How to Avoid the Dangers of Armchair Investing
Brian Hamrick
On today's episode of The Real Estate Nerds Podcast, we explore a Bad Beat that is truly a real estate horror story, complete with colorful characters and AWOL property management. Brian is well-versed in multi-family and note deals, but the one-bedroom condo he bought in North Carolina was one of his earliest and worst deals.
Brian Hamrick's Bad Condo Beat
Brian Hamrick joins our intrepid host and attorney Scott Smith. The two investors go over Brian's background.
[1:00] Brian isn't just here to share his Bad Beat–he's actually researched the property after-the-fact to see how bad it really was. Brian is the owner of an investment group and podcast host himself. He describes himself as a "net seller" who has bought and sold over 450 units.
[2:00] Brian gives a brief overview: "This was one of the smallest deals I've ever done, but also one of the most boneheaded deals I've ever done." The property in question was a condo in North Carolina. He began investing after reading Rich Dad, Poor Dad, took some seminars, and made offers in his home community (Los Angeles) but found almost none of the properties there cashflowed. Properties were simply too expensive, even with Brian's nice job in the entertainment industry. He found a network for out-of-state investors, complete with property managers and brokers, that allowed him to buy 7 single-family homes in multiple states. He was given the offer of "armchair investing," though this ended up being far from the case.
[4:40] Brian had invested in several properties already, and all were performing well. He paid $33,000 cash for a condo in a community called Heritage House. He reads out his full list of monthly expenses, which should have been $125. Given the total rent, he should have been cashflowing $350-360/monthly. He was also comfortable enough in his W-2 job that this deal seemed like a no-brainer.
[7:00] "I will never invest in condos again," Brian explains, briefly listing his reasons. HOA fees tend to go up on these properties, and HOAs have been the source of other problems. He was also promised rent-ready properties complete with new fixtures and appliances and given indications that tenants were ready to move in. Brian was almost prepared to buy two or three of these properties.
[8:50] Brian describes his due diligence efforts. His biggest problem, in his view, is that "I never visited the property. I took their word for it."
[10:00] The property was in a less-than-desirable area. Brian now realizes the error of owning the nicest property in a terrible area.
How The Property's Problems Snowballed Into a Major Loss
The two investors explore how Brian's issues with this property piled up quickly.
[12:00] The first major red flag for Brian was that his rental payment was paying $475, not the $550 he was promised. He accepted this in the interest of getting the cash-flow immediately, but it ate into his profits by about $50. Things went well enough for a year, but the next tenant paid only $400 and Brian was on the hook for new furniture.
[13:30] That tenant was evicted, and the property remained vacant. The property manager informed him a fire was set in the hallway, and that Brian needed to replace the carpet. Since his tenants were a woman and a small child, he was concerned for their safety. They left, too–leaving him with yet another vacancy. At this point, he went online and did some research on the complex. He found a horrible review complaining of prostitutes, thieves, broken appliances, and worse.
[15:25] Scott speculates that there may not have been no on-site property manager. There was, which makes Scott laugh and question whether they were drunk all the time. But the reality was worse: the on-site employee was apparently an ex-convict photographed smoking crack on the premises. He used the services of the local prostitutes, but for whatever reason, the property management would not fire him.
[17:00] Brian points out he owned this property in his own name rather than in an LLC structure–something we at Royal Legal Solutions advise investors never to do. He worried, quite rightfully, about the possibility of being held liable for the antics on this property. He knew he had to get it out of his name, and quickly. He found a real estate agent willing to sell properties in this "war-zone" area, but she could only get $2,000-$4,000 for it.
[18:00] Ultimately, Brian took the deal: "I bought this unit in 2008 for $34,000 and sold it in 2010 for $3,000."
Lessons Learned From This $31,000 Loss
[19:00] Brian realized he should have done a lot more on the due diligence front. The fact that he never met the people he trusted to manage his properties, let alone took a flight out to view the property and area, contributed to this becoming a bad deal. He learned his lesson and changed his strategy: "Now, I only buy in my backyard…All of my residential properties are within 20 minutes of where I live."
[21:20] The property management lesson learned is even simpler for Brian: "Having the right management team is important in real estate. You really have to know and trust your team." He also has far less confidence in "armchair investing" in general. He got a call every time there was a problem anyway, and the team on the ground wasn't handling them. He is careful to point out that armchair investing is different from syndication or ordinary passive investing, as there are asset managers who are incentivized to deal with any issues.
[24:00] The building Brian owned was later condemned, and just for fun, he reads of the laundry list of scary things inspectors found on the premises.
Connect with Brian Hamrick
Connect with Brian Hamrick via his website, Higinvestor.com, or by checking out his podcast. If you're at a loss for where to begin with The Rental Property Owner & Real Estate Investor Podcast, try checking out the episode our host Scott Smith appeared on.
About Brian Hamrick
Brian Hamrick is a multifamily investor with 380 units in his portfolio. He also invests in self-storage and non-performing Notes. Brian currently also hosts a real estate investing podcast called The Rental Property Owner & Real Estate Investor Podcast,
Brian Hamrick has eighteen years of experience investing in single family, apartment & commercial real estate. In 2012 he founded Hamrick Investment Group ("HIG") to help other qualified investors take advantage of the lucrative returns real estate has to offer.
Brian has assembled a team of professionals who understand all of the complex and specialized in's & out's of finding, negotiating, acquiring, managing and profiting from commercial multifamily real estate. To date, HIG has bought & sold over $17.5 Million in assets and currently owns 380 units in Grand Rapids & Wyoming, Michigan.
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