a truly inspiring book that prompted an immediate call to action.
At the time, I was a freshly minted Second Lieutenant stationed at the Pentagon in Washington, D.C. Though I was itching to start utilizing the lessons learned from the book , as some of you may remember, the market prices at the time were very prohibitive, if not simply frothy. Unbeknownst to me, the market would continue it's meteoric climb, but I digress. My willingness to act was also diminished by the allure of taking advantage of the opportunity to enjoy the company of family, which happened to live about 20 minutes away from my duty station when not accounting for traffic. Reading into that last statement a bit, you may have guess that I was able to live virtually for free, paying my parents rents that were severely below then market rents.
I spent the next four years saving the extra income in the hopes of one day being able to purchase my first property. The idea at the time was simply to purchase a primary residence each time I incurred a Permanent Change of Station (PCS). Simply put, each time I was moved by the Air Force to a new duty station to begin a new job, I would buy a property to live in. Fortunately for me, I had the foresight to place those savings into both a Roth IRA and the government-sponsored 401K known as the Thrift Savings Plan.
From 2003 – 2007, the period I lived in D.C., the stock market was generating historically high returns. In fact, during that time, you could essentially do no wrong in both the stock market or real estate. Everyone at the time was a genius. So, though I “missed” out on the gains in real estate, I was able to capture quite a bit in index funds and some stock and option plays.
From there, I moved to Dayton, Ohio to pursue and Master's degree on the military's dime. Score! It would be an 18 month tour, and I would finally be able to purchase my first property!
It’s is now late 2007. The market is beginning to show signs of stress. Real Estate prices have fallen ~10%. I’m thinking, “wow, I’m one lucky guy. I am getting such a great deal on this new construction condo!” Ugh, a condo? Anyway, I purchased this property: a 2 bed, 2 bath, 1350 sqft condo for $115k. I used conventional financing with a 30 year fixed loan at 6.12% after paying points. Hey, historically this was a great rate… It was structured as an 80-10-10, where the primary first loan is at 80% of the purchase price, a second loan is at 10% with Private Mortgage Insurance (PMI), and I bring 10% for a down payment to show some "skin in the game". This brought my payments for PITI (loan principal paydown, Interest, Taxes, & Insurance) to $765/month on the first loan, $85/month on the second loan. Additionally, the property had condo fees at $160/month and homeowners association fees of $72/month.
To sum up this “deal”, I was in for $12k. At the time, I didn’t want to waste my VA loan. I would later find out that you can take out multiple VA loans as long as you were below the threshold of about $415k at the time. In hindsight, this was still a good decision. Fixed costs totaled $1082/month. I was in a great location! As I'd read, "it's all about Location, Location, Location!" I had that down, so the rest (appreciation, rents, etc.) would all magically fall into line. Little did I know, rents for a similar property where going for about $750/month. Uh oh...
Being in the military and having to move for the second time, I was essentially forced to use a property management (PM) company. Now I will say, I've had a good experience with them. They tend to keep my unit occupied and don’t charge an arm and a leg to do repairs. But, adding on a 15% PM fee on top of a bleeding rental is torturous.
Here are the numbers:
- Purchase Price: $115k (I broke rule number one, you make money when you buy. I paid market value in a declining market. I’m still shaking my head.)
- Down payment: 12k
- Rent: $825/month (I allow pets)
- PM fee: $123
- MX: $82/month (10%)
- Vacancies: $82/month (10%...It’s actually been closer to 7% the last 5 years)
- Reserves: $41/month (5%...I probably can drop this due to this property being a condo. The condo/association fees generally will cover this)
- PITI (Loan Princial, Interest, Taxes, Insurance): $850/Month
- Condo/Association Fees: $232 (in the last nine years, these fees have increased to$ 330 or 42.2%)
- Cash Flow: -$585 / Return on investment: Let’s not talk about this.
And so it follows, this was the first mistake that I made in the real estate game. I did not do the proper due diligence and account for all expenses like vacancies, maintenance, capital expenditures, and property management compared to market rents before purchasing. This property continues to be a thorn in my side. I know many of you are probably thinking, “sell, sell, sell”, but I like to take the mindset that I'll just do twice as better next time.
Unfortunately, I hadn’t found BiggerPockets yet, and incredibly real estate online education platform and didn't fully understand how to find a great real estate deal. I found this site after my second purchase in 2013. It has opened my eyes tremendously, and I am a completely different, and better, real estate investor today.
I have managed to do some creative financing recently, again thanks to BP, to make the number presented look a little bit better. Nevertheless, overall, this is a terrible investment. I even broke most of the Rich Dad, Poor Dad rules. Luckily, as I travel down this exciting journey, the story starts to improve. It's a slow, but steady process.
Thanks to all of you who took the time to read my first post. Check in for the next blog post, where I'll detail my second purchase.