Not-so-succesful Real Estate Stories


#1

I’m looking into starting a house hack in the near future and was wondering if anyone would be willing to share their experience jumping into real estate? Especially from those who started in their 20’s and early 30’s.

I’ve read a ton of great posts from all over the FIRE community about blogger’s experience with real estate and rental properties, but most of the articles are all about successful ventures. This concerns me a bit because the information seems a bit one-sided. I’m a firm believer that the negatives that come along with any decision or action are more important to know than the positives, which is why I’m posting this question.

Does anyone have any posts to share or have stories about their experience in real estate that didn’t go so well? If so, would you mind briefly explaining why things didn’t pan out?


#2

You are absolutely right that you only seem to hear the success stories. I will share my Real Estate horror story with you…

I purchased a very small house for about 75k and I was able to rent it out for $100 more than the mortgage and taxes per month. Everything went great for about 6 months and then the tenant started to be late on rent. She eventually had to be evicted because of non-payment. After cleaning up the pigsty she had left, I was able to rent out the house to another tenant. He was fine paying rent for about 3 months. Then he could no make his rent payments on time. After 4 or 5 months of listening to excuse after excuse, he stopped paying all together and squatted in the house. He had to be evicted and left the house a pigsty.

Lessons learned:
1.) only pick tenants with great credit
2.) every tenant will pay their i-phone bill and rent is the last bill they will pay… this to me was foreign as I thought your shelter should be your first priority…
3.) I should have spent more on a house to get better clientele
4.) do not buy a rental home in a hot market (like it is now!)
5.) there are so many deadbeat renters out there…
6.) look into having someone manage the property so you do not have to deal with deadbeat renters
7.) some people live like animals and will not treat your property the same way as you expect it to be treated

We sold the house after owning it for a few years. My wife got a job offer offer with a certain software company in Seattle and i was able to work from home with my job. I did not want to have to manage the house from afar, so it had to go.

We lost ~10k in the resale since the market had tanked due to the great recession. Plus several months of missed rent…This was after a lot of TLC and DIY fixing up of the house…many, many hours. The bright side is we made that money back up and some in the home we bought in Seattle at the bottom of the market and reselling a few years later.


#3

Thank you Joe!

There are so many factors that come into play when buying real estate and to a novice it seems like every time you think you have a handle on things, you realize you don’t. I have a few additional questions for you if you don’t mind.

1.) What state and or city was the property located? I’m in upstate New York and right now from what I see on Zillow and hear from our customers at work, decent properties are selling in a week or so. Its insane!

2.) How much of a down payment did you make when you bought the property?

3.) Did you spend any time building a network of contractors before purchasing the property?

4.) Are there any books, pod casts or blogs you can recommend? I recently found Bigger Pockets which is a great resource!


#4

I’m game @SteveC

http://www.cantankerous.life/2016/11/my-first-real-estate-deal.html

Turns out interest rates can go up as well as down (who knew?).

Moral of the story: Only idiots focus on the happy path, without considering what happens if their cheery optimistic outlook on the world transpires to not be shared by the actual world!

In my case I was lucky I could afford to carry an underperforming asset for a while, and ultimately made out like a bandit from it. I don’t pretend for a second that this was down to good management or sage investment foresight however, it was dumb luck.

Real estate is an awesome asset class, apart from being a business owner (also a great wealth creator) it is just about the only one that you can proactively add value to and actually generate wealth from (as opposed to just riding the markets wherever they may lead).

Good luck, I wish I’d known about house hacking back when I was tolerant enough of others to have done it.


#5

Great post!

One of the common benefits that seem to pop up in most real estate articles are the tax advantages from owning rentals through an LLC. That way you can write-off expenses and lessen your taxable income by carrying over losses and all that other accounting shtuff. It sound similar to the advantages people raved about in your post.

Does the current low interest rate environment seem similar to the one you experienced back when you were 26? I never really considered the fact that with rates being so low, there is a good possibility that they may rise over the next few years before I pull the trigger.

At this point in time, I still have a year of college left and live with my parents. I just took a really great full-time position at a local realty company in the risk management department and will be able to save a TON of $$$ while living at home. The plan is to save up enough for a down payment ($20K to $30k) to finally pull the trigger when around 24 or 25.

I really appreciate the insight and if you have any other things you wish you knew when you were 26 about real estate (or anything in general if you want to be really generous) I am all ears!!!


#6

There are definitely ups and downs in the real estate investing experience. I’ve only got the one rental property and I’ve still got it. I didn’t try any fancy hacking though, I just bought a property with a tenant already in the place, hired a property manager, and share periodic updates on the experience here: http://agaishanlife.com/our-money/

After several hiccups along the way, it’s been a relatively smooth journey so far but I’m sure it will continue to be interesting.


#7

God I love this website!

I never ever even considered doing that. Buying an already existing rental property already rented out. Are those common in your area?


