Today’s Investment story comes from Ben Walhood. Ben is a real estate investor operating predominantly in the western suburbs of Chicago. His primary strategy is to fix-and-rent residential properties in working class neighborhoods, including condos, single family homes, and apartment buildings. He has been a landlord since 2005 and left his neurosurgery sales position at the end of 2013 to pursue his passion full-time.
Ben typically purchases properties using financing from a combination of hard money and private lenders, then works with community banks and securitized commercial lenders to refinance into a lower rate.
Pre-close
This particular story is about Ben’s first real estate investment in 2010, and the many lessons learned throughout the process of buying, managing, and eventually selling the property. Ben was eager to get started, so he managed to scrounge up 50k between himself and three close friends to make his first purchase possible. The partners agreed to give Ben an extra 10% of the deal since he would serve as the property manager (or manager of the property manager). The property he landed on was a 2-flat in Maywood. The house purchase price was only 19k, and they used another 31k for performing repairs and improving the house’s value.
Paraphrasing Ben’s own words, he bought something he could afford with the cash that he had, without first considering the other factors involved with owning a rental property. In retrospect, he would have considered hard money or a construction loan to allow him to purchase a property that aligned more with his overall goals in terms of location, property age and type, and the overall headache factor.
Execution
From the start, Ben and his team planned to hire a property manager (PM) for the property. Ben interviewed 5 or 6 local PMs, and eventually landed on one that he felt relatively confident about; the issue was that the person he talked to wasn’t actually going to manage his property, but was simply the managing broker of the property management company. The person actually managing his property was clearly much less competent. The PM ended up putting two tenants in the property without running their credit score. This resulted in Ben hosting two tenants who (he later found out) actually provided false Social Security Numbers on the rental application. The tenants were ultimately removed after 9 months of headache, $10,000 of damage to the house and furnishings, and seven months of lost rent.
The house itself was no easier to deal with than the tenants. It was built in 1905; and as such, had many issues that needed to be dealt with. First, the ¾ galvanized water pipe was not large enough for two different families, costing $5k to repair. He also decided to take out a bannister in the house and add a concrete parking pad in the backyard. The parking pad cost $3k to pour to the city’s required specifications.
The biggest drag of the investment was the location of the property itself. After the first property manager mishap, Ben decided to self manage and find tenants himself. It was extremely difficult to find qualified tenants in the area. Luckily, since it was a duplex, he was able to get half of it rented - despite the fact that he had to evict one unit, the other remained rented which ultimately reduced the blow to his cashflow. During the time the unit was vacant, the house’s gas meter was stolen - something that took several months for Nicor to replace. At this point, the house was freezing since there was no circulating heat. After they started work on the unit, the property was broken into again and they had Copper stolen from the house - a $15k unexpected expense. In retrospect, Ben mentioned that he would now install a security system or have dogs protect the property if in similar circumstances.
Ben eventually found a leasing agent through a local CAREIA, who ultimately leased the unit to higher quality, section 8 tenants. Ben found working with the new tenants to be an interesting learning experience. They often called him to yell about issues, and Ben had to “retrain” them to not do this anymore once he gained their trust. They were so used to nonresponsive landlords that he had to show them that he wasn’t the same way, and that they could expect things to be repaired in a reasonable period of time. Performing repairs timely, but not too quickly, is important to set a reasonable precident for the tenants.
Final Result
Despite the large amount of cashflow the property was now generating, Ben decided to sell the house. After acquiring roughly 20 more properties, this one was still accounting for 95% of the real estate “headaches” he had to deal with. The straw that broke the camel's back was when one of the tenant’s cousins was actually shot on the way home from school in the property’s backyard. This sad event made the decision to move on from a cash flowing property a little more justifiable.
Ben has since bought over 100 properties, and only one of them was built after 1960 - demonstrating the impact of the painful lessons he learned from the first one. Going forward, he has been less aggressive with his purchasing strategy, and plans to own anything he buys for the long term. His current strategy also involves the use of the 1031 exchange into larger buildings.
Lessons Learned
Don’t buy something just because you can afford it and because it cashflows. If you plan to hold the property for the long term, consider the headache factor - this includes the house’s age, the potential tenant pool, and the quality of the property’s location.
When interviewing property managers, make sure to confirm who will actually be managing the property - it may not be the person you talk to during the interview process. Ensure that the person actually managing the property is qualified.
Depending on the area and circumstances, it may be prudent to install a security system or have dogs protect a vacant property.
When self-managing, it is important to “train” tenants to expect reasonable maintenance response times (not too quickly, but not too slow). Ensure that you are consistent with your communications and actions. Tell them you are the “Property Manager” instead of the “Owner” of the house - this allows you to defer decisions if you don’t want to feel forced to make a split-second decision on the spot.
Shout outs
Rob Hayes at Evergreen Real Estate
Mark Ainley at GC Realty & Development
Jason Marcordes at Landmark Property Management
How to best contact Ben