It has been a while, so hello again! We have been all over the place this summer and have managed to neglect the blog, but that does not mean we don’t have things to share. It has been a bit of a level setting period. We got our 3^rd short term rental up and going in late May and had our first busy season. All of our properties are in the Midwest where the cold months aren’t the months you run to the lake. 🙂 So this summer was interesting. We learned a lot and what I can tell you is owning a business is up and down and all around! 

I actually heard this really interesting concept not too long ago called the 1/3 rule. 1/3 of the time you are flying high and everything is going great, 1/3 of the time you are in a disaster state, and 1/3 of the time you are stable. I think we hit all three of these in 2 months this summer and I felt like it was time to share the lows now that we are back at our stable 1/3. If you can learn from our mistakes or downturns, we consider that a win. We know we have!

Let’s start out with the fun one shall we. We got our Lake Geneva home up and ready to rent only to find out that the realtor may have been incorrect about what kind of permit we could get in our area. We are not looking to rent for less than 365 days a year and the permit we can get was only 180 days. Not great for our numbers. Then we have 2 groups of guests come through and the air conditioner goes out. So, there is a guest there and it’s 90 degrees out and the air isn’t working. Luckily Wisconsin is full of wonderful people and we found an amazing company that came and fixed it in a day. But you still owe that guest a refund. Then the water heater went out on the next guest… So, we bought a home with pretty finishes but all the major things are OLD. Got all that fixed so we moved forward. 

THEN the guy that was there when the air went out, well his kid broke into our home at 4 am with a few of his drunk friends. Falling down the stairs on camera and going in the back sliding door a guest left open (luckily as I assume they would have broken it otherwise). This man is well known in the community so because we refused to drop the charges on his drunk 19-year-old, his friends starting harassing us and calling the city on us REGULARLY. Real neighborly! On multiple occasions I was ready to just sell it. I grew up in a small town and I know what being an outsider will do to a business. However, we decided to stick it out and see if they would let it go as summer settled. We have all the correct permits but the annoying calls from neighbors, police, and city officials was not pleasant. I still fear what the winter will bring but we have decided to keep it for a year and reassess. The numbers are working even if the neighbors aren’t! 

Moral of this story is check your own city ordinances and try to stay as discrete as possible! Police at your house a month after buying it really riles up the small-town gossip. 

Now we can head north up to Door County. Our two properties up there did amazing this summer. It has really been exciting to watch. However, cleaners are hard to come by and the ones you have are VERY busy. We thought having two would be perfect. Wrong! We went through 6. One of which just decided to not show up or respond to any of our texts for 2 weeks leaving the house uncleaned for a guest when they arrived. Needless to say, we are no longer working together. Another I had to spend 4^th of July weekend searching for while on vacation myself because we had a cleaning coming up and no one to clean with a renter coming in the same day. We contemplated driving up to clean it ourselves! However, the women I found is wonderful and I am so glad we are working together. Her husband also conveniently works as a handyman on the side and was extremely helpful when our front door lock broke! In hindsight we should have been more prepared knowing the market would explode in the summer. And we should have had a handyman ready well before the summer months hit. Using your dad who lives 8 hours away is not the sustainable option. 

Now, back down south to Indiana to our long-term rentals. ALL of our air conditioners broke this year in Tipton. That’s 3 units if you haven’t been following along + the one in Geneva. Not to mention the 3 months we were without air and had to buy our primary home one as well. Needless to say, I know A LOT about the HVAC and condenser especially how much they cost in these three states! Then we had a few lease renewals go sideways and the property management contact we have finally gotten into a groove with left. 

Now none of this is particularly overwhelming on it’s own but ALL of this happened in June and July. It felt like we were bleeding money, time, and SANITY. However, the houses continued to bring in a profit and we managed to get no bad reviews (because I obsessively apologized and gave refunds when necessary). We had been flying so high getting all of these properties in a year, piecing together this puzzle, and seeing the future we wanted unfolding. We hadn’t really hit a rough patch. So, summer reminded us that if it were easy everyone would do it. 

We learned things we didn’t even know we needed to consider, we thanked ourselves for setting up systems (like the cameras when the kid broke in and making sure to get the right permits), and we also have amazing teams of people to thank for helping us get through all this summer fun in one piece. We will do more work to set those teams up BEFORE we need them next time so it doesn’t feel so UPHILL, but now we are in our stable 1/3 and feeling great. Now, I completely plan to derail that by buying something new soon. But in the meantime, we are coasting into fall, preparing for our first real year of income for tax season, and trying not to trip too hard into 2023! 

