The FULL Story! - Our CEO's FIRST Investment property | Real Estate | REIal Talk | EP. 67

Hi, guys. Welcome back to another episode on Real Talk. I am Caitlin. I guess we're doing the vlog for or podcast first. I started with that. Today we're here with Aaron and we are going to be talking about his first property investment. So we're gonna start it by, you know, kind of setting the scene.

Yeah.

Where was it? When was it?

Yeah. Okay, so it was several years back. And when you get to be my age, years disappear. You can't tell years from decades. So anyway, let's say it was a decade back.

Okay.

Closer to a decade than a year. And it was south of. In between Cincinnati and Daytona. So in our Fairfield, Hamilton area.

Okay.

So not too far from southwest Ohio, essentially about a decade ago. It was before real estate kind of boom, you know, prices.

Yeah.

And all that fun stuff.

It was probably around 2012. Ish.

That's close to that. Yep. I had owned real estate before and I had flipped my own home, you know, moved in, renovated and sold it for profit, whatever. So I'd done that kind of thing.

Right.

I had even moved out of my own home and rented it for a year. But I had never bought a property before with the intent of being an investment. Right.

Okay.

This is my first time. I was going out of my way to research and invest in a property.

Okay.

As a money making effort.

So now what kind of property was it? You know, was it single family, multi family?

Yeah. It's the only time I've ever bought a condo.

Okay.

So it was actually a apartment, condo, whatever you want to call it. But shared roof, shared hallways, HOA fees.

Yeah. Yeah. So now what kind of planning was involved, if there was any.

Yeah, that's the fun part of the story, actually. I'm. I'm here sitting in this seat and running the frag family of companies purely by luck, because that deal is kind of what defined my future in real estate investment investing.

Okay.

I. I have no plan whatsoever. And I got lucky. It could have gone really, really bad. And I never advise anybody to plan on being lucky, but I did happen to get lucky with that buy. So I was. I was actually shopping for that property at a sheriff's sale. It was an auction conducted by the court. And I had been to a couple auctions before, and I was kind of doing my research on how that process worked by showing up to them and kind of learning that process. And this property happened to be one. I'd gotten to the point where I was shortlisting and thinking through which ones would be good to move on and that was one that I had kind of eyeballed.

Yeah.

I thought if I could get it, you know, around this price or whatever, I think I could do okay on this one. But that's about as much as I planned. Okay. I didn't think through an exit strategy. I hadn't decided if I wanted to rent it or sell it. Like, I had no idea. I just thought, that looks like it's selling for less than it's worth.

Yeah. Did you have any like rehab budget in mind or anything? Or did you like have any idea what you did?

Not at all. So like I'm kind of a do it yourselfer. So I just, I. Oh, I could do anything. I've done all the stuff or whatever. And by that point in my life, I think I had, I had put a beam into a second floor and I had laid floors and installed windows and doors and electrical and a little bit of plumbing. And so I thought I could do everything. And I was invincible. So I gave very little thought to rehab budget, to be honest, because I kind of discounted the most expensive part of it. What often is the labor and probably underappreciated what a big deal that could be. So really I did not prepare well at all in this property.

Yeah. So now with sheriff's auctions, you don't really get to see what the property looks like before. You get to see what's online and that's it.

That's right. So like I don't even know if I had done a. I think I had done a drive by in the area.

Okay.

But the unit itself was positioned in a way that like I, I couldn't even get in and like peek in the windows without really imposing and stuff. So I don't, I hadn't seen much of this property at all.

So then what was the end result after you purchased it and everything?

The purchase is actually kind of the fun part of the story. So I go to the sheriff's auction and I think it was. I think it was a $36,000 opening bid.

Okay.

And I had been to a couple of sheriff's auctions already and so I had seen what happens. These things get bid up and blah, blah, blah. Right. And I thought, well, maybe I'll just. I'd never bid on anything at an auction before. So I thought maybe I'll just, I'll do the first bid.

Yeah.

That way I can kind of get the jitters out. I can just like, you know, walk that off essentially and just work out the, the nerves or whatever. Of building up my courage to bid. And the first bid won the property. Oh, so nice. Yeah, it was good and bad. Bad because I didn't even have my checkbook on me. Like, I was not prepared to buy this property at all. It was a real hack job.

Yeah.

So I literally. I bid $36,100 or whatever the minimum, you know, bid is, and sold to Aaron Davis.

Dang.