#8

By the way, we have called my little sister “Bean” forever and still do (she’s 19 now) :joy:


#9

I don’t know if it’s too common or if I happened to luck out - the timing was perfect when I was ready to start looking, this house came on the market a week later and came with a tenant. It wasn’t a great tenant but it was awesome to have the income come along with the purchase for several months and then I was ready to get new tenants in when we mutually agreed not to renew their lease.


#10

Hah! I guess I could have kept JuggerBaby’s blog name, huh? I still call my cousin “Tiny” from his baby nickname. Why’d y’all start calling her Bean in the first place? Baby name?


#11

That one was in Australia, so the tax rules are a little different. In the U.K., where I am now, pretty soon investors won’t be able to claim much of their financing costs as deductions. The point is things can and do change over time.

Over the long term rates will go up, and rates will go down. By how much, and when, is the question. Your Fed raised them today for example. Historically rates average around 5% over the long term, so they are unlikely to remain forever down where they are today

.[quote=“SteveC, post:5, topic:3053”]
I really appreciate the insight and if you have any other things you wish you knew when you were 26 about real estate (or anything in general if you want to be really generous) I am all ears!!!
[/quote]

BiggerPockets, Coach Carson, and Afford Anything are all good places to learn from. Just be mindful that it is all opinions, and on BP many of the people are trying to sell you something. Still worth listening, but always trust, but verify.

This post sums up most of what I know about real estate investing, might be something for you there.

http://www.cantankerous.life/2016/11/hard-won-property-investment-lessons.html


#12

I think my Dad just started calling her Bean because he liked the sound of her first name with it “Sara Bean”

It just stuck throughout the years hahaha


#13

That would be a great opportunity to find if the tenant is alright and the reason for the sale isn’t anything too serious.

I’m very impressed by your blog and am really glad you commented to help me find it! Your real estate posts are great and I’m looking forward to getting through all of them this weekend!!!


#14

We bought our first house when I was just starting my PhD and despite our original criteria, we found a cute A frame home on 8 acres of property (with a pond) located a few miles outside of town. And of course, this house was on the high end of our price range. We ended up pouring a bunch of money into the house to remodel the basement (including many energy efficiency upgrades) and while we loved the house and the property, it was a very unconventional layout. Technically it was a zero bedroom, 2 bathroom because the upstairs bedroom was a loft and the first floor room was partially below ground and didn’t have a second form of egress.

Anyway, I mention all of that because when I graduated and we tried to sell the house we had a hard time finding a buyer. We got a lot of showings and everyone loved the house, but it was mostly young couples (planning to start a family in the near future) or couples nearing retirement. And the odd bedrooms and two sets of stairs discouraged anyone from making an offer. Lending was also tight because this was just a few years after the great recession, so even the one potential buyer couldn’t get a loan.

We ended up deciding to rent for a year and try selling the following year. Unfortunately we were in a hurry and did not properly screen our tenants. It was a bit of a disaster all around. Our tenants stopped paying rent towards the end, they spilled candle wax all over our new hardwood floors, the fire department was called at one point, and they got grease on nearly every surface in the kitchen and near the outside grill. Just to name a few things.

After cleaning and/or repairing our house, we decided to list it strictly through Craigslist in the hopes that we would find buyers who weren’t looking for a traditional home. And it worked! We sold the house for $20k more than we bought it for, but when you consider how much we put into it (we did all the work ourselves), we definitely didn’t break even.

I don’t regret the updates we did to the house, but I do wish we had looked more into managing our house as a rental property (including how to screen tenants). This would have saved us a lot of time and frustration. In fact, after this experience we never thought we would be interested in owning another rental house.

However, just this year we bought a home specifically to rent out on Airbnb. We are just finishing the remodeling, so we haven’t rented it out yet, but we are much more optimistic (and knowledgeable) this time around. I see others have recommended Bigger Pockets, which is a great resource (both their blog and podcast). They also have an active forum.

Good luck!


#15

Thank you for sharing your story!!!

I’m sure you learned a great deal from the experience, especially doing all of the renovations and repairs yourself. Now you can see it all paying dividends with your new property!

Are you living in the new home and renting out spare bedroom(s) for Airbnb clientele?

Would you use Craig’s List again to find tenants or potential buyers?

If you paid for a management company to screen tenants before hand, do you believe you would have kept the first property?


#16

Your the best! :smiley:

I’ll be bingeing your blog this weekend as well!

I started Part 1 of your “Run Up to Financial Independence” and have really enjoyed it!

http://www.cantankerous.life/2017/05/the-run-up-to-financial-independence.html


#17

1.) Omaha, Nebraska so property values are much lower here.
2.) We put down 20% to avoid PMI
3.) No, I used to work in construction for a time, so I can handle most repairs
4.) I will have to check out Bigger Pockets. My favorite finance podcasts are: The Madfientist, Stacking Benjamins, Afford Anything, Radical Personal Finance. You will hear several guests on those podcasts who have had great luck with rental properties (so don’t take my advice). I achieved FI at 44 the slow and boring route by saving and maxing 401k and IRA.