It has been 12 months since we started on this real estate journey. We have learned A TON and know there is so much we still don’t know, understand, or even know exists. And that is why we keep chugging forward 100 miles a min. This past week we had our offer accepted on what will be our second short term rental property. If all goes well, in May we will have 3 STR listings along with the 2 long term properties with 10 units total. Seemed like a good time to write a year in review post! (I clearly wrote this post in April. We now own 3 STRs and are looking for a warm location next!)

What did we learn and what do we think everyone should know? A LOT! First, get your legal self in order early. We have recently decided to restructure the way we have the LLCs set up. Tell your Lawyer and Accountant what you are trying to accomplish and set it up early to hit your goals. For us personally, we plan to have a lot of properties and were opening LLCs for each, that was expensive come tax season! So, we worked with our accountant and lawyer to find a more efficient path that also keeps us protected. Everyone’s goal is different but I will say, don’t wait. It is harder when you have more! 

Speaking of taxes, something many people mention but never clearly explain is depreciation and who/when you can use it. As W-2 income goes up so does the percent you pay in taxes. So many people love the idea that you can use long-term rentals to depreciate against taxable income. Well, not everyone follows that sentence with, you must also be considered a Real Estate Professional by the government. You have to invest most of your time in real estate for this to be possible. Basically, you cannot have a W-2 job and have this status. Therefore, if you are working while you build, do not expect to realize the depreciation on your taxes. 

However, after listening to a lot of real estate podcasts on taxes I found that there is a specific tax code that states if you manage your short-term rental (specifically STRs) that is non-passive and can be used. With this we decided to pay to have a cost segregation done to really capitalize. A cost segregation breaks down the house and all it’s parts to allow for different timeframes of depreciation. Your roof will depreciate over more time than your flooring, etc. We worked with our Accountant who is able to perform a cost segregation. If you have questions I would start with your accountant! Make sure they understand real estate per our other posts, those that don’t may advise against this path. Make sure you understand how it works and what gets paid back when you sell. If you don’t plan to hold a property for a while it may not be worth it.

The depreciation that could be realized toward our W-2 income allowed us to have more money to put down on this current short-term rental and helped us continue to propel forward. Now, I want to call out I am not an accountant or a lawyer, so nothing I call out here is to be considered advice! Please, connect with your accountant. We are simply sharing what worked for us! 

Finally, systems, systems, systems. Set them up! Once a property is up and running, we barely interact with it. I would say I spend about 10 min a week on it at most (Probably less). We created comprehensive guestbooks online to avoid a lot of questions and we automate everything; pricing, messaging, expense filing, etc. If you can set up systems, legal, and realize that depreciation in year one, you are off to a great start!

To work with a property management company or not, that is the question. And honestly, still a really hard question to answer for us. When we started out everyone was saying how you have to work with one to scale your business. There are tons of books out there that specifically tell you to delegate the work others can do well, while you focus on the work that expands your business. However, I am of the mindset that you have to feel the pain to know what it takes first before outsourcing. Otherwise, how will you ever know if you have picked the right management company?

When we started out with our triplex in Tipton, we remodeled and managed it ourselves. I am lucky to have a contractor for a father but we should be clear; I was abusing him as my property manager and he has a pretty firm stance on rentals. He is extremely uninterested in self managing them (I would avoid the topic with him if I were you). 

When you buy a building that is over 100 years old, everything breaks. Nothing was maintained in this property. That first few months the renters called me every week. Luckily all were great and never needed to call at 2 AM, but I work an 8-5 job and their air conditioning was out in 90-degree weather. Oh, and the roof was leaking into one unit flooding the floors, and the water heater went out, and the electric was shotty, and I think every single breaker tripped… I can go on, but I will spare you. 

Needless to say, my dad was there a lot and I wanted him to continue to like me as a person so I decided to start researching Property Managers. One big thing I never considered when I decided to focus on smaller markets like Tipton and Muncie Indiana is that smaller markets have fewer options. This is clearly very obviously, but I never even considered it. I assumed there were companies out of Indianapolis that would reach that far. Wrong. Fewer companies make it easier to research upfront. However, it also means you have less options to switch to if you are unhappy with the service. 