And so I literally had to go to the bailiff, or whoever it was that she was. She was running that auction, and tell her, like, hey, I. I live 40 minutes away. Forgot my checkbook. I'll be back. And she's like, okay, I'll hold this for an hour. I think she gave me, you know, two hours or something.

Oh, damn.

And. And I made it back, wrote her check. Had to go to the sheriff's auction to write her a check and deliver it, that help from thing. But I had. I had no intent of buying that property at all. I was really just trying to bid for the sake of, like, you know, practice or something.

Right.

To try to kind of, like, sentimentally get that fear out. And. And I ended up buying this property. And to this day, I don't know why nobody else bid on that property. People didn't like to mess with condos or whatever. The right audience wasn't there, but it's. I did. I did great on the property.

Oh, nice.

Like, it was a woman who had moved out into assisted living. There was some junk left behind, but it was actually in great shape. I mean, I cleaned the carpets, painted the walls, moved in renters. It was. It was the easiest acquisition I've ever done.

That is pure luck.

I think I spent less than $1,000 to, like, flip it or whatever and get it move in ready for a tenant.

Wow.

And it rented overnight. No problem with know, they lived there for two years and paid rent steadily. And I decided to sell it after that.

So then once you got in it and kind of, you know, saw what it was, was that kind of when you made the. Your exit strategy decision, or did you ponder on it a little bit?

Yeah, so when I. Yeah, that's exactly right. So when I realized that there was really not much to put into it, like, I guess at the time I thought, well, I don't have to put a bunch of money into it, so why don't I just collect the rent for.

Right.

And I don't need to get cash back out to, you know, pay off some other. I don't know, really. I had no good rationale. Like, I didn't understand the 1% rule. I wasn't. I didn't have a target for profitability or cap rate or cap. I was really just kind of shooting from the hip there and lucked out. Because that. I mean, that is not how you win in real estate. You win in real estate by having an exit strategy from the beginning, doing the math up front and sticking to a budget.

Right.

But I just. What I lucked out in Caitlin was that it didn't get bid up to what it was really worth.

Yeah.

And the property just. It didn't need any love, you know, any attention.

Yeah.

Or work. So I really lucked out. And then, I mean, who wouldn't fall in love? I mean, it's like going out to golf for the very first time and hitting a hole in one. Like, who wouldn't come back and learn how to play? You know what I mean?

Yeah.

So I crushed that one by pure luck. Just Happy Gilmored. That thing, whacked it, fell right in the hole, and then kind of fell in love and did a bunch later and didn't do as well as easily figured out how to win.

So then the emotions geared towards that, you know, were the, like, you're saying the happy go more, you know, the happy feeling, everything. You were excited for the next one. I know this podcast. We're supposed to be talking about the first one. How did your second one go?

How did my second investment go? Ooh, I have to think about what my second one was. Okay. Yeah. So the second one, it's interesting. I think I got the itch then. Like, I loved it then.

Right.

And I actually did not do great on the second one. I made a little bit of money. I flipped it.

Okay.

I also bought it at an auction. I did a lot of the work myself, so my cost was modest, but I ran into surprises in the property. My second one had mold in the basement and, you know, cat pee smell everywhere. You had a lot of stuff. It needed to be rehabbed from top to bottom. Right.

Yeah.

So that one ended up being a, you know, kind of barely got away with a few bucks investment. And what it really came down to is I. I didn't plan all those expenses in advance.

Right.

And then set myself a good threshold at the auction.

Okay.

You know, a walk away number. I just kind of let it go wherever it went. I bid too high and paid too much of the acquisition.

Okay. So based on, you know, both of those, what did you learn from them?

Yeah. So I guess two really important lessons.

Right.

Like in the first one, I learned that there's a ton of money to be made in real estate.

Yeah.

And if you show up at the right time and, or, you know, you. You can really. You can really win. And that is true. I might have gotten lucky. I might not have done my homework, but I made the acquisition.

Right.

I rented the property for two years at a really good rate, and then I sold it for a nice profit. I mean, I did great on that property.

Yeah.

So that despite the fact that it was lucky, it is true. Sometimes you do get lucky.

Yeah.

Sometimes, you know, you do hit a little arbitrage of sorts or whatever, and you. You capitalize on being in the right place, the right time and, and. And grabbing things below market. Right. Yeah. And rolling up your sleeves and putting a little sweat equity.

Yeah.

