How I bought an 8-unit apartment building with no money down and walked away with $1000 cash at closing
When I was 23, I bought an eight-unit apartment building with no money down. And I walked away with $1,000 cash at closing! Sounds pretty fancy, right? Wrong.
It was one of the dumbest real estate investing mistakes I’ve made in my young life.
I escaped without a scratch, but it was due to an over-sized dose of sweat, tears, and luck. None of it was due to savvy investing skills.
The Sound and the Fury
I was 23 years old and had just earned my real-estate license the previous year. My first couple of months were spent buying and selling a few upper-end units for individual homeowners. The commissions were decent, but as a new Realtor, my split with my company was high. To complicate the problem, I had financed my association, training, and union fees to get started. (This was before I had decided to cancel my credit cards.)
After several months, I began to work more in the booming foreclosure and short-sale markets that were plaguing central Indiana. Out-of-state lawyers, doctors, and other high-income earners (mostly from the West Coast) were swarming our local market.
They were buying up $30,000, $40,000, and $50,000 houses like they were toys — albeit over-priced, over-financed, and only half-functioning toys at best. With rents ranging from $400-$1000, they simply couldn’t resist what their spreadsheets were telling them the return would be. They bought many of the homes sight unseen and used the first real-estate company that would sell to them.
We represented a lot of the banks that had no idea about the local market prices. They also didn’t understand the current condition of their properties (even after we told them several times). Well over half the deals fell through. Either the banks were too unrealistic to negotiate, or a closing would be interrupted by the discovery of a mystery lien, a second mortgage no one knew about, or some other problem with the title that we didn’t even know was possible!
It was harder work for lower commission, but there were hundreds upon hundreds of properties, which helped even out the paychecks from month to month. And I was learning a lot about how to avoid real estate investing mistakes.
Property Management Comes Calling
After most of the out-of-town investors closed on their new rentals, they began searching for a company to manage/rent them. After several dozen requests for an affordable and trustworthy property management company (and no clear-cut option), we decided to start offering the service ourselves.
I joined forces with a broker who spent his time focusing on acquiring more leads for buying/selling. I set about figuring out how to actively manage and rent the vacant units (which almost always needed repairs first).
Since many of our clients were repeat customers already, they were ecstatic to have the option of having their properties managed by us in-house. Within just six months or so we had over 125 units under management.
I was working countless hours and answering the most bizarre phone calls you can imagine at all hours of the night. Overall, though, we were turning a profit and looking for ways to scale our system over the next couple of quarters.
A Perfect Storm
As part of our networking and lead-generation work, we regularly attended private meetings where local brokers would pitch each other their current clients wants and needs. In one particular meeting, another broker was pitching one of his own properties for sale. It was two side-by-side four-plexes (eight units total) with each unit being one bedroom. It was in a low-income part of town, but he was only asking $125,000 for both properties.
“$125,000 for eight units?”, I thought. “There has to be a catch.”
There was. Seven of the eight units had tenants, but only three had any history of paying on time. Even after kicking out any non-paying tenants, each unit would need a couple thousand dollars of work to get anything decent in rent. In addition, there were four furnaces in total all of which were probably made in the 40s or 50s.
In other words, it was a project by anyone’s terms. It would require some up-front repairs, several months of eviction filings, court visiting, and re-showing the units, but… “$125,000 for eight units!“
If Only Someone Would Loan Me the Money…
I dug deeper and deeper into the numbers. I was already managing property, coordinating repairs, negotiating prices on materials, and renting units for dozens of other clients. It made sense that if I could get a loan, I could plug a property right into this current system I was running.
There was a big glaring issue, though. Neither my partner nor I was credit-worthy in any sense of the word. The chance of me getting approved for a mortgage was zilch (let alone a non-owner occupied, low-income commercial loan). With regret, I pushed the property to the back of my mind and continued about the process of building the management business.