Another thing I should have done was asked my circle of investor friends more questions. I did not ask the right questions and while I don’t think the Property Management company had good (let alone any documentation to skim through) I should have done more research. I felt VERY nickel and dimed at that start of the transition and some of that was because I didn’t know what to expect. There were fees to onboard the units, there were fees to inspect the units so I could keep their security deposit if the tenants destroyed the unit. Which personally, seemed weird to me since I bought the place through the Property Management company… There were fees for EVERYTHING. 

I didn’t get a lot of input from the Property Management company on how the transition would go or who would own what. I was tossed from person to person for a while. I really regret not being more direct from the beginning. If you know me personally that sentence is confusing considering I am pretty direct. However, I didn’t know what to ask or when to push. The first month in Muncie no one reached out to any of the brand-new tenants, so no rent was paid… Surprise, expenses must be paid even when rents don’t come in. So again, we were loaning the business money. Lucky for us, Tipton was still paying us directly. I let this type of stuff go on too long and finally it boiled over. I went to a lawyer to see if I could just get out. I went to the owners of the Property Management company and shared my extremely detailed thoughts. I was spending more time micromanaging someone I paid 9% of my gross income to then I was before we hired them, and that was not going to fly.

The reality of this situation is the expectations were not set. Yes, they slipped up but I let them. I let them for way too long. Now I know what to look for and what to ask for. I still think some things are just overpriced and we may still do big things on our own to save money when we can. However, it is worth it. I don’t have to ask my dad to go put in window air units, I don’t have to chase the government aid checks, I get that time back. Now that I know what to expect I can plan and focus my energy elsewhere. Do I still ride an emotional rollercoaster when it comes to this topic? Absolutely! However, I truly believe we couldn’t scale the way we want to without that partnership. Who knows how I would feel if I lived closer? 

Where do I start…

There are so many different ways to invest money in real estate. Everyone’s strategies are different for many reasons. Their goals, their resources, their experiences, etc. However, the real answer is just start. It can be very overwhelming when you think it to death. A lot of people call it, “analysis paralysis”. I am sure you have witnessed this in other areas of life as well where growth is bound to happen. For example, travel. Everyone loves the idea of a big vacation to backpack in another country yet, so few do it. But once you buy that first plane ticket you will never stop (at least I haven’t, I am as addicted to travel as I am real estate at this point)! You learn so much on that first trip about who you are, how you travel, who you can travel with, what it costs, etc. It is the same in real estate. Buy that first house, trailer, building, mobile home park, note, whatever it is-just buy it. 

Realistically, what is the worst that can happen? You will learn SO much. By simply just having the conversations with the realtor, or the lender you will learn things you never even knew to ask. Now I am not saying just jump in and trust the first person you meet. It is a relationship game. Call a few lenders, talk to a few realtors. See how they make you feel. See if they teach you or just push you. There is a difference. Once you find the people that teach you, that is when you know you are set. 

When we started, we had no idea what anyone was talking about (honestly, sometimes I still don’t). With all the acronyms and jargon, you are literally learning a new language.  I asked so many questions and kept asking until I understood. The infamous “they” always tell you to find ‘off market deals’ and ‘drive for dollars’. But I knew no one in the industry and don’t live where we invest…so I couldn’t do either of those! Instead, I researched and found a little company that sells the emails and phone numbers of property owners. I was not about to pay for this list of information (I mean I work in big data and I know how bad these aggregators can be) so I signed up for the 1-week free trial and downloaded 2000 emails. Be forewarned, they aren’t stupid-they don’t make it easy to scoop up gobs of information for free. I spent hours screenshotting the information until my trial was up. Then I went back and manually entered it all into excel to organize and keep notes of who I had talked to, who responded (and what they said), and who bounced. I spent hours stalking people online to get the information I was looking for but I had to be creative since we didn’t have connections yet.

I would be terrible at sales because cold calling is my nightmare, but as it turns out, I can craft an enticing email…so I emailed all the people from the list. As I mentioned earlier, I did get a lot of bounced emails, but I also had a decent response rate. People were willing to help me, mentor me, introduce me to other people and a couple even were willing to sell me their property. 

