I never wanted to be a landlord
It just happened. Not in the way good things happen when you aren’t expecting it, more in the way of how you might describe a horrible accident
“This guy was crossing the street, and a big truck just came out of nowhere, and BOOM… it happened”
Back in 2006 the real estate market in the Seattle area was hot. Prices were on the rise, and the press was full of stories of people making tons of cash rehabbing properties. People were even quitting their day jobs to flip houses.
I had taken advantage of the hot market to sell my own house, choosing instead to live in a small apartment in a walkable neighborhood. I wasn’t interested in real estate myself, but I was interested in building some passive income streams
House flippers were in need of short term cash. As it so happened, I had some. So I started lending money to a few people with incredible return rates. They would get the cash they needed to remodel a house for 2-6 months, I would get a percentage of the profit from the sale of the home. Yield was sometimes 10-20% per month!
This was great! What could possibly go wrong? A lot, apparently
There was one house in a good location on a nearby island that needed some love. Similar properties in good condition were selling for $130k. A rehabber had an option to buy it, and total costs for purchase and rehab were estimated at $65k. He even had a few buyers expressing interest. I would make a guaranteed 13% return, plus part of the profit on the sale
Guaranteed. That’s a funny word
Things didn’t go according to plan. Some time later, I learned a little about the foreclosure process. I was now the proud owner of a distressed property
A friend of a friend lived nearby, and had a business rehabbing properties. He stopped by one day to take a few photos and share his thoughts. He even made an offer to rehab and sell the property, but based on the declining market thought the property would sell for less than $80k. After inspecting the interior, he withdrew his offer
The Living Room, Spacious & Airy
It wasn’t all a loss though, one of his crew was interested in living there himself. I had a realtor stop by and do a market assessment, and my new partner and I signed a lease option agreement, whereby I would provide materials and he would provide labor. He would also have a few months of free rent and a percentage of the equity he helped create, in the form of a lower sale price
Some time later a nearby military base reduced staff. 2008 brought market declines in real estate and stocks. The rehab business friend didn’t have any work, so I now had an unemployed guy living in my half-refurbished property. Oh, and the septic tank was declared unfit for use
The property value was declining by the day. I began to wonder if I had an ulcer
Garage with Rotten Roof
In theory, the rent-free phase of our contract was over. In practice, my bank account remained empty. I would wake up in the middle of the night in a cold sweat
My partner continued to improve the property with the bought and paid for materials stored in the garage. I took the 1-hour ferry ride to see the property and check in on progress, my one and only visit. It was looking quite nice, really.
My partner finally found a new job, but it had him away from home for days at a time. Rehab progress slowed. With irregular income, he would sometimes pay rent. Usually late
Trying to test the market, I advertised a home for rent on Craigslist and in a local newspaper. I didn’t get a single response
After a time my partner executed the purchase option in our contract. Of course with poor credit, he was not eligible for a bank loan. Instead I provided owner financing. Having weighed the pros and cons of all options, I bet that his Owner Mentality was stronger than his Renter Mentality. On this one thing, at least, I was right
Worst case, I was a seasoned veteran of the foreclosure process. We could even use the property as a home base if need be. As an added bonus, I saved a great amount on taxes that year thanks to a loss of $18,756 (and 33 cents.)
Owner financing has worked out well so far. Payments continue to be late most months, but the late payment clause in the mortgage provides for a healthy amount of additional income. I hired a note payment service to act as a middle man, so I no longer hear excuses. Escrow services continue to pay the insurance and property taxes. The faceless corporation rules all
The interest payments over the last several years have been helpful in paying our travel expenses. When we receive a lump sum payoff in a few years when the balloon clause triggers, hopefully on schedule, I’ll use it to increase our dividend income. The reduction in interest income will allow me to accelerate the ROTH IRA Conversions I’ve been doing as part of our long term tax mitigation strategies.
I’m glad this whole experience is behind us. My blood pressure is skyrocketing just writing about it.
