Take it from John theory in real estate investing

Take it From John

Take John for example. Because he knows his own neighborhood and the property values much better than areas farther away from his home, he decided to get started with a property just a stone's throw from his front door step.

The good news is that it's a very attractive property - and he can point it out to his friends as tangible evidence that real estate investing is a great idea. The truth is, he paid retail for the property, but he rationalizes it in his mind because of its proximity to his house. It is after all one of the best-looking places on the block.

Plus, he ran the numbers himself so he knows he will realize a small positive cash flow every month as long as he can handle his own property maintenance. The property management is simple enough. All he has to do is swing by the property once a month and pick up a rent check from the tenant. Anyway, it won't hurt to learn a little bit about how to effectively deal with tenants and tenant issues. He actually enjoys this aspect of property ownership and, anyway, it's fun and even a little invigorating.

Maintenance is no trouble because he's always been the type to strap on a tool belt on the weekend and he enjoys putting together those cheap pressed sawdust furniture items his wife insists on buying at Wal-Mart. It's also really easy to rationalize his decision because while he is learning more about the up-keep of his property, it allows him to keep up-to-date on the overall condition of the property and is helping him to become a better landlord and real estate investor.

His "What if..." investment is working out much better than he had hoped, and now he's living his life's dream - in miniature. He is a real estate investor. Although he isn't experiencing the level of success he had initially hoped, he realizes that it's still early in his career. Overall, he has no complaints.

And then everything changes with a simple phone call from his boss.

He's been transferred to Portland, Oregon.

What now?

Left with no choice but to go, his "What if..." real estate dream is about to become the poster child for "What now?" real estate regret. When he lived just down the street from his investment, it seemed like a good idea. Although he had to handle his own maintenance and management, John did have positive cash flow every month, which is more than he could say for some of the other investment opportunities he had looked at.

Once his move was complete he went from being a part-time real estate investor to full-time worrier. Even though John's property was in outstanding condition with no deferred maintenance (thanks to his regular handyman efforts) he was concerned about the possibility that something major could go wrong. Things were looking good for now, but a lot could change in a hurry. As long as nothing broke, he'd be OK.

Then the bottom dropped out of John's "perfect" plan: John's too-good-to-be-true tenant proved that he was - and promptly stopped paying his rent as soon as John was too far away to physically do anything about it. Adhering to the concept that "The mice will play while the cat's away," his positive cash flow evaporated as soon as steady flow of rent payments stopped.

Unfortunately, begging, pleading, and threatening to put a curse on his first-born did nothing to get John's tenant to pay his rent. He was stuck hundreds of miles away from a tenant who steadfastly refused to pay his rent, so John had no choice but to dip into his dwindling savings account to pay the mortgage payment on his property.

John decided to give his tenant a call to reason with him. Surely he would start paying the rent once he understood the importance of on-time rental payments. Claiming poverty, he promised to pay within a few weeks.

Unfortunately, John didn't have a few weeks for his tenant to get his financial house in order. The mortgage company needed to be paid today - not next month or when the urge struck him. Losing his composure, John told his tenant to either pay his rent or get out. So his tenant opted to leave - after filling the pipes with cement and remodeling with a baseball bat. The damages - several thousand dollars worth - would have to fixed before another tenant could move in.

After six or seven months he's at his financial breaking point. John's budget could hardly handle one payment - and two was almost enough to put him in the poorhouse. Before he can re-rent the property to another tenant, he'll have to scrape up the cash to repair the place, and finding a contractor he could trust was going to be next to impossible.

Never in a million years did John consider the possibility that he would be transferred to another part of the country not long after pulling the trigger on a real estate investing career. Because John thought he had done such a good job of vetting his rental candidates - and because of his payment history - he didn't even consider the possibility that his tenant would become a conscientious rent objector.

Unfortunately, these situations are rarely foreseeable. Furthermore, most times they won't even appear on your long distance radar screen as distinct possibilities. When you do your "What if..." projections you feel good about the numbers you come up with if the result is a positive number. When you don't know your numbers are flawed and things take a turn for the worse, you have an important question to answer:

"What now?"

Stay tuned for part #3 tomorrow....

Peter Vekselman - Real Estate Investor and Coach

www.coachingbypeter.com