Right. So those wins are out there, and I'm glad I learned that early because I think if I had bought that second one, you know, I would have learned those hard lessons first and might have been turned off to it. Right?

Yeah, absolutely.

Those hard lessons obviously were. No, what your know, what your ceiling is before you.

Yeah.

You make an acquisition, don't negotiate with yourself late into that process. Right. And so I should have known that, you know, 150 was my number. Instead, I was like, 159. Well, you know, and that's nine grand. I lost that. I. I could have put that money elsewhere. Right.

Yep.

And so, you know, being prepared, learning how to budget, costing things out in advance, those are the hard lessons. I learned that second time didn't have as great of an experience, and I'm kind of glad those lessons came in that order.

Right. Yeah.

Because I still knew there was juice out there to be had. Right.

Yeah.

But I knew that, you know, obviously I was going to have to be more disciplined in order to grab a hold of it more consistently, so.

Right. And I'm glad the second one didn't scare you away, otherwise you wouldn't be here today.

It wasn't too bad.

Right. So now at the auctions, you know, were there a lot of people there or was it just like, you know, a few in between or.

You know, auctions over the last couple years are barely worth showing up. Everything's getting bit up over retail, whatever else. But back then, it was a modest showing and it was sporadic.

Okay.

Sometimes there'd be 10 people there, sometimes there'd be, you know, 40 people there.

Okay.

You could always. You could kind of tell whether or not you were going to walk away a winner.

Yeah.

How Many people showed up, but it was real hit or missions when I was going to them back. That was years ago. But when I was showing up to those things back then, it was real hit or miss. Sometimes you'd grab some winners and you'd see people get away with winners.

Yeah.

That you maybe didn't do your due diligence on, but you kind of. Kind of tell. That was a. That one went away lower than you had expected. And. And then some days it was like everything was just getting fit to the max. And that's a day where you just, you know, take your notes and move on.

Now, some properties, they do have maxes, don't they? Or is it just until no one bids?

I mean, the max is when people stop bidding.

Okay, that's what I wasn't sure.

I know they have minimums. Oftentimes they'll start with a. Generally, different courts have different rules, but two thirds the appraised value is a common starting point.

There was before we put my significant other and I Cole, before we put our property under contract, we were looking at a house that was going to go up for sale and an auction. And we were like, okay, well, let's, you know, drive by the property. Well, we ended up driving onto the property, which you're not supposed to do, but we did. It was vacant. And we start looking through the windows. It was on six acres of land. I think the starting bid was 100K.

Okay.

So it was on six acres, three bedroom, one bath, I think. So we start looking through the. All the windows in there. It's just like filled, like up to the window. Oh, it was awful. And then the back door happened to be unlocked, so we got the deeper look. We went to open the door, and we couldn't even open the door.

It was like so much junk in there.

It was bad. And so, you know, we sat on it for a few. A couple more days, and we kept going back to the auction site and seeing what we wanted to do. We ended up passing on it. Just because we're like, six acres is a lot for our first home.

Sure.

Because that was what we were going to do. We were going to buy it to live in for a few years and we would sell. But we were like, there's no way this thing is going to sit at 100k. There's no way it's going to go.

Do you know what it got bid up to?

I don't. I tried looking it up the other day and finding it, but I drove past it because my Parents, they actually live in the area. I drove past it last week and it still looks vacant. So I don't know if it ended up selling and whoever bought it just hasn't done anything with it yet or what or so.

But yeah, I've, I've seen some doozies. I bought a property once that was also full of junk. In fact, somebody had been murdered in that property.

Oh wow.

I think this, there's conflicting stories actually. I think one party, police investigated it or whatever. This is just gossip from neighbors or whatever. But somebody said it was a suicide, a murder, but something tragic happened.

Yeah, absolutely.

Like I literally had to attend to a bullet hole in the wall.

Oh God.

As part of the rehab. Right. And then there was a transmission, like a literal car transmission, like in the dining room, along with all kinds of other stuff, dog, feces, whatever. There was also like a three thousand dollar piece of gym equipment, like a big universal gym in the garage that's still in my basement gym to this day. Because it was the most valuable thing at that property. It was pristine. It was like it had just been bought. Brand dang. So I don't know what was going on there. Yeah, Christmas present or something that never got used, I don't know. But that was a, that was a great little gem to find. But otherwise the place was a total wreck. It's kind of crazy the things you run into when you buy sheriff's auctions because there's always obviously really bad circumstances that lead to that. You can, you can, you can find some weird stories, that's for sure. Not, not really. You know, my preferred method after, you know, learning other ways of making acquisitions or whatever, but it made for some interesting stories.

