Season 1,
30:08

7: Meth House: The Story of a Real Estate Investor’s Nightmare with Brian Hamrick

November 30, 2016

This is a story about a meth house—kind of.

Brian Hamrick bought a house in New Mexico that he thought would generate passive income. In reality, it only led to a horror story that almost cost him tens of thousands of dollars, all because he trusted the wrong person.

Listen in as Brian tells how that house led him down a completely new investment path—with a few twists along the way.

Green Flag: Passive Income

The story begins in Rio Rancho, close to Albuquerque, NM.

In 2003 I bought a single-family home through a real estate network. I wanted to get into passive income, and it was my very first foray into investing. I liked the demographics of Albuquerque, I was able to get the house for $5,000 down.

It was a nice, three-bedroom, two-bathroom house. The network I used set up everything I needed to buy into the property quickly.

For many years, it provided a decent cash flow. I wasn’t really making money off it, but I wasn’t losing money either. I was happy to have it in my portfolio. This was my way of getting into real estate investing.

Red Flag: Who to Trust?

Spoiler alert: Anytime I’ve lost a lot of money, it’s because I’ve trusted the wrong people. That lesson sets up the rest of this story.

Around 2009, we evicted a tenant. It cost me a couple thousand dollars. That was my first red flag that my management company wasn’t doing a very good job.

They placed another tenant in the home, and within a year we were evicting him and his family as well. This time, it cost me around $3,000.

The house was vacant for a couple of months. Finally, I’d had enough of this management company and fired them. I needed to find a good company to get in there quickly.

One of the potential management companies went to the property and talked to the neighbor, and in that conversation the neighbor revealed a startling observation:

“Yeah, I think the resident who lived there before was selling meth out of the house.”

Now that changed everything. When I first heard it, I didn’t realize how loaded and explosive of a statement that was. I immediately started googling “meth houses” and “remediation of meth houses.”

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The management company didn’t want to manage it; they told me I had a big problem. Physically, a house in which meth has been used or cooked becomes a toxic waste dump, a biohazard. It can be quite serious: not only are the surfaces contaminated, but the plumbing is as well. It’s not just a matter of the house being unattractive because of its former usage: it’s actually uninhabitable until you fix it or tear it down.

In my “investigation,” I realized how extensive and expensive remediation would be. I found a guy locally. He asked if the police knew, because if they did they would reg tag the door. It would have a scarlet letter, forever registered as a meth house.

So we were talking about a literal red flag.

(Keep in mind, all this was happening because the neighbor thought the residents had been selling meth out of the house. There was no proof.)

The local guy said he saw this everywhere; meth houses were found across all socioeconomic boundaries. He said he would be able to smell meth, but he also had a special blue light that he would shine on the walls to confirm.

He got into the house, reported back, and confirmed my worst fears: he could smell it, and it was evident all over the walls that someone had been cooking meth. Despite the severe warnings of my research, he said we could probably clean it off by scrubbing the walls and repainting. After all, you never know what you can trust on Google.

I had him send me an estimate: over $15,000.

(Almost) Black Flag: Blue Light vs. A Chemical Lab

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This guy with his blue light was my only beacon of hope. But the management company that turned me down did suggest I check with my insurance company to see if this would be covered.

I called a State Farm investigator, who said I would probably not be covered for remediation, although if there was damage I might be. He also recommended that I get an independent chemical swab test done before hiring the blue light guy.

He convinced me. It ended up costing about $2,000, and when the chemical tester brought me his results, he basically told me there were zero traces of meth in the house.

Zero.

I almost lost a lot of money to this guy and his blue light, who ended up being a complete fraud.

White Flag: Done With This House

I was cash flowing on the house, but that cash flow gets eaten up pretty quickly when you have a situation like I had. At this point, I was lucky if I was breaking even on the house.

I can say it with 100% certainty: that investment was not worth the trouble. We got a new tenant in there, and a couple of years later I sold it. I took a little profit out of it, but it definitely wasn’t worth the insanity that preceded such a miniscule return.

Checkered Flag: The Economy of Scale

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Ten years after buying the house, I had only made a couple bucks. Two small events (evictions and lab testing) had cost me the majority of my profits.

Here’s what I learned: In single-family investing, one little problem can eat up your cash flow. An eviction or a tenant trashing the home can devastate your investment.

I moved forward by beginning to invest in multifamily investing. Before, I’d bought seven of single-family types of properties. I sold six, and I’m trying to sell the seventh, because that strategy did not work for me.

I like the economy of scale; I like the commercial real estate world much better than I like the single-family residential real estate world. I do know several people who have been successful in single-family investing, but those people are hyper-local and they make that investment their jobs. They know their communities very well. I can’t really call that passive income, though: those people really have to be on top of their investments.

In the end, if I had trusted the remediation guy, I would have lost $15,000 for no reason. I’ve learned two things above all others:

  1. Don’t run the risk of investing in a single-family home.
  2. You have to trust the right people.

Failing Forward

In each episode of How to Lose Money, we’ll be asking our guests to answer a few questions about failure. Here’s what came out of this episode:

  • Why do you feel this failure experience happened to you?

It happened because I put my trust in the wrong people. But can I really blame those people? I did a type of investing that I thought would be passive, and it turned out that for me, that just wasn’t possible.

  • What’s the single most important lesson you learned from this experience?

Always get an expert second opinion. It’s easy to trust someone with a good story; it’s a lot better to trust someone with chemical or hard proof.

5_(52)Who do you turn to when you need help?

I start with Google, to inform myself. But now I’ve developed a team of people: lawyers, insurance agents, property managers. I can ask my team of professionals what they would advise.

  • How do you protect yourself from failing in this way again?

I “look for the flies.” If I see a fly zooming around, I look down and I’m sure to find some B.S. somewhere around me. We want to hear what we want to hear, but it’s worth looking at our assumptions and saying, “What if I’m completely wrong?”

  • What advice would you give to someone else in a similar position?

Build a team you can trust. That will make a huge difference. If your team is long-distance and not close to you, you’ll just be another cog in the wheel instead of someone they view as part of their own team.

Be sure to check out Brian’s own podcast: The Rental Property Owner & Real Estate Investor Podcast.

This episode is based on an interview with Brian Hamrick from Hamrick Investment Group. To hear this episode, and many more like it, you can subscribe to How to Lose Money.

If you don’t use iTunes, you can listen to every episode here.

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