I remember watching my mother pay all her bills at the dining table in the kitchen when I was a teenager. She meticulously wrote the name, amount and account number on the checks used to pay the mortgage bill, utility bills, and the credit card bills. After the checks were written, she stuffed them in the envelopes with the see through window, and applied the stamp for mailing. Oh, the days before electronic payments and online banking.
As a teenager, without even a credit card to my name, I thought to myself how much work my parents went through to set up all those accounts. It all seemed very complicated to me. I thought I would have to go through a herculean effort in order to set up all those accounts for my future self. Fast forward 25 years later and now I have 5 investment properties with 15+ rental units. I have mortgage bills, utilities bill, credit card bills, management company invoices, and a whole slew of maintenance and miscellaneous billings on a seemingly daily basis. All the complexity I felt when I was a teenager observing my mom’s stack of bills gradually happened to me but just in larger numbers and multiples of what my mom had to deal with. All those accounts I set up gradually increased in number over time. I guess this is my long winded way of pointing out something simple which seemed complex or daunting at times, but is quite natural and common once you get to that stage of your life.
As previously mentioned, I own 5 rental properties with over 15 units, some commercial and others residential. I got to this point because I took the first step in making a decision to acquire an investment property. I performed my analysis and decided it was a property which fit my investment criteria. But no matter how good it looked on paper, I would never really know how it will turn out without moving head and executing the purchase. Taking that first step is very important.
How does a baseball player get to 3,000 career hits? Answer: By getting the first hit and repeating that 2,999 other times. Don’t underestimate the mindset of taking the first step in moving forward with a plan. All big plans start with the first step. For people, starting with one investment property might not sound appealing if you actually stop to think about the time investment against the potential return. Since it is your first property, there is likelihood you are not sourcing the best deal out there. There is a lot of upfront work in learning how an effective and efficient owner of a rental property. There will be time spent on locating the property, running your analysis, finding a real estate attorney, finding a mortgage company, closing on the property, finding a contractor to renovate the property, setting up all the necessary utility accounts and filings with the state/local jurisdictions, finding and vetting tenants, etc. All that time spent all just to get a 5% capitalization rate on a property. It sure sounds like a headache that isn’t worth the return. But if you take a long term approach and view, that mindset would bring many benefits. While there is a lot to learn on the first property, a lot of the knowledge can then be applied to your second rental property. If you were lucky to connect with a great real estate attorney, bank or contractor, you can use those people again for your next property. Also, with additional experience, you start to come across better and better deals (or at least be better able to recognize a good deal). By the time I got to the 5th property, my incremental return on that property far outstripped my incremental time and effort spent on that property. In order to make your goal happen, be sure to take the first step.
When I approach a goal, I always try to make myself take the first step. Nothing will ever get done if I don’t take that first step. It might be step one out of many other steps, but that first one must be taken.
Here are the future benefits of having a term long perspective in taking the first step:
Everything you learn will be applied in the future to the next stage of your plan.
Getting that first hit isn’t just about that one hit and then be done. The knowledge and experience obtained and, subsequently retained, will continue to benefit you into the future. When I purchased my first investment property, there were a few issues with the property identified by my house inspector. In order to move forward with the purchase, I negotiated with the seller an escrow amount he will hold with his attorney post close in order to provide me with the money necessary to correct the issues I’ve had outlined in the contract of sale. The escrow was intended to work in the following way: (i) I fix one of the issues on the list; (ii) I present a receipt to the seller’s attorney for the cost incurred in fixing the issue; (iii) seller’s attorney obtains seller’s consent to release the amount on the receipt; (iv) seller’s attorney sends me a check. When I completed all the work to correct the issues on the list, I sent the receipts over to the seller and the seller’s attorney for reimbursement.
I thought it would be a fast process and I would get reimbursed in no time. I was wrong about my assumption and it did not turn out that way. It took me about a year to get the full amount reimbursed despite the fact the seller agreed to cover the cost associated with remediating the issues. It so happens I purchased the property in 2010, and the previous owner of the property purchased it in 2005. Property prices were a lot higher in 2005 in this location than in 2010. The seller sold the property for a 20% loss. Given the loss, the seller was either unhappy with the sale of the property or he wanted nothing to do with the property post close. Therefore, the seller’s attorney had an incredibly hard time in obtaining consent to release the escrow. Hence, it took about a year before I was able to get my reimbursement from the escrow. It was a painful process to go through given the uncertainty of not knowing if I would get the money due to me and the timing of when I would receive the money. Additionally, I needed to follow up constantly with the seller’s attorney regarding the status of the seller’s consent to release the fund.
But I learned a valuable lesson from that headache. Putting an amount in escrow post close with an intention of getting reimbursed at a later date sounds good in theory but it will require the goodwill and word of the seller to release the funds (or you can litigate which would be time consuming and potentially costly). I told myself I would not want to be put in that situation again. On my purchase of another investment property which also had issues, instead of offering to allow the seller the option to set aside money in an escrow post close to address the issues, I simply asked for a credit. This way, it allowed me to get my funds immediately at close and does not rely on the good will of the seller to release the funds when he/she no longer has an incentive to be accommodating.
The relationships you have built and invested in will help in the future.
If you view relationships as long serving, then it is easier to justify to yourself to take the first step in spending the time to build those relationships. The financial adviser, accountant, lawyer, seller, buyer, or customers can help you in the future in your next transaction or business venture. There is a real estate attorney whom I have utilized on a number of real estate transactions. If I need to move the next real estate deal a head quickly I already have my real estate attorney in place. This will help provide assurance to the seller for a quick transaction to already have the attorney identified. Additionally, I feel comfortable that I am in good hands with this attorney. I can expect a high level of service from this attorney given I am a repeat costumer. He knows as long as he provides a high level of service, I will continue to utilize him on future deals. I also have a contractor I use for renovations and minor repairs. I know he is responsive to my calls, does a decent job and charges fairly.
The processes you develop can be used in the future.
For my first investment property, I inherited the method in which the previous seller collected rent. He would go pick up rent from the tenants. I didn’t think it was efficient. Instead, I asked the tenants to send me a check. As the number of my investment properties increased, that wasn’t the optimal method as well because I would have to make trips to the bank to deposit the checks given the checks would come at different times from different tenants. I decided to set up my own bank account and ask the tenants to deposit directly into the account. This method allowed me to reduce the number of trips to the bank and, as an added benefit, I have access to the money faster given I don’t have to wait for the check to arrive. New tenants also have the ability to send me funds electronically using Venmo or Paypal. I will continue to use this process on all my investment properties until I can find a better way than the current process.
At the end of the day, action beats inaction. Once you have a plan in place, work to take the first step in making the plan happen. You will never know the journey that first step will take you and you will never find out if you don’t move.
To the audience: How do you motivate yourself in taking the first step? What are some of your lessons learned which you can apply to the future?
Many people work hard to better their physical and mental health. What about their financial health?
I started this blog back in 2019 to help people better their financial health as well.
My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.
I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.
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