After we bought our first rental property in October 2016 in St. Augustine, FL, and successfully rented it out on a one-year lease, we were determined to get a 2nd rental property in 2017. Jacksonville and St. Augustine both had promising areas, affordable prices, and a wide pool of renters thanks. We didn’t think it would be easy, but we were confident that we’d get that property and continue to build our net wealth. It didn’t quite work out and here is a house by house look at how it went wrong and how we should approach the same situations in 2018.

The Search for our Second Rental Property

House #1

We found a promising 2-bedroom, 2.5 bath townhouse in Mandarin, a historic (read: old) area of Jacksonville that used to be just swampland about 40-50 years ago, but has since been transformed into a nice neighborhood with some expensive houses and a scattering of more modest properties like this one. It was next to decent schools, built after 1990 (one of our stipulations), had no HOA fees (we hate when they’re unreasonably high, like $300 because of one pool and some lawn maintenance), and was in good shape. It even had some work done on it recently, like a new-ish AC and appliances.

After checking the rental history, we saw that it rented for about 900/month. Given that the price was about 85K, we decided to go for it. Now, remember that we didn’t do all this work in one day. It took a few days to do the background research, get our agent to go and see the property, look at the rental history, etc. So after about 2 or 3 days, we were ready to submit an offer.

As soon as we submitted, our agent called us and said the house had multiple offers already. We were officially in a bidding war. We raised our price, bid again, and waited. The next day, our agent said the house was sold to an all-cash buyer (this would become a theme). No matter if our price was higher, if there is an all cash buyer, it’s usually lights out for people with conventional financing.

House #2

This property was on the Westside of Jacksonville, where property prices are lower because the neighborhoods there aren’t as desirable as parts of Southside, Mandarin, Beaches, etc. They’re not necessarily terrible, just less desirable. It was a two-story townhouse (we like those, as you can tell), which was going for about 80K. It was renting for between $750-800, so it would be a smaller return, but we liked the fact that it had low HOA fees (about $30/month), low property taxes ($60/mo), and though the house itself did not have modern appliances, it was built after year 2000 and was well maintained.

We visited the property ourselves, along with our agent. It was in good shape, and we also talked to the neighbors, who liked the neighborhood. We felt good about the visit and decided to bid later that day. The next day, our agent told us they had accepted a bid just a few hours earlier. After this experience, we said we will be much faster going forward. Looking at a property and analyzing the neighborhood, prices, are all important, but speed is most important in real estate. We resolved to be much faster.

Houses 3 & 4

We shifted gears to the Northside of Jacksonville, which has a pretty bad reputation for high crime and such, but there are good spots around the airport and we found a fairly new (built 2007), relatively spacious 2-story townhouse (1400 sq ft+). It was selling for about 85K, and the houses in the area rented for $800-900/month. We liked the look of it and decided to bid right away. And then…

House #4 came along on the same day! It was located on the Westside, in a neighborhood we’ve looked at before and liked well enough. Obviously, we couldn’t afford to get both houses, but since we missed out on the previous two, we thought we’d put in simultaneous bids for these two and increase our chances of getting one. The only difference between the two houses was that one house had a carpet in pretty bad condition, so we made it a point to the seller to replace it as part of the deal. And that’s where the trouble started.

We bid for both houses on a Saturday, and went to the mall. At lunch-time, we got a call from our agent, saying that there were other buyers and the selling agent wanted to see if we were going to raise our offer for House #3. We discussed it and said yes. However, 15 minutes later, House #3 came back with a note saying that they didn’t feel the need to replace the carpet. We were confused because we believed that this would not be a big issue.

We asked them back why the carpet couldn’t be replaced and didn’t want to make a big deal out of it, but apparently the owner of that house got a bit annoyed and went with another offer. We were confused even more until our agent got back and explained the problem. It turns out our broker accidentally put the note on the carpet replacement into the offer for House #3, not #4. So the owner of House #3, with a new carpet, felt it was weird that we were asking him to replace it!

Lessons Learned

Speed is Key

We learned this the hard way. Naturally, when making an investment, you want to make sure that your return is good, that your resale value will be high, property taxes, flood zones, all of that research needs to be made, but we realized that once you know the neighborhoods fairly well, you don’t need to spend days researching whether or not the house makes sense. In a competitive market, you need to be first to bid, first to close. If your bid is accepted, remember that you still have 10 days to inspect the house, so if something bad comes up, you can always walk away from the deal.

Cash is King

It’s tough to win against a cash bid, but you can do it if you offer the seller an enticing enough offer that will trump anything else on the table. If the cash bid is around 100K, raise your financed offer to 110 (if the house is worth that much of a jump, of course), and tell the seller you will pay for their closing costs in the deal. Anything to sway the seller the other way.

Careful with simultaneous bids

As we learned, it is not easy juggling a few simultaneous bids, especially if you’re in a public place and don’t have somewhere quiet to go and think. We lost a property because we were a bit distracted during the bidding process and confused one property with another.

Despite these setbacks, we have not given up and will eventually find another property. No matter how hot the market may be, we feel there are always good deals to be found. We just need to be careful with future carpet replacement requests!

Real Estate May Not Be The Best Path to Financial Independence

If you read other posts about financial independence, a few of them have dabbled into real estate. Real estate is not a passive income source, but a way to earn some extra income on the side. If you want a truly passive income source, then you’ll have to look into index funds.

With real estate, if you want to save a little more money and be hands on with your tenants, you’ll have to screen them, check if the monthly rent payments are coming in, fix or replace anything that may need replacing in your rental property, maintain the mortgage payments and/or HOAs (if you still have any) and attend to little admin tasks here and there.

Once you have a good tenant and a paid off property, then you are free to enjoy the benefits of owning a property while it is cash flowing enough for you to survive on. If you have enough free and clear properties, then it is a good way to earn income without going to a traditional cubicle job.

What are your rental investment stories?