The Reality of Real Estate Investing: My $72,354 Lesson

You know the old adage, you can’t teach an old dog new tricks?  Well, this old dog learned a new trick recently.  A very expensive trick…

I bought a townhouse back in 2018 as a rental.  There was already a tenant in place, on Section 8.  I bought it the traditional way, putting 25% down.  We did a home inspection before closing and we found that the home would need to be re-plumbed.  The piping in the townhouse was polybutylene pipe, which was one of the first flexible plumbing pipes on the market.  It was a great alternative to copper for a while but eventually a big flaw emerged.  The pipe would seemingly dry out and begin to flake and crack, leading to leaks.  I recognized this from my days selling plumbing supplies and the home inspector and I had a good conversation about potential costs and timelines.  My wife and I decided to continue moving forward with the purchase and we began to set aside money from the cash flow to cover the re pipe.  We decided we would re-pipe the home when the tenant moved out.

We knew there was potential for leaks, and there was some evidence of pipe repairs noted during the inspection. The location was good, the HOA seemed decent, we expected some appreciation and the cash flow made a lot of sense, so we bought the property!  As expected, we got a few calls over the years for leaks, but our property managers moved quickly and addressed all of the leaks in a very timely fashion.  Everything was moving along as we had planned, small expenses were covered by the cash flow, the property was appreciating, and the tenant continued to renew.  In some ways it was playing out the way anyone would want their rentals to go.

This year we began to get some new calls about this property.  There were complaints from other neighbors.  The big complaint was about dogs being on the loose, and even getting into fights with other dogs in the complex.  That was until the complaint came about a drive by shooting!  Of course, there were excuses and reasons that all could have made sense but as the lease was coming up for renewal, my wife and I, along with our property manager, decided it was the right time to not renew the tenant.  Time for a change!

When I first walked the vacant property, things looked mostly the same.  There were the damaged cabinets in the kitchen, the dark colored walls, the old and beat up bathrooms, broken tiles, and the very dark, dirty basement.  We began to get quotes to fix up the unit, starting with the re-pipe.  There was no need to work on anything cosmetic if the plumber was going to have to cut into the drywall to run the new PEX piping.  To be honest, I was very pleasantly surprised to find out that the price to replumb the house was actually LOWER than what I had been budgeting for these past 6 years!  The re-pipe was quick and painless, and I was beginning to think that we could be in and out of there with some new paint on the walls, a few new windows (without bullet holes!) and some quick patchwork.  All in all it was sounding like $12,000 – $15,000 total, and I prepared myself for $20,000 as things always come up when remodeling a property.

Then we had contractors come through.

The first bid was for $65,760.  There was no way this was going to cost that much!!!

The second bid was for $58,664.  Uh Oh, what are they seeing that I was not???

I was able to meet my property manager at the property as well as the two contractors.  They both took me to the basement and opened my eyes and blew my mind.  I had completely overlooked what happens when there are leaks.  Leaks that happen over and over again.


Townhouse Troubles

I had not thought about the risk of mold at all.  Down in that dark, unventilated basement, the moisture from those leaks had stuck around, on the back of the drywall, and allowed mold to grow.

There were countless other items they showed me, like the oven that somehow could not turn off.  I think it was all of the cockroaches that had somehow gotten inside the oven that kept turning it on.  There were so many cockroaches in that oven that the display on the top was half filled with dead ones!  Although this was extremely gross, replacing the appliances was not that big of a cost.

But the big miss was in the moldy drywall. The contractors had bid out tearing down and replacing all of the drywall in the basement. I was able to work with the contractors on the price and scope and got them both to revise the budget down a bit by doing a flood cut in the basement instead of tearing down all of the drywall.  A flood cut is where you cut out the bottom 1-2 feet of drywall, typically so a flooded basement or room can air out.  This, hopefully, prevents mold from forming after a burst pipe.  My idea for the flood cut was to identify where the mold was and then be much more strategic about where and how we demoed the drywall and remediated the mold.  This brought the pricing down to $58,810 and $52,804 respectively.  Better, but still not great.

Once I got the pricing a bit lower, and pulled my head out of the sand, I chose my contractor, and we were off to the races!  Of course, as with any renovation, there were change orders.  Did I really want to put carpet into this rental?  Just so the next tenant could ruin it?  Nope, let’s upgrade to the LVP. Did we want to keep the cabinets and just paint them? Or should we replace them since they were literally falling off the wall?  Replace the cabinets. Let’s replace the vanities as well while we are at it. Looks like we don’t have to tear down all of that drywall!  Good news!  But we did find a lot of rot in the framing of the basement bathroom, we need to rip out those walls and rebuild them!

The contractor has not finished everything, and the property is ready to be listed for rent again.  Total price of the renovation? $92,354.

$72,354 MORE than my original budget of $20,000.


Rental Repairs & Renovations

The property looks amazing.  I am very happy with the contractor and the quality.  I am expecting to get several hundred dollars more in rent per month for the property and I know this will help the value of the home.  Thankfully the property has been appreciating since we bought it.  We bought the property for $200,000 in 2018.  Looking at comps today, in the same complex, the new value is $375,000.

Thankfully my wife and I are in a place where we had the money to handle this.  We both have good jobs, have a fair amount of savings, have been accumulating cash flow and also have a HELOC that we could draw on if we needed.  We were able to handle the massive repair budget as well as handle the mortgage payments that were not being covered by the rent.  It reminds me of why we as hard money lenders have our liquidity requirements.  Investing in real estate takes money, real money sometimes, even if you can get a hard money loan that covers 100% of your costs.

There will always be a need for your own cash. You might not need as much as we did on this project, and I hope my experience will help you all think through all of the possibilities and potential pitfalls the next property you look at may have.

There are plenty of other stories I could share, and lessons learned from this property.  I would be happy to share them if you catch me at the next Investor Success Summit or Pine Panels meeting.  Right now, I am moving on to the next turnover I have at another property. Don’t worry, that one will only cost me $25,000!  There is also going to be a turnover in property management, but that is a story for another day!