Our Worst Real Estate Deal
Sometimes you have to use unconventional strategies to turn around a bad real estate deal. This blog is about our first real estate purchase and our first unintentional rental. Learn from our blunders.
Buy High…
When my husband and I married in the late 80s, we excitedly bought our first property. The market in New Jersey in 1987 was on fire! We were so excited we were able to purchase something in that market; I distinctly remember the lawyer at our closing, who had two units in the same complex, telling us we made an excellent investment and it “could only go up.” Hey, this guy had a law degree and was a real estate lawyer, so he must be smart, right?
Our newlywed home was a one-bed, one-bath upstairs unit in beautiful New Jersey. We purchased it for $92,000. We had good credit, and we thought we got a smoking hot deal with a 30-year mortgage with an adjustable interest rate of 8.25% (rates had been as high as 18.5% a few years earlier). The mortgage was $78,000, so our payment with insurance was $540.
The property was a co-op (like a condo but worse), and the HOA was a big fat whopping $500 (this included utilities, insurance, and taxes, as well as upkeep on the property and common areas).
All in the monthly payments were $1040. No problem for us to pay as we both had decent jobs. We were young, in love, and frankly, not too financially savvy.
What could go wrong?
About three months after we purchased it, the market cratered and was worth about $30,000.
We knew we wanted to start a family within a few years and realized we couldn’t raise kids in a 700 sq foot unit. We had no choice but to sock away as much money as possible. This situation taught us to be frugal pretty quickly. Our goal was to save my husband’s salary and live off mine, which was a little higher then. His salary was direct deposited into a savings account; mine went to a checking account and paid the bills. When we got raises or bonuses, they went straight to savings. Things were tight.
We would have to dip into savings from time to time, but it was a conscious decision. Having money in separate accounts made it hard to justify that new pair of shoes if it meant dipping into savings.
Accidental Landlords
After a few years, we saved enough for a down payment on a home out of state. However, our little one-bed, one-bath was still worth less than the mortgage, so selling it was out of the question, and rents for similar units were only $600 per month. At that rent, we were left with a deficit of $440 per month before any maintenance costs! And, of course, every property needs some maintenance.
We moved away to a less expensive mountain state, bought a cute house, and started our family. Every month we paid the extra $440 and had to replace the water heater one month, but we could keep current with the mortgage. Luckily we never had a month without a renter. There were a few very tight months, but we always scraped by.
We could not refinance the mortgage because the unit was worth less than the mortgage balance, so a lower payment wasn’t an option. So for several years, we rented the unit out at a deficit during the leanest time of our lives. We didn’t look at alternatives to a traditional unfurnished rental.
It Helps to Have Friends
When we lived at the co-op complex, my husband had been on the HOA Board, and we kept in touch with Kim, president of the HOA Board. We got a call from Kim one day. She knew our predicament and reached out and told us some great news! Furnished units were being rented to corporate travelers for $1700 per month! We couldn’t believe it! Finally an unconventional real estate strategy to turn around our bad real estate deal!
It was fortunate we had remained in contact with her because we were 1800 miles away and had no idea we could do that. We didn’t know the first thing about a furnished rental!
A month or so, we flew back to Jersey. With the help of my husband’s aunt and uncle furnished the whole place over a weekend. It was a small place, so a couch and chair, a dinette set, and bedroom furniture, as well as kitchen items, were all we needed. We had to put it all on a credit card.
Because we seldom went to New Jersey, we included a monthly cleaning service with the rental. We offset this by listing the property for a little more rent than similar units. We arranged for the cleaning crew to check up on the condition of the unit. They were able to ensure that renters weren’t damaging the furnishings and to keep the unit in excellent condition.
Not only did it give us peace of mind, but it appealed to the tenants.
Within a few days, our realtor found a renter, and we had a small cash flow after paying off the furnishings.
Three Lessons we Learned
We learned three hard lessons from this real estate misadventure. I wrote this blog post so you, the reader, could learn from my mistakes and not make them yourself. Sometimes you need to think outside the box, and look for unconventional real estate strategies to help you get a win. As George Bernard Shaw said, “Success does not consist in never making mistakes but in never making the same one a second time.”
- The first lesson was that real estate goes up and down. Unlike we were told, it doesn’t go up forever. Condos and co-op properties usually drop first and recover last. We are not fans of the co-op arrangement and wouldn’t ever buy something like that again.
- The second was don’t buy a primary residence that won’t cash flow, even modestly, if you need to leave the area, if prices drop, or you anticipate needing a more prominent place due to having kids or needing elderly parents to move in with you.
- The third one was to get creative and don’t be afraid to change things up. Many people will face a similar scenario in the next few years. Interest rates are going up, and housing prices are falling. If you have to move, can you rent your property for enough money to cover the mortgage and upkeep, or should you use unconventional strategies to turn around a bad real estate deal? Would furnishing it and renting to corporate travelers or traveling nurses or renting it by the room be a better strategy?
KEY TAKEAWAYS
After ten years, the co-op converted to a condo, which made it easier to sell. Because we had a cleaning service, the unit was in excellent shape, clean, and ready to show. We sold it at a small profit in 2002; it was a challenging learning experience. But, it taught us that when the traditional use for a property isn’t working you can use unconventional strategies to turn around a bad real estate deal.
I figure we broke even financially on the property, which wasn’t ideal, but it could have been much worse. We moved away, started a family, and learned how to be landlords. It didn’t stop us from intentionally becoming landlords, but it took us fourteen more years to jump back in and buy our first planned rental property.
Having experience furnishing a property gave us the confidence to purchase units that we now rent to travel nurses.
