Real estate investment properties will teach you many things. Through my journey in purchasing 4 real estate investment properties I have learned many things. For each of my real estate investment properties I am going to outline some of the key learnings I had. Every day I continue to get more knowledgeable and get just a little bit better!
Before reading this article, it is important to understand more about The OG! Below is my first post introducing The OG and talking about all the details of the property.
Time to jump into one of the first major things I learned from The OG!
Lesson #1: Understanding How Tax Assessments Work On New Builds
This is honestly something many people may not even know about when investing in real estate. When you purchase a home you will owe taxes each year on the property. The taxes vary drastically depending on where you live in the country. While I was going through to get an understanding of how much I could afford in a monthly payment, you want to ensure to add taxes to the overall cost.
Here is the major kicker and thing I learned about taxes though that kicked me in the butt after year 1! Let’s say you are buying a newly built home. When you go to purchase the home you are going to see the projected taxes from the previous years tax assessment. This is where it bites you in the ass though.
For my example with The OG, I purchased the property in August of 2016. This means the taxes I was looking at from the property was the tax assessment from 2015. Well, in 2015 the land my home was built on was just land. There was no physical structure on the land. For that reason, the tax assessment will always be less. I believe the tax assessment is less because the lands value increases when a home is built on it.
The worst part of the whole situation was the fact my real estate agent didn’t talk me through any of this. So here is what happened. I purchased the property and expected the taxes to be roughly $1,700 a year. Remember, the $1,700 a year was the tax assessment based off the lands value with no home on it. 6 months go by and I am thinking all is well and good. Then I receive something in the mail from the county appraiser’s office. The letter states my property was reassessed for 2016 and the next tax amount per year increased to $3,500. WHAT!?!?! That is going to increase my overall payment by $150 per month. Even worse, I had to pay back taxes in arrears for the previous year because my escrow account was short. So overnight my monthly payment increase by $300.
Lesson I Learned: If I buy a new build property again in the future, make sure to understand what other homes in that area pay in taxes per year. Use that as the baseline for running my numbers. Simple lesson, but an expensive one to learn.
Lesson #2: Have A Plan Before Buying
This one sounds so simple yet I cannot reiterate the point enough on how important it is. I knew when I was moving down to Florida that I didn’t want to rent anymore. This came from reading the book ‘Rich Dad Poor Dad’. At the time I felt like renting was just throwing away money and I wanted to be a homeowner.
The problem I had though was I didn’t have a plan. I knew I wanted to buy, but I didn’t even think of house hacking of any sort. I didn’t even know what house hacking was at that point in my real estate investing journey. I was lucky enough that a friend of mine kind of helped me stumble into house hacking after living there for three months.
Lesson Learned: Buying a home is all well and good, but make sure you have a plan with it. I always recommend house hacking! Always! To learn more about house hacking, checkout this article.
What I Would Have Done Differently: If I were to go back and do it all over again, I would have been prepared to house hack from Day 1 of moving in. I would have also added the fourth bedroom from day one and looked to add one additional bathroom. I think when my next guest moves out, I am going to look at adding an additional full bathroom.
Lesson #3: Don’t Just Buy Because You Think Renting Is Just Throwing Away Money
You often hear people say they want to buy a home because they feel like rent is a waste of money. The simple fact of the matter is this is not true. There are many reasons that renting is better than buying a home. There are also many reasons why owning a home can make sense for you. Renting allows you freedom and flexibility. Owning a home doesn’t.
There are a lot of additional things you have to pay for to maintain a home. Insurance, taxes, capital expenses, and HOA payments to name a few.
Be very careful to not fall into this trap if you are currently looking to purchase a home. Buying may be right for you, but make sure to understand the cost of home ownership. I highly recommend adding on 10% of your mortgage payment in unexpected expenses that will come up each month. For example, if the home you are looking to buy has a mortgage of $1,000, I would expect to pay $1,100 a month total. There is a high likelihood of the home needing $100 of unexpected expenses each month.
Lesson Learned: Buying can be extremely powerful when done right. Especially if you decide to house hack. Just because you rent doesn’t mean you are throwing money away. Renting usually allows you to live in a nicer area and allows you much more flexibility than owning a home.
Always Have Tenants Sign A Lease
Okay, I have to admit again, I was a true rookie when it came to managing my first house hack. I started with Airbnb and then transitioned to long term rentals by the bedroom in The OG. A huge mistake I made when pivoting to renting out the bedrooms long term was not having tenants sign a lease.
I mainly found people from Airbnb who then wanted to stay for months on end. I was very happy with it at the time because it was then guaranteed income. Here was where I messed up. I always just agreed with the tenants with a handshake on what the amount was going to be per month. No contract. Nothing in writing.
I know I know. Very much a rookie mistake. I learned my lesson the hard way with my first tenant when they decided to just pick up and leave after staying for 6 months. I couldn’t do anything or charge them anything because we didn’t sign any contract. I will say that is the last time I ever made that mistake again!
Lesson Learned: Whenever renting your place out long term, make sure to draft up a lease agreement. Personally, I use the base form from eforms.com for Florida Residential properties. This has helped me have things in writing and make sure there are clear things in the lease that help to protect me in case something happens. Do not make the rookie mistake I made of a gentleman’s handshake!
Additional Item Learned: Florida AC systems
A little bonus item I learned the hard way in Florida about AC systems! Florida is an extremely humid state. With that comes some fun challenges with AC systems. Most AC systems have a condensation pipe that goes from the AC unit to outside the home. What I didn’t know about this was the fact that this condensation pipe is supposed to be flushed out and cleaned once a month. If you don’t clean it, it will back up into the AC unit and shut it off.
I learned this the hard way at The OG. I forgot to do this on a monthly basis to the point where the condensation line backed up twice. After spending $350 on the AC guys to come out to service the unit, I was finally not going to make that mistake again. Just an extra small tip for those out there who live in humid areas.