At our next networking meeting, though, we caught wind of some additional news on the properties. The broker who owned them was in serious trouble on about a dozen different pieces of real estate. He owed $76,000 on both the buildings, which were financed through a popular investor/hard-money lender.
The private lender was getting scared that the investor would soon default (giving the lender a property he wanted nothing to do with). The owner was only looking to get out of the property, so he could focus his energy on his salvaging his other properties.
Without much thinking, we pulled the trigger.
A Bold Offer
We called up the private lender (an individual) who was currently financing the properties. Then we pitched him the idea of us taking over the loan and purchasing the property from the current desperate owner.
We offered to both sign onto the loan, giving the investor two names opposed to the one he currently had. Then showed how we would remedy the situation, evict all the tenants, and plug it into our management system.
Neither of us had a penny to our names, so we even had the guts to require that the private lender actually invest more money into the property. In order for us to take it over he’d have to loan us an additional $15,000 to replace the furnaces and repair two of the units after evictions.
It was a bold offer. We’d give nothing but a management plan and our signatures on a $91,000 private mortgage (at 12%) for eight units and a $16,000 cash loan. The lender must have known even more about the current owner’s dire circumstances then we did because he took our offer. The current owner was happy to get out for what was owed, and within the week we sat down to close.
After the paperwork was signed on my first-ever real estate purchase I was handed a $1000 check (for prorated rents/deposits for the month). I gave nothing tangible, just my worthless signature, and walked to the bank to deposit the money.
“So this is how real estate works”, I gloated. “I could get used to this.”
I had no idea what was in store…
J.D.’s note: This is a glimpse into a world I’ve always wondered about. Though Kris keeps trying to dissuade me, I have a fascination with rental properties. I look forward to reading part two of this story. And although GRS is not about to become a real-estate blog, this Sunday’s reader story is actually about how one of you folks decided to take the plunge by buying a rental property, so we’re going to have a mini-theme here for a week or so…
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There are 98 comments to "How I bought an 8-unit apartment building with no money down and walked away with $1000 cash at closing".
ow no, I hate a “To be continued…” just when things are getting interesting. Can’t wait to see how this continues…
Wow! That is crazy, Baker! It’s a life experience, though. 😉
Talk about a cliffhanger…when is part two going up?
Its nice to have rental properties as a source of passive income. ^_^
Very risky though if you have to borrow money. As much as possible I try to avoid debt.
Kris is right! But it is also a really important topic. I almost took a real estate class once in college (but dropped it), and one of the students was actually an artist — he said he was in the class because a lot of his artist friends make their regular income from real estate. It’s a fair game. But Kris is right, it’s really bad news a lot of the time!
I had landlords (a husband and wife) last renting round who owned about 4 units around town; they were teachers who counted on it for a more steady income. But, they also apparently didn’t have much business skill. They made a verbal contract (email, actually) that I would be paid to move out early, then reneged the day before my moving company was to move me out (so costs were very much sunk — moving co., new apt half-month fees, etc.). I was out a lot of money if they got away with it. So I sued in small claims court, and won. At the hearing, it became clear that they had no idea that a verbal contract was just as much of a contract as a written one! I don’t expect all landlords to be big business people, but they need to have at least some sense of the fact that it is a business arrangement, and all that that entails.
Sitting at the edge of my seat. DH and I have 2 rental properties right now that have gone pretty well so far. We’re not profitable, but we’re not bleeding or dealing with deadbeats, either. DH is a member of the local landlord association, which provides some very interesting information, so we’re overcautious, if anything.
I can see a few clues of where Baker’s experiment is going to go off the rails, but I wait for the next installment. 🙂
I really enjoyed this guest post! Can’t wait for the next installment.
My boyfriend’s family thinks rental properties are THE way to make money on the side. I’m not convinced, so it’s good to read about others’ experiences.
I’m looking forward to the next post as this is an area I’m interested in. Not so much the landlord part, but perhaps buying condos during the building phase and selling once they’re built.
Real estate has always intrigued me, as well. I am looking forward to the next installment!