Yeah, that was going to be. My next question is if you know, if you're still involved in investing in real estate and if so, you know, what is your kind of go to strategy with everything that you've learned?

Honestly now I would just buy one of our turnkey properties.

Okay.

That is as I'm shopping, I'm looking at our inventory and I'm buying with our customers. Buy, right? Yeah, that's the go to approach for me because somebody else has already done the costing. Whatever else you put your markup on it, I don't care. You know what I mean? That's a worthwhile investment for me. Yeah, it's really the cash flow. And so the way I analyze a deal is different now. I'm not looking at a property that's below market, I'm just looking at cash flow. That's a maturing factor. Right. I mean, a good deal to me is one where I know the money in is going to be less than the money out. Money out is what I'm buying. So that's probably where my go to, you know, first stop, first look or whatever would be because I'm a little more hands off at this point. I like the idea of somebody else having done the due diligence, done the homework, put the renter in, blah, blah, blah. That's my move. As I've gotten old and lazy, I'm just buying money. Right. At that point. Right. Sheriff's auctions are still interesting. You can still get lucky. But like I said, the last few years, with home prices going crazy, crazy inventory being so low, there's just. It's an army of people showing up and bidding everything.

Yeah.

And there's too much risk in that. So I haven't, you know, I haven't paid any attention over the last four or five years or whatever. It hasn't been a good place.

Yeah. And so I don't know how it was when you went, but like the example I was just talking about when we were looking at that one, the auction date, I don't know when it was uploaded, but the auction date was set for like a month and a half down the road.

Yeah.

Was that pretty typical? Okay. I didn't know if it was like, if it's just change because of the demand for it, if now they're like prolonging it more to get more people interested.

Pretty common. It's pretty common. Covid messed that all up. They didn't do auctions for a while.

Yeah.

You know, there was a bunch of different transactions or transitions that happened in that whole space over the last couple of years. But it just. It's not a predictable it like you said, because you can't always see the property, it's hard to do your homework in advance. Like you should. I had my method. Eventually I figured out my method for guessing. But if you didn't have a. If you don't have a pile of cash as a buffer, you're. You're not going to be 100. Right. In that scenario.

Yeah.

Where you can kind of get close to that when you're walking the property and you're seeing the finishings and the materials that are used and able to add up a real rehab cost.

Yeah.

You can't do that. If you can't get in the property.

I think that's kind of looking in.

A window and see a Kitchen.

Right.

You know, your big. But you can't see the furnace in the basement.

Right, Exactly. I think that's something too, to, you know, kind of point out, and I think you and I have actually talked about this before on the different types of investors. You know, whether you want to be active or passive or kind of in between.

Yeah.

Is, you know, you started going the active route and you were very hands on. You even did the rehab yourself.

I did the renting myself. I managed the tenant relationship myself. All that stuff. I showed up and changed out the, you know, the garbage disposal. Right. Like I was the handyman.

Yeah. But then on the flip side of things, you can do the turnkey route, which everything is done for you. And even at that option, at least in Ohio, and this might even be a little biased, but the prices. The ARVs are a lot more attractive than other markets, in my opinion. They're a lot more affordable.

I think that's another way that I got lucky and a lot of investors don't, is that I happened to be messing around in real estate. Experimenting in a market where you know that the cost ratio is advantageous to an investor. Right. Dayton and surrounding areas are a really good rental market.

Yes.

Right. So buying a property that can rent well to cash flow is. It's easier to stumble into a year. So if I had been doing that in a different city that what. Where those price ratios were not as. As good, I would not have fared as well.

Yeah.

Right. But yeah, you're right. I mean, that's one of the biggest mistakes that investors make thinking that their own backyard is the best place because they're close.

Yeah.

But you know, your rent and home value ratio is way more important than how close you are.

Agreed.

So anyway, I got lucky in that regard. We happen to be in a great market here and it's just, you know, through series of coincidence or whatever that, that. That I happen to be sitting here. But. And why now? My move would be, oh, 8% cash on cash. Okay. A property manager with a great reputation and those are stuff. And a good maintenance team here locally. Okay. Looks like a move to me.

Yeah, absolutely. Especially all under one roof too.

That's right. I mean, it really is. I mean, we've talked a lot about this recently that. This isn't supposed to be sales.

No, nothing.