I never wanted to be a landlord. It just happened
But I’m more than happy to be a bank
Do you have any landlord or property investment horror stories? Please share
A collection of Real Estate Investment horror stories:
Send me an email to get on the list
Jim Collins: How I Lost Money in Real Estate Before It Was Fashionable
My second investment property was a nightmare. We bought a property on the wrong side of the tracks in Richmond, VA thinking that, because it was in a historical district, we could get state and federal rehab tax credits, reducing the basis by 70%. Good in theory, bad in practice. We wound up not qualifying for the credits and trying to rent the property out. As it was Section 8, we had the right to inspect with little notice. We walked in to a pile of pot and what was clearly more than the mother and her 2 kids living in the house. We finally evicted them (an onerous process despite the evidence of drugs sitting on the kitchen table) and sold the property at a gushing loss. It’s taken me over a decade to shepherd the courage to dip my toe back into Section 8 rentals.
You would do Section 8 rentals again?
Just got one late last year. It’s turning out slightly better this time! Of course, the bar was low.
I have 5 Section 8 properties. I factor in a $5,000 rehab, give or take $2,000. I went through 2 terrible tenants and I now have a very stringent vetting process. It includes an actual look at their actual credit report, a visit to the county to find evictions and civil procedures (like domestic disturbances). The two counties I deal with have online research.
What’s the advantages for a landlord of having section 8 tenants beside (I imagine) a guaranteed paid rent from government?
Yes, guaranteed rental income is the best reason to rent to Section 8.I have 2 properties that are 100% pd by Sec 8 and others have nominal rental amt from tenant. I am extremely cautious and do a thorough vetting.
That’s a scary story. Just to chime in, i rent to section 8. I have only one property. I was scared to death hearing all the different section 8 stories. We had no option. All the calls were section 8. The neighborhood went to pots. I found a section 8 family with kids, single mom.it could not have been better. I’m gong on my third year and is all great.
Credit doesn’t tell you much when you screen section 8. You really have to talk to the person and get your intuition to work. I even talked to her kids; that’s what sold me. I’m a teacher and have been working with kids for a long time. I don’t need to know a family once i meet the kids.
Well, my accidental landlordship was pretty awesome compared to yours. I tried to sell the condo we owned in Chapel Hill NC while attending grad school. We had just bought a house in Raleigh (for cash) and needed to offload our Chapel Hill condo.
After sitting on the market for 6 months, we got a nibble from a guy. His son was needed to move in ASAP though. So we rented to them while the closing details were arranged (inspection, financing, etc). Wouldn’t you know it, they couldn’t get financing. He did have a really huge stinky unbathed disgusting mutt that he allowed to have the run of the house. The carpet was very close to being torn up completely. We must have used 2 cases of carpet deodorizer and five passes of the steam vac.
Since we couldn’t sell it, we found good renters (on purpose this time) with solid income from PhD assistanceship grants. Two fastidious smart girls. They weren’t bad tenants, just sometimes a pain the butt. They wanted things like the water not to drip from the faucet all night and an oven that heats evenly. Completely unreasonable in other words. The property cash flowed nicely, but it was a hassle managing it from 40 miles down the road.
There wasn’t enough money in it to hire a manager or pay a handyman, so we decided to sell it again. This time as a rental property with established tenants and positive cash flow. Some California bubble-riding real estate investors bought it sight unseen for asking price. Score.
The real estate sirens keep beckoning me back to the land or rentals, but so far I have resisted their call. Maybe when I have more time on my hands (and the market crashes again) I’ll jump back in the game a wiser man. I’ll definitely be looking at outsourcing more stuff this time, and make sure any investment has enough fat in it to pay for a manager or at least a handyman for repairs.
You just made me realize that Winnie and I are the best renters ever :) I should go get a big dog and start dealing drugs
Might want to skip the dog. Those are a lot of work. And with the baby coming?
honest officer, it is baby formula
What a wonderfully awful tale! Fun to read now that I’m safely decades removed from my own.
I’ll email the link to that tale and if you’d like, feel free to publish it here.
Good luck on your final escape!
Jim, your story is incredible. It made me laugh. It made me cry
And now it has pole position on the list of RE horror stories at the end of this post
Oh. And thanks for the pole position. Would I had known one day it would lead to such an honor! ;)
So far so good on the DIY landlord life, we ran in to a couple interesting tenants but I think everything gets better with time.
I know my opinion of this incident has gotten better with time :)
Glad to hear your RE investments are doing well
I’ve got a few horror stories myself, but luckily many more positive ones to very much outweigh them. Real estate is going to allow me to FIRE a decade+ early, so putting up with the occasional headache has been worth it. But I hear you, having to foreclose on a note you hold isn’t fun (I’ve done it). Having to evict isn’t fun (I’ve done it). Having to evict a squatter who you’ve never even met isn’t fun (I’ve done it). Having to clean a toilet when the water isn’t on isn’t fun (I’ve done it).
