John Goreham owns rental property company and has used Mashvisor’s tools in the past to help with his business.
In this article John shares with Mashvisor’s investors how he got into real estate investing by buying his first rental after the housing market crash 2008.
As the American real estate market soars to new heights, Mashvisor thought it may be worth looking back to the 2008 housing crash. The best time to prepare for a crash is when the market is at a high point. After all, we all know that the real estate market is a cycle and the 2008 housing crash followed a long period of incredible market confidence. Just like today.
As luck would have it, I was in a life transition in 2008. Having had a prior career that had about run its course, I was looking for a new way to generate income. My home life required less than a full-time job with flexible hours. Investing in rental property is something I had always aspired to do. My grandmother had a long-lasting small rental property business that had served her well over many decades, and I thought it could work for me.
Real Estate Market – Perfect Timing
The 2008 housing crash was an ideal buyer’s market in which to dive into the rental property business. Those who were holding properties saw equity evaporate before their eyes. This lowered the buy-in price for shoppers looking for deals. I assumed that I would be buying rental units that were already being used that way. As it turned out, I was mistaken.
Although I call the 2008 market crash a period of perfect timing for me, I am well aware it was a terrible period for many homeowners. Some homeowners had become overextended on their total credit, and many had second mortgages or had completed cash-out refinancing deals to pull their equity down to near zero. When the market crashed, those unwise or unfortunate owners were suddenly underwater.
Faced with paying mortgages on property that was worth far less than they owned, many owners opted to short-sell their properties. A short sale is a plan that owners work out with the lenders they owe money to. The lenders see that the owner is about to go bankrupt and walk away from the debt. So, both the owner and the lender see that it is in their mutual best interests to sell the property for less than is owed. The owners walk away with less damaged credit, and the banks settle accounts on property they own at the new market price levels.
The 2008 Housing Market Crash and Distressed Property Sales
The upshot of the 2008 housing crash in my area was that there were condos sitting unoccupied. Former owner-residents had agreed to short sales with their banks and moved to less expensive lodging such as rentals that better matched their means. My realtor and I found an unoccupied two-bedroom condo unit in decent condition for sale near me. Its market value had dropped by nearly 50% over a period of just a year!
Although I still had a lot to learn, I was sure that a deal like this was worth jumping on. As quickly as I could, I began working on the purchase. My realtor and I worked with the seller’s lender and also the seller. My realtor’s help was very important. I still work exclusively with her in my rental property business. I also had help from real estate attorneys, but not what I would call “good” help. Barely adequate is more like it. And at a high cost to me. As in all life’s struggles, you go into things with the best team you can muster, adapt, and overcome.
Short Sales and Financing Before You Are Really Ready
Following the 2008 market crash, I scrambled to find a lender who would finance my condo purchase. I was fortunate to have cash on hand to back the sale if I was unable to find financing, so financing was a luxury if I could find it. What I quickly learned was that my local bank, who I had worked with for decades, didn’t finance rental properties. Nor did my large regional bank offer such financing. In fact, none of the big-name Boston banks were doing this type of lending at that time in my area.
Through word of mouth, I discovered that one nearby local bank (Walpole Co-Op) did offer rental property financing. Without delay, I made an appointment and met the manager of the business. What she told me in my first meeting was an eye-opener.
First, she educated me on what rent roll was and how it was calculated. Next, she overviewed how her bank treated new clients who wished to finance rental properties. Since I was not buying an owner-occupied multi-family, I did not qualify for an FHA loan, nor any low-interest rate loans. Finally, she told me that the mortgage rate was about 25% higher than the rate of a residential mortgage and that the downpayment would need to be at least 30% of the assessed value of the property. Then she did me a huge favor. She told me to go and form an LLC and come back to her for my next property loan.
Cash Purchase and the Short-Sale Waiting Game
It became clear that I had a LOT to learn. Before I was ready for a lender to hand me a six-figure stack of cash, I needed to set up an LLC, and I needed to have a real rental property business established. I went forward with the condo purchase, in my own name, and I paid cash. Because it was a short sale, it took longer than planned because the seller side consists of multiple parties, all of whom need to have their needs satisfied and all of whom must then agree. In the end, it all worked out.
Day One as a Rental Property Investor – LLC and Organization
The day I took ownership of my first rental property I realized just how much I needed to learn about this game and how quickly I needed to become more professional. The internet in 2008 was not what we think of today. Google didn’t even launch its browser until the end of 2008. The resources available then were nothing like what Mashvisor is today. Much of what I needed to learn I had to learn by word of mouth and phone calls.
My first (and best) step was to establish an LLC. I switched lawyers and moved the condo over from my personal holdings to the LLC. My new lawyer was also a CPA and he helped me to set up a simple spreadsheet to track my rental income and costs that would enable him to file my tax returns efficiently. The clock was ticking and I owned a condo that was far from rent-ready.
Preparing My First Unit for Rent
The crash of 2008 left the economy in shambles. Having had a prior career, I had a cash reserve that I could put to use renovating the new condo I had purchased. Since I owned a home in the area, I knew a great handyman company, electrician, and plumber. These three were my close partners over a period of about two months. I also did some work myself, badly, inefficiently, and in an amateurish fashion. I’ve since quit the trades! I let the pros do the work now – even cleaning. It quickly became apparent that I was only breaking things, hurting myself, and wasting time on a project when I had more lucrative things I could be doing with that time.
Unit Completed – Ready for Rent
As the unit’s needed repairs and upgrades neared completion, my realtor was already posting for rent listings, screening candidates, and lining up showings. Credit was a problem after the 2008 housing crash. We had to adjust our expectations about what we considered “credit-worthiness.” Within a limited number of applicants, we found a new tenant and things were off to a start. Cashing that first month’s rent check was the first credit on my account after investing a considerable sum.
Off and Running – Being a Rental Property Business Owner
Having learned lessons, I applied them to acquire three more units in short order. The last two were a duplex. The financing of that purchase was done in the same office by the same lending manager who had schooled me on the ins and outs of how to run such a business and prepare for a loan.
Within about five years, I had a great run of paying tenants and I sold the first unit for 50% more than I paid. That cash was rolled into the business to reduce the debt I had incurred on the financing of the other units. At that point, my cash flow became nicely positive and the business began “paying me a salary.”
Prepare for the Coming Market Correction
If I could offer a prospective rental property investor any advice, it would be to look back to 2008. That market correction was a big one, but such corrections come periodically. Build up your cash reserves. Establish an LLC. Have a get-to-know-you meeting with a lender. Get to know the local contractors. Find a realtor who knows the rental property business. Read online educational resources like those found at Mashvisor. If you do, when the next market crash comes you will be far better prepared than I was!
If you need tools to help you in your rental property business why not check out Mashvisor? Starting is easy and you can benefit from the lessons we have already learned.