Next purchase - Tulip - oops - 2006

So while we were fixing up West street, I bought the next property - a very nice brick house on Tulip Lane.

This house was bought very cheap, and had a huge upside.  However, once again, I found a way to make a mistake to mess things up.

I purchased a white board, and put on it a list of what repairs were needed for the house, but along with that, I put the purchase price, cost of repairs and potential profit.  In hindsight, this was very stupid, and thinking back, I can easily predict what happened next, but....

A contractor that was hired to change windows, add some siding, and outside soffits saw this, and I am still not quite sure how - but his prices doubled overnight - AFTER he had finished the work.  After a fight, we has paid, and that entire mess caused serious problems with the house.

Unfortunately, I could have made over $25,000 on that house, and do to a lot of mistakes, bad contractors, etc, this property turned out to be a loss.  The money that was lost was put on a low-rate credit card, and that was the very beginning of what will eventually turn out to be close to $80,000 in credit card debt (at the time, it was just shy of $10,000, but that number will start to grow with future mistakes.)

After that, I developed a contractor contract, and every contractor hired had to sign the contract.  This seems very simple, but something that was seriously overlooked.

First Flip - West Street (2005-2006)

So, at this point, I had bought two houses, and both had become rental houses, and both had monumental mistakes.  I thought that mistakes were ok, because the properties were still making money (cash flow), and I was learning from the mistakes.

The ultimate goal was to flip houses, so the next house that I bought was on West Street.  The house was bought relatively cheap, and I really made a lot of nice improvements to the house, nothing extravagent, but it was very nice, and the house actually sold pretty quickly.

This not only got me very excited about flipping properties, but also should have given me some cash to spend on the next property.

However, I was new to the business, and bound to make more mistakes.  My cousin and I were working on the properties, and we decided that instead of leaving the money in the bank, that we should split the money three ways, between me and him and the business.  The total profit on the house was $12,000, so we each split $4,000.

If that money were left in the business, it could have grown and multiplied, but at the time we decided that the business didn't need money - huge mistake.

Lesson learned:  Always leave money in the business, especially at the beginning.  That $12,000 would have been very useful in helping to fund future properties.  (This becomes apparent soon, because troubles are on the near horizon....)

Watching too many 'flipping' shows

The next house that I bought was 11th street.  (This house I will talk a lot more about - as I have retained this house after bankruptcy).

This house was bought very cheap - only $20,000, and it was a duplex that didn't need a lot of work.  This house HAD the potential to make a lot of money, if it was done right.  Unfortuantely, it wasn't.

I hired contractors to work on the house, and get it ready to be rented.  With this duplex and the first one, this would mean I would have four units, and would be accumulating a pretty nice cash flow.

When the house was almost completed, my cousin and I were walking around the house.  It was a Saturday, and we had just watched Flip this house all day.  Somehow we had the stupid notion that night to convert it into a single unit.  So he and I started knocking down walls, adjoining the units.

This resulted in several issues.  First, we had to pay contractors to work on the house as a single-family, meaning the repairs cost twice as much, and a lot more time.

When the house was finished, it looked very impressive.  However, it is in a location that makes houses hard to sell, and unfortunately, it didn't sell.  I ended up renting this house, so the duplex became a single family, I had to put a lot more money into the house and got less rent.  In hindsight, that house would have been perfect as a duplex, and I forgot a core principal in investing - always have an exit plan.  In other words, before any work is done, know what is going to be done to the house, and DO NOT change plans in the middle of the house.

I would have dumped this house in the bankruptcy, however, it is tied to a different house which is actually profitable, so I am going to keep it, with a monthly loss, for the forseeable future.

Lessons learned:

1)  Do not convert a duplex into a single unless you have a clear vision and exit plan
2)  Do not fix a house up more than it's value - never a good idea
3)  Know your market.  Watching the "Flip this House" shows made it seem to make the houses extravagent, so I put a whirlpool tub in the house, double sinks, etc, but in reality it should have been kept very simple in order to make a profit.