for-rent 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

Living Room

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

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Jim Collins:  How I Lost Money in Real Estate Before It Was Fashionable