What I Learned From One Mistake That Seven Years of College and Law School Did Not Teach Me
Back in 1988, when I graduated with honors in Economics from UNC Chapel Hill, with a prestigious Morehead Scholarship, I figured I was pretty well equipped to succeed in whatever I endeavored. Thus I ventured out to invest in real estate. A brand new tower was being constructed in Flushing Queens, around the corner from where I lived at the time. I walked into beautifully decorated and arranged apartments with modern furniture and sleek paintings, with a nice lobby and a parking lot with gorgeous looking sales staff.
They convinced me that if I invested in a $148,000 condo, after paying the requisite 20% down payment and closing costs and obtaining a mortgage for about $120,000, I would be able to rent the 450 square feet for $1,100 a month and would soon be on my way to real estate riches. They all sounded very earnest and sincere, so I figured they had my best interest at heart. As a result I applied for and got a mortgage from then Green Point Bank at 8% per annum, over 30 year fixed rate amortization, which at that time was a bargain, considering I did not have a full time job or a credit score I was aware of.
At the closing, I discovered that my monthly interest and principal payments were $880. With tax escrow of about $150 per month and $230 of common charges per month, my monthly payment was $1,260 per month. After closing, it took me a few months to rent the place for $750 per month, which was the going rate at the time for a studio.
Absorbed in the excitement of owning real estate, I had done no homework. I was starting out with a $510 per month deficit on an investment of about $30,000, not taking into account months of vacancy and bad tenants I ran into. The situation only became worse. Right after my purchase, the real estate market underwent a correction. What I had paid $148,000 for was selling for $55,000. Soon thereafter the sponsor went into foreclosure and stopped paying its share of maintenance on the unsold units it still owned. Thus, a special assessment to meet expenses added a few hundred dollars more per month to my liabilities. Adding insult to injury, an additional assessment was levied to repair and repoint the exterior walls to prevent water from coming in every time it rained as the sponsor had done a shoddy job building.
I lived this nightmare for about 8 years, losing about $10,000 per year until I sold the unit around 1996 for $130,000, thus putting an end to my misery.
So what is the moral of this story? Do your homework. See my previous blogs. Read the Offering Plan. Analyze the financials. Perform a background check on the builder. Verify the amount of common charges. See how many units have been pre-sold. Talk to current owners. Any investment is only worth what it returns to you. Today, it is easy to verify the correct rental amounts for any property in any location through websites like Streeteasy, OLR and Trulia. Do not take what brokers tell you at face value. Ignore what the place will rent for in a year or two years. Hone in on the numbers. What is the place costing you monthly, and what are you making from it? It comes down to simple math. I learned my lesson the hard way and I have successfully practiced it since. Neither an economics degree from UNC nor a law degree from UVA taught me that.
Unfortunately, as a real estate attorney, I see so many deals every day with starry eyed buyers who remind me of myself in 1988. They refuse to listen or to do their own research, and they buy with unrealistic expectations and blind hopes of making a killing. The deals today are pricier, and the buildings and brokers are fancier, but the underlying facts remain the same. We are in an inflated market that is fueled by low rates, 1031 exchange monies, foreign buyers and a hype that is driving prices to stratospheres unseen in the bubbles of 1988, 1998 and 2008. Caveat Emptor.