But having cash roll in month after month, and making more in real estate than in my normal job is fun (I’ve done it).
Thanks for sharing your story. :)
Thanks Joe for sharing the other side
I’d go in for another round, but would go multi-family. We put in a bid on a 7 unit in a popular neighborhood in Seattle. The penthouse was a 2000 sq. ft. beauty, with professional chef’s kitchen and a private rooftop with great views. We were thinking of using that as our home base, allowing the 6 renter’s to cover the bills for us while we traveled
The owner’s took it off the market but I’m still tracking it :)
That sounds amazing. The key to making money in buy and hold real estate (landlording) is finding good quality tenants, and keeping them. Buying a quality property that type of tenant wants to live in is the first step. :)
Nothing on the landlord side, but experienced a few vicariously, while living in Sacramento as a teenager. The Air Force base there was constantly on the list of potential closures, and it was THE major employer in the area. A house across the street from my parents was continually in rent, until at last, it was pretty clear it was being used as a major drug dealing operation–cars would come and go at all hours of the night revving their engines, and there were regularly fights in the front yard. Th owners lived somewhere far away, and didn’t have any sort of property management–my mom played detective, got their phone number, and every time they had a “buyer” come by, or a fight, she called them–regardless of the hour. After about a month, the cops showed up, and busted the house.
Everything–every single object–had to be removed because of contamination. They had to do “abatement”, which means sealing the concrete because of potentially dangerous airborne particles. They removed all cabinetry, carpeting, and fixtures–including the toilet, and all the interior drywall. It was stripped down to the studs, and concrete.
Don’t think they made any money, if they got to keep the house at all under seizure regulations. I believe it finally sold at a police auction.
My only other observation is that more than half the roofs in Seattle look like the garage one in that picture :)
Sounds like something out of Breaking Bad
Oh, my! Don’t remind me that memory of tenants. Drug dealer/addictive, gangster, ten kids from five different women. These are just a sleek peek to the “best” tenant we have ever had. Thanks to him, police broke into the house, windows broken, everything detachable is stolen, the whole basement became a water pond, and big holes in the wall…. Oh that is just half of the story…a lawsuit against us asking for $70,000 compensation, a loaded gun on the table when my dear poor husband went to talk to him, …. oh my… Let me go to drink a lot of water to flush that memory away…
Fortunately, the tenant is history. But the rental property is still current. Wanted to sell it, but hubby became irrational after the bad experience. He is turning his hatred into determination that the house has to make it up for us. I pretend to be rational and call it an alternative saving account for our kids’ education.
Ouch, sounds painful. I would need to drink something more powerful than water to forget that
Sounds like a lot of folks need a better class of rental property, which yields a better class of renter. If you’re a slum lord (not a specific you her, but a generic one) you can expect a lot of problems. Buy and rent decent homes in good neighborhoods, and avoid 90% of this stuff.
No experience on the landlord side yet. Thought about becoming one but the property values are just too high in Vancouver. :(
Your tale is pretty terrible. Makes me more want to continue investing in REITs.
REITs are great. I would have been way better off putting all that money into a REIT 9 years ago
Thanks for the story and sorry for what happened. I almost picked up a rental for a song. But I hesitated. There are too many horror stories. Anyway, I needed up renting the lower floor of my house to a relative and her boyfriend. For 5 years, late 99% of the time paying rent. Heavy drinking. Smoking outside, but the smoke happened to pour into the house no matter. Threatened with a beating or more than that once. Fortunately, the boyfriend blew out his liver at 42 years old and has high blood pressure and swelled up like a balloon due to liver problems. He decided to move out, stiffing me for 2 month’s rent and leaving at the last minute. The relative wanted to stay in the house until she found a place. I had to put my foot down and say she’d worn out her welcome. Better off in mutual funds of bond index funds. Also, something could happen to the house like costly repairs. Or Seattle which is earthquake country. None of it is worth the risk or stress.
Relatives and rental property is a tough combo. Wiser for the experience though, right?
At least it looks like you were wise enough to bake in some well thought out clauses into the contract/mortgage. When you were providing investment money, how were you finding the flippers?