The first man I talked to was so pleasant and he owned a 5-unit property in Greencastle, IN (I went to college in Greencastle). It was fate, he and I talked about DePauw and all the changes that had happened over the years. It was a great way to get my feet wet and connect over something I was confident talking about, my alma mater. After the trip down memory lane, we did dig into the real purpose of my call! I discussed an owner finance strategy with him which wasn’t something I’d had experience with at the time. We got pretty far into how that would work before he decided he wasn’t ready to sell. I didn’t walk away from the phone call as the new owner of the 5-unit property but he now knew I existed and that when he IS ready, he could reach out (and let’s not forget I learned things about owner financing I couldn’t get from YouTube). This allowed me to really get past the butterflies and nerves of talking to people about things I literally knew nothing about!  I realized what questions I needed to ask to run the numbers and organize deal structures. I began developing a system to track the calls I was making and the information I was receiving from them. The next call went even better and we even met and walked the properties. Had the foundation not been falling completely out of one we may have closed a deal this way! 

Saying we got lucky on our first deal is a stretch, I worked really hard to find the deal and make it work; but it was a bit like the stars aligned. “They” tell you ‘on market’ deals don’t make the same returns. But being the Zillow addict I am, it’s only fitting that it’s where I found our first deal. (If you haven’t seen the SNL skit about Zillow addicts you should go watch it now). It has become my main form of social media. One weekend I was deep in the spiral and I saw that little red pin in my home town of Tipton, IN. I immediately called my dad and asked him if he could go look. As fate would have it, the listing agent was also my parents go-to realtor and she walked them through it. After an extremely nauseating facetime with my dad (consisting of me staring at the floor most of the time) I was sold! 

It needed work but it was in a good location and was an insane price. I learned a lot on this one. Residential loans can be used for properties with up to 4 units, 5 and up require a commercial loan (which also means 25% down in most cases). This was a tri-plex…easy-peasy, right? I can get a low interest, residential loan, RIGHT? Wrong. The building had been a commercial storefront at one time with a legal clause that allowed for the space to be used as residential “as long as there was no significant lapse in renters”. Luckily, I’d already been talking to a couple of commercial lenders since I was also interested in buildings with 5+ units. He and the realtor helped me navigate through the clear-as-mud process! To make it even more exciting we were buying it from an estate, so multiple parties were involved. 

Once we had lending and an offer figured out, we submitted. Of course, there were multiple offers (including one all-cash offer that came in hours before the decision was to be made). It was stressful but also made us realize we weren’t wrong; there was opportunity here. Our realtor was awesome and told us to use an escalation clause. I had never heard of that before this deal, now I love it! It allowed us to make an offer but say we are willing to go up to a predetermined amount if another offer came in higher than ours. For example, if you offer $100,000 but are willing to go up to $110,000 and another offer is 105,000 your offer will jump to $106,000. The amount you jump by is determined by you. We’ve used both $1,000 and $5,000 increments, depending on the deal. This is a fun tool in the toolbox to beat out other offers BUT keep in mind, the seller will know how high you would have gone. In our case the sellers pushed us up a bit but it wasn’t worth letting the deal go. 

Your first deal teaches you so much. I was angry, stressed and annoyed (all the feels really) when we were asked to pay more. I was scared, nervous, and more stressed when the appraisal came back low (typically good for you but we didn’t want to lose it or pay for more than it was worth. You quickly realize if the numbers work then that small concession is worth it). It was quite the emotional rollercoaster. However, the day we signed and closed on this property I was sure we would not be stopping here. 

You will gain a lot of momentum and foster some interesting relationships with the first deal. Use it, and doors will just continue to open. Our next two deals just came along organically (not to say we aren’t always “looking” for a deal). The second one we found because I was looking for a property management company to manage our first building. They introduced me to the realty side of their business and had some great properties on the market. By the time we closed on our second building, we’d already decided to switch asset classes to short-term. At the closing we were talking to our lender about short-term opportunities and he opened doors for us to financing we didn’t even know existed. Even though he wouldn’t be the one helping or making money on the deal, he was willing to help us! I still connect with these people regularly and continue to grow my network to find new people to have on our team. I would say we still don’t know everything and never will. Instead, we find smart people to help us grow and when we are in a position to help them one day, we will! 

I can’t say it enough, the things you learn by taking that leap into the first deal are invaluable. You can’t learn them reading and studying. Practice makes perfect! In short, when you ask yourself where to start the answer is, just start!