Tales of an Indianapolis Landlord: The Big Purchase “Mistake”
We provided a nice “State of the Indianapolis Real Estate Market” during last week’s blog.
It’s not a secret… buying rental real estate in this market is tough.
And, frankly, it has been for a few years now.
Our brokerage group works hard – every day – to find deals.
We write a lot of offers and, more times than not, we get outbid.
Losing out on properties is part of the territory. Our job is to continue to provide opportunities for our Clients, which educating them along the way.
Indianapolis Real Estate Investment Models
As with any investment, it’s important to run numbers. All of our investor Clients have models that they run homes through.
Do a quick internet search and you’ll find numerous models out there on virtually any return you find valuable.
When a home pops up that we feel could be a good option, we generally provide our Clients with the expected rent rate, a very cursory overview of expected make-ready costs, and numerous other things: the overall feel of the neighborhood, school system ratings, how fast the home should rent, etc.
But, we then leave it to our Client to come up with the price they want to offer.
And most of our Clients stick to their numbers. If $102,000 is the highest their model shows, they won’t budge beyond that.
I get it.
Whenever we attend the Marion County Sheriff Sale auctions (which has become much less frequent these days), we always write down our maximum bids.
For this week’s blog, I want to share a real-life example where we didn’t exactly stick to our numbers.
In fact, we weren’t anywhere close to it.
Our Big Indianapolis Real Estate Mistake
To put it mildly, we made a massive mistake in March of 2010 at the Sheriff Sale.
Back then, the sales were large and it required tight teamwork between my business partner, Scott Hallberg, and me to work the sale effectively.
Back then, bid amounts came out the morning of the sale. We had to hustle downtown, review all the opening bids, run them through our models and, if needed, do another drive-by of the property to ensure we wanted to bid.
It was hectic. Lots of numbers, lots of analysis and, yes, lots of opportunities for mistakes.
I don’t remember exactly how this disaster played out, but Scott and I got our numbers crossed and we ended up placing an opening bid on the wrong home.
And paying $19,000 more in the process.
Even if we had spent what we thought we were spending, the margins on the home were going to be fairly tight.
Add $19,000 to the total and we were flat-out, unmistakably upside down.
And, yes, before I move on, we did change our processes to avoid making this mistake ever again.
Our goal for almost every Sheriff Sale house we purchased was to flip it. Although we owned, and still own, a hefty amount of rental properties, our goal for this home wasn’t to buy and hold.
However, due to this “mistake,” we decided renting was our best option.
So, we did some basic cosmetic work, secured some permanent financing and rented it.
And, right at 10 years later, we continue to rent the home.
Was it really a mistake?
Here are some numbers to consider.
We paid just over $53,000 for the property and spent another $8,000 or so to get the home rent-ready.
Since we began renting the home, we’ve collected just under $100,000 in rent.
Clearly, we have expenses as well, but it’s been a solid performer as far as single family properties of that age go.
The home is in a solid area, we’ve suffered minimal vacancy and, fortunately, minimal maintenance.
Our long-term Tenant just inquired about purchasing the home and, after doing some research, we found the home to be worth around $140,000.
So, you tell me, was this a mistake?
Sure, we were very upset that we overpaid. It’s something we never hope to experience again.
However, there’s no doubt that we’re happy we own the home today. We’re much better off because of it.
The Power of Buy & Hold
We stress – almost every single day – that real estate is a long-term play.
It’s a wealth-building exercise that requires time and patience.
Let’s assume that we had bought the home at a number we expected, meaning $19,000 less.
It’s likely that we would have made some decent money – say $10,000-$15,000 – if we had flipped the home.
So, we missed out on a (relatively) small payday back then.
But, do you think we’re complaining now?
The Moral of Story
Treat real estate as a long-term venture. You aren’t day trading.
And while numbers are very important – particularly when flipping homes – they shouldn’t force you into making bad, long-term decisions.
If you find a home that checks all your boxes, don’t be afraid to pay a little more for it.
In this market, it may well be the only way you’re going to be successful.