Good luck with your real estate investing!


#18

Hey Steve,

I have 2 rental properties. The first rental property was being an accidental landlord. At the time I owed a townhouse and needed to move away for 2 years before returning. My wife and I moved and rented the townhouse.

I used a real estate agent to find a tenant. He happened to be renting one of the other townhouses in the neighborhood and so I figured (wrongly) that he must know what he’s doing. He wasn’t very good. He was bad about letting me know about showings and I would have people show up unannounced and he suggested we price the monthly rent about $100-$200 too high.

Took 4 months to get it rented to an acceptable tenant. I price dropped the rent myself $100 during that period. When it was listed too high, I was lucky to get 2 people looking at it a week. House was in great condition, great location within a block of metro, but was the nicer part of an okay area. Agent tried to convince me to take a 6 month lease at one point from someone who needed a pit stop between selling & buying a home. Obviously a bad deal I refused as agent takes 1 month’s rent as his fee and I’d be soon looking for another tenant with such a short term lease.

Finally got a great tenant. Screening is key! He stayed two years and got me my next tenant who took his place and the next guy is working fine. I ended up not returning to that house and continued to rent it. I probably lost 3 months rent at the initial leaseup from choosing a poor real estate agent but otherwise it’s working fine. I could float the mortgage during the 4 months because we were staying with family at that time.

Staying home and saving money is a great accelerator and I suggest you continue to do so as long as you can. Not only to build your down payment but also for reserves (repair & maintenance, capital purchases, vacancy, lease up costs, etc) in case you do get issues.

The rent I get is about 30% higher than mortgage/interest/property tax/insurance. It’s more of a B/B- area, so cash flow won’t be as great as it could be in a lower grade area. I put away the extra money knowing that I’ll need it eventually for the house. My gain is probably principle pay down and appreciation of property value.

A couple of years later I decided to buy another rental in a C/C- neighborhood. Thought the property was in pretty good shape, but dated. Estimated repairs at 30-35k with 2-3 months to do. Probably cost me closer to 45k and 6 months. Used a tenant placement guy and it took 4 months to lease up. But that was more about me being picky based upon my strategy. I turned down maybe a dozen applicants who were ready to sign the lease (pets, bad credit, uncertain employment, lied on application, etc). This new guy was very diligent and was actually more picky than I was in picking tenants, which is a sign of someone who cares more about how good a job he is doing versus just looking for the quick commission. Almost a year into this second rental and it’s been going okay. Tenant pays on time and seems reasonable, with a few sharp elbows here and there. I’m satisfied enough to be willing to sign a 2 year lease with her on lease renewal. It’s a Section 8 tenant, so government pays about 95% of the rent. Extra hassle and cost because it’s a government program, but nice to have reliable rents. Net cash flow for this investment as compared to investment cost is much greater than the first rental, but I don’t expect much if any appreciation on the property.

Gearing up now to look for another rental.

Good luck on your plan.


#19

My personal dipping my toe in landlordship went ok but it started out bumpy. I found a tenant, a member of my church, and then I found a property management company. Unfortunately the tenant’s credit did not align with the management company’s requirements (low credit score). In the end her dad cosigned the lease and we were ok. The management dealt with the late rent one month. I only kept the house that one year it was leased. I sold it to have a large down payment on my next property. Lesson learned don’t rent to friends. It could have gotten sticky.

Friends of mine have a full paid off condo (bachelor pad pre marriage). Over all it has been good but they have had some weird things happen. You just have to be prepared for the bad to happen. If you can’t go multiple month without a rent check you may not be ready to buy. Their long term tenant (like 6 years) had a breakdown. His wife left him, he lost his job, he stopped paying rent etc. Then he was hospitalized for a while and they felt bad to evict him. In the end he abandoned everything he owned in the condo and his car. He signed the car over to my friends for back rent. But they were left with a ton of crap to clean out, several months without rent and the condo needed work after it was cleaned up. Then with the next tenant the condo common water heat burst during the day and they had to put in an entire new kitchen. Yes it was paid for by insurance, but they were with out rent again for at least two months while the new kitchen was done. So bad things can happen and you have to be prepared for them.


#20

Extremely detailed and insightful response, I love it! !! !! Thank for sharing!

How did you find the tenant placement guy for the C/C property? Just curious

That is one thing I really have to work on the next few years, which is building up a network of people for when I buy the first property. I worked at an insurance agency for the last four years, so I can call upon them for a dwelling policy and my new job is at an affordable housing realty company (within their risk management department) which could help too. There are also a couple lawyers I know through family and friends who are training to become plumber, electricians and other handyman professionals. Its a start I guess!