I expect that the comments will soon be filled with anecdotal stories about ‘Good Tenants vs. Bad Landlords’ with the occasional ‘Bad Tenants vs. Good Landlords’ thrown in from the other side. This is what people like to talk about when the subject of Rental Property comes up.
I would like to suggest that although people like to relate the ‘horror stories’ first (because they make more interesting stories) – real estate can be a very good way to ‘get rich slowly’ – despite the recent volatile market, the fundamentals still hold.
1) It is a business. Don’t get involved unless you are willing to learn a lot about it, and treat it like a business. Learn the law, tenant’s rights, landlord rights etc.
2) Study the numbers. Make sure you are comfortable with your rate of return from Day One. Don’t let anyone sell you on the idea of ‘this neighborhood is going to be great in 10 years’. While this does happen, and will add to your wealth over time, don’t count on it.
3) Assess and quantify your risk. Have a plan, but know what to do if things don’t go exactly according to plan. If you are not able to rent that unit for $500/mo. you have to know how you are going to pay the mortgage if you can only get $400/mo.
4) Have an emergency fund. Just like personal finance, you have to have a cushion in case your unit(s) go empty for a month or two, or in case something unexpected breaks and needs to be fixed.
5) Talk to a professional. Ideally, you want to talk to someone who has done this before and can give you unbiased advice. If you do it right, it can be a great income stream. Find someone who is ‘doing it right’ and ask them lots of questions. Take them out to lunch.
6) Doing it right means that you are enjoying a positive monthly cashflow, tax benefits (like depreciation), debt paydown (by paying your mortgage each month), and hopefully capital gains via long term appreciation in value. If this does not apply to the deal you are considering, think about it long and hard before you proceed.
I’ve been in the business for 14 years and have trained lots of new investors. It is not for everyone, but if you have the right head for it, and are willing to dedicate some time, attention and money, it can be a great business.
I like this, since so many tout the virtues of property ownership and the ease that the money will roll in. It takes hard work to learn the ropes, and get to the point where it becomes second nature. Yes, years later, after much blood, sweat, and tears, it can pay off, but I don’t have the patience or discipline to wait that long.
That and making my taxes much more complicated.
I love the rental game. I learned by watching my parents that there is no short cuts though. You have to put at least 10% down, screen potential tenants hard and be consistent with everyone. If you give to one the others will find out. You also need to keep the maintenance current on it. Go to a lawyer or friend in the business for a contract its a must have item.
Over all though it’s a wealth building machine if done right.
I would never buy into the low income areas though because people just are not dependable with rent and destroy to much.
i can’t beleive you that! i can’t wait for part two! my parents were landlords….not fun!
“To be continued…”
I can’t wait!
To be continued…
Boo-urns…!
This post was more exciting than an episode of “24”. 🙂
Great story – I can’t wait to hear more.
My husband and I have been in the real estate game for about 7 years now. We have had some properties make us a lot of money, and had one that lost us money (though not a lot, thankfully). It takes a lot of time and effort, and we ended up selling most of them because of changes in our job and life situation that required more time at home. We are still the owners of two tenanted homes, including our own (we have a basement renter).
It’s really the tenants who can make or break the situation, so my advice to anyone renting would be to do your due diligence up front. Screen your tenants, get references and call them, do a credit check, etc. The unhappy part of this is that even good screening does not always catch the “tenant from hell”.
We have an incredible tenant in our three-unit building who has taken over many of the management jobs in return for slightly discounted rent and use of the backyard garden and storage space. We have provided him with a list of our approved workers (plumbers, HVAC, etc), and if issues come up, he deals with them after a quick call to us for an update and go-ahead. I would highly recommend this to anyone who felt they had a tenant responsible and willing to do this for you.
Can’t wait to hear the rest. At first read, it sounds like a good investment. But, based on your tone, I’m guessing that it doesn’t end good.