The mortgage agreement was a well written document, with many details finely tuned after months of experience.
At the time I attended a few meetings of a RE Investment Club. There were a lot of amateurs, but also some seasoned veterans. Unfortunately I wasn’t exactly able to tell the difference :)
This is only my first year out as a landlord. Since the previous owner didn’t take care of the problems. I had to do 1 month worth of repairing. After that, the people that I got for the vacant units call/email me every week for something. Problems didn’t die out until last Christmas actually. One of the problem was actually cockroaches. It turns out I could never get rid of it, because the apartment above was so filthy. So I ended up calling exterminator, and have the whole building bombed out with fumes. So far so good.
I didn’t know it was so much work being a landlord. So I’m now tracking how much time I actually active in managing or take care of issues. So whether I can call it as “passive income”.
I’m actually trying to be a good landlord, as growing up in the ‘hood. I wouldn’t want to be treated like that. Beside, take care of the property, the reward is the house value will go up, you choose your tenants, if the property is nice!! Win-win situation in my book.
I never thought that investing in real estate was possible living in the NYC area. Way to expensive and the properties don’t cash flow. But reading some blogs in the community I’ve started looking into turnkey out-of-state investing. At first it sounded risky, but with some due diligence I think the risk can be significantly reduced. Plus the tax benefits and leverage seem too good to pass up.
We rent out my husband’s childhood home on the Mississippi gulf coast. We have been incredibly lucky, and have had great tenants. Our trick is renting to MILITARY ONLY. if they screw up your house in any way THEY LOSE THEIR JOB. plus, rent is direct deposit by the military. We had one girl (plus roommates) for the first 2 1/2 years who we miss terribly. She was wounded in Afganistan and stated with us until she was “medically seperated” and moved back in with her parents. Now we have a great officer and his young family for about a year and have also been very pleased.
Make sure you vet your tenants!
After listening to really bad advice from the in-laws on what we should sell our first house for, we got no offers. After a few months of sitting on it, we found someone who wanted to rent-to-own (a land contract). Basically, he gave us a down payment, was supposed to pay rent, then buy the place in 2 years at a set price. Of course, the rent was always late. He was doing some renovations, and had ripped out the only shower and was using a hose in the basement. After almost evicting him twice, he finally managed to get a mortgage (only because he worked at a mortgage company). We all signed the papers, and then he was KILLED in a car accident during the three day waiting period of the contract. Our lawyer didn’t even know who owned the property at that point. We had to deal with grieving parents in another town, including a pregnant girlfriend. We ended up with a non-working bathroom, a car motor in the garage, and had to pack up all his belongings (including the porn), except a few personal items the family claimed. We sold at a horrible loss, and that ended our land lording days forever. But to keep it in perspective, the poor man lost his life and we are here to enjoy ours…
Ouch! What a horrible experience!
I feel terrible for the family and his girlfriend and child.
Just curious what was the criteria used for screening tenants? Same for the readers who mentioned drug dealings in their rented units
Criteria? That may have been part of the problem ;)
I rent in Romania. A lot easier it seems than in USA. Of course what matters most is location, location, location. This obviousely makes the difference between a lousy tenant and a long and beautiful relationship. Of course the prices that you pay there I am sure are nothing compared to ours but for good location in the capital the prices are very high here as well. Would love to do your way of life with our 3 children. Our net monthly income – if we would to leave our jobs – is 3000 $. Would it be enough? I’m not sure. We are almost in our mid 30s.
Well, not a complete horror story, but it has certainly had its ups and downs: http://rickroze.com/index.php/2016/12/02/slip-slidin-to-slumlordin-part-one/
Hey Curry. I’m curious to know what company you used for seller financing. Was it a mortgage company or did you just have a lawyer draft up a contract? I also wanted to know which company you used to managed the collection of payments.
Thanks,
Frankie
Inquire at your escrow company. As far as I can tell they all have a branch that processes payments. That is what I did.
Thx. Will do.
So being a landlord isn’t all horrible but I suppose it would suck if you didn’t intend to get into it :P
I love the idea of being the bank. I tried it once, just to test it out and they defaulted. It was not so fun :(
Everything seemed pretty great going in but they seemed to have decided defaulting was better than trying to dig out of the debt they got into. QQ