Building and delivering what we would buy. Just had that conversation with Steve this morning, our rehab director, and about. We were talking about a tactic or whatever. Okay. I'm the buyer now. How would I like that approach? Okay, I would like if this. And I would like it at that. Okay, cool. That's what we'll do then. You know what I mean?

So anyway, I think even doing that, you know, like in a rehab itself is, you know, what are the kind of things I would like, you know, to an extent, you know, you don't need to like the granite countertops or anything, but like, you know, what, what's modern right now, what's going on, things like that.

True. Yeah. So thinking about it as your home, you know, there was a point in time where I was at that price point. Right. And I was renting and whatever. So I think about that when I get out into the field, put a lockbox on something on my way home or whatever, and I look at this property, I'm like, huh, if I was going to move in, move my family in here and rent this property, what I. What would I want it to look like? Yep, I'd want this hedge out of the way.

Yep. I do the same thing. So did you do that with your first investment? Did you put yourself in their shoes or.

Yeah, yeah, I did. You know, like when I. We painted the walls or whatever and I did a couple fixtures and whatever else, it was pretty minimal, like I said, but I thought, oh, you know what, this is a good looking place. I would rent this more. Decisions like that were made on the second one that was all problematic and completely ripped it apart and the ones that. Subsequent ones. But yeah, that second one was interesting because it was a home that would have been a. It was a retail flip. So I bought it, renovated, and then sold it. It is a home that could have been my home. Right. It would have been comparable to a home I was living in. And so I definitely thought a lot like that. You got to be careful too, though, because sometimes you get a little dreamy about what's uniquely valuable to you that's not consistently valuable to everybody. So there's aspects of that are useful and then aspects of that that are just expensive for no reason.

Right. So now what made you, between your first and second one, what made you on the second one, decide to go that retail route? Was it just the luck of the draw or.

That's a good question. You know, I think I intuitively did that. You know, the. I was doing a form of, you know, cap rate analysis at the time, where I'm looking at the money I put into it and I'm thinking if I rented it, I could get this much. If I just sold it, then I'd have this much.

Okay.

And so it was crude and I'm doing it on my cell phone calculator and not in a pro forma or whatever.

Yeah.

But it was still true. You know, it's still a basic, you know, rate of return ratio that I added up to decide that that wasn't one I was going to try to rent.

Okay.

Like, that's not a property that I knew I could sell it for 250,000, but I couldn't rent it for 20, $500 or whatever.

Okay.

And I don't. I didn't know the 1% rule, but I knew in my head that I needed this much in order to make it worthwhile to me. Right. So I did a crude version of that, an early version of that. That was, you know, one of the first, you know, principles or whatever that I kind of learned is differentiating it as a rental prospect versus a retail prospect. You know, that the thing I do better now is I think about that before I buy it. Right. Back then I was just like, I'm halfway into rehabbing it. You know, I've made no decisions about what kind of countertops I put, what kind of carpet I put on based on whether it was going to be a rental or retail sale or whatever else. Right. It was just, I'm hacking at it and somewhere along the way I'm like, I think I'll go ahead and redo this floor and then maybe I could sell it for a little more.

Yeah. Okay. So I don't have any questions. I think that was really good. I learned a lot. Do you have any.

It was a trip down memory lane, that's for sure. Some hard lessons.

So do you have any, you know, kind of final words on, you know, your experiences or what you would want for first time investors doing, whether they're going the active or passive route?

Yeah. So maybe the most important thing, particularly for investors who are not here locally in Dayton, Ohio or the surrounding area, Cincy, Springfield, whatever, is don't buy a property in your backyard just because it's in your backyard. Shopping the right market where the price ratio, the value of the property and the rent ratio is good, it's going to make you. Is going to give you a better prospect for winning. And doing that requires you to have a great property management partner. Yes. So vet those things. Vet your, your rent ratio and your property manager. Those are two big things that I got lucky on that investors throughout the country and elsewhere are not going to get lucky on.

Yeah.

So if you're like a first time investor or whatever. Do your homework on your property manager. Do your homework on your rent ratio. That's a good place to start that you probably won't get lucky on. So start there in that.

That's chapter one of many.

That's right. That's chapter one. That's it. That's all I got.

All right. Well, this was good. I am excited to get this one out to the world so you guys can all hear this one. I don't have anything else.

I'll do it.

All right. We always like to end these with.

Invest smart and live happy. Yes, I promise.

Bye, guys.

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