What the sub-prime crisis taught me
Tragedy or Opportunity?
From great tragedy comes great opportunity. For the last few years we have all heard the sad stories that came from the sub-prime lending bubble. When this combination of greed and ignorance imploded, it created an amazing opportunity.
Houses went on sale, at the same time interest rates were falling to record lows. This was a once in a lifetime event in real estate; unseen since the great depression. Those who recognized it, and were positioned to take advantage of it, have thrived. I recognized it, but was not in a great position to take advantage of it. I lacked 3 major components that would have positioned me to better exploit this opportunity.
Here are those 3 components and what I have learned.
In 2007 as home prices were coming down I began buying. My first purchase was 3 triplexes in a poverty stricken section of Louisville. I acquired two additional properties in 2007, and kept purchasing homes over the next 18 months.
My first problem: Location
There are 2 aspects of location:
First was my location. I was living in Singapore and my properties were in Kentucky and Indiana. I had a variety of assistance from others, including a “property manager”(more on this later), and partners. I was only able to be onsite about twice a year and lacked the right person to watch my property. It is hard to manage assets from 10,000 miles away.
Proximity to your investment is good
Location of the properties: there is the famous line that 3 most important things in real estate is location, location and location. While I would disagree, it is an important component in your evaluation. I overpaid for those 3 triplexes because of their location, not because of the buildings. They were great buildings in a challenged area of Louisville. I struggled to find tenants worth having. These 3 properties would almost bankrupt me as I learned the next component.
Good neighborhoods attract good tenants
Experience:
I had very limited experience in owning residential rental real estate. So, I hired a “property manager.” Just because someone calls themselves a “property manager” doesn’t mean they are. To this day I have not found a good property manager who will work in that part of Louisville.
Rent would fail to be paid due to poor tenant selection. It seemed we evicted tenants every week. I paid the lawyer to do the eviction. Eviction process took 2 months (getting no rent). Then I had to pay to clean up and market the apartment again. It is better to have a unit be empty than have a bad tenant.
Bad tenants are rarely profitable
I had bought way to many properties (we had 12 at the peak), to fast. This amplified the cost of my ignorance and lack of experience. Remodeling costs were higher, tenant occupancy lower, and rents lower than anticipated. Only infusion of cash from my wife and I kept the venture together.
When entering into uncharted waters start small (or your inexperience could sink you faster than a lead brick in water).
The last component I lacked was: Capital.
During college and early working years, I spent a substantial part of my income on eating out, expensive liquor, and two brand new vehicles. This included about $20,000 dollars of credit card debt, that was in collections when I finished my undergrad degree. I had just finished getting out of that mess in 2007.
I had very little capital to invest in this opportunity. This was a good thing as I would have probably leveraged it to a level that would have bankrupted us. When I married in 2008 my wife brought capital into the marriage and a great income. This enabled us to purchase several properties with cash. (Her parents and culture taught her about not spending more than you make, I had to learn it the hard way.)
Even though I lacked these 3 components, the opportunities were so amazing. We have been successful! It took 4 years of struggle but now our rental income is one of the main reasons I get to be the primary care-giver for our 3 beautiful girls.
What was your response to the sub-prime crisis?
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