Looking forward to part two. After hearing how easy it is on commercials, I enjoy hearing the more realistic side of the story.
Looking forward to the next installment.
I agree with JKC — you need to know your stuff. This is a business just like any other. My older brother owns 3 rental properties, and he makes just enough from them to pay his mortgages and put a little away for emergencies. He’s still glad he bought them, tho, as they’ll make profit eventually for him and don’t cost him anything (he has a management company, although he did manage them when he lived in the local area).
On the other hand, my parents delved into renting their house with no prior experience with renting — the last time they had rented was 30 years ago! They didn’t even bother to call my brother or me (an experienced renter) to ask for advice. They ended up charging way too little on security deposits ($500 on a house that rented for $2,500 a month), didn’t check their tenants thoroughly, and really got screwed in the end. The renters ended up leaving bedbugs and a very dirty house behind, and they never paid for the cost of treatment. My parents just barely broke even because they had charged a lot more for rent than their mortgage.
Know what you’re getting into. You could be lucky and have things just work out . . . or you could get screwed. Just like any business venture, I suppose. Best to be prepared.
If you just take the highlights of this it is a great lesson.
Business + Inexperience + Debt = Problem
I am with JKC, commenter #10.
And I am willing to bet that this story comes out ahead – the price is good, and the author, though cash poor, has the knack for it.
Rental property is the ultimate in get rich slowly techniques. I was surprised when I first found this blog that rental property wasn’t what it was about – the saying in real estate (apart from “location, location, location”) is “Don’t wait to buy real estate, buy real estate and wait”.
And everything takes work. How much effort does it take for a person to get up and go to work every morning? Do you think that it takes more or less effort to own four or five rental homes? (Answer, significantly less!).
I too am excited to hear the end of this story, but I bet it ends well – and I bet the property is cash flow positive. (just as mine are).
I lived this same nightmare myself for three years: an apartment building in a low income neighborhood. The worst mistake one can make in real estate is to become emotionally vested with the people you think you are going to ‘help’. Let me tell you that there is a large swath of the low income community who does not want to be ‘helped’ and instead will continue their pattern of destroying anything good that may come their way. I already know where your story is going and how it ends. All I can say is that it will take you some time to recover from that experience, not just financially but EMOTIONALLY too. Reading your story today has dredged up the emotions I usually keep buried regarding my own apartment building debacle, especially the simmering anger that remains at my own ridiculous foolishness. There will definitely not be a ‘next time’ for me when it comes to low income rentals.
One fallacy about owning a rental unit is that it is a great “passive” investment. Unless you are going to immediately turn it over to a property manager it is a business, not an investment. You don’t buy a house like a stock and just wait for the dividends/rent to roll in. And if you ARE working with a management company there are ongoing costs and other pitfalls you have to be aware of or you could wind up in a deep hole.
People who try to pitch the idea of being a landlord often tout the fact of leverage: you CAN purchase a $100k+ house with very little down. But the flip side of that is that, no matter what happens, you are on the hook for that money! If you buy a stock and the company goes belly up you lost the money you used to buy the stock. If you buy a house and a renter completely destroys it in a way that your insurance won’t cover, you have to cover it or deal with the bank that wants their money. I have known a number of landlords who declared bankruptcy because they didn’t have sufficient capital to cover the damage caused by renters or the expense of an extended vacancy.
You also need to keep in mind that you are turning over that $100k+ asset to someone you don’t really know, or worse someone you DO know. And once they have a contract in most states they have more claim to the property than you do. Unless there is a situation that poses an immediate threat to the state of the property (fire, flood, etc) you can’t enter without permission. It doesn’t matter if they haven’t paid rent in months, and yes, they can get away with months. I learned that the hard way working through my own eviction. The horror stories don’t always happen, but you NEED TO BE PREPARED FOR THEM. When all was said and done last year I collected $2000 in rent (in the whole YEAR) on a $1250/month mortgage. The rest had to come out of my pocket. That doesn’t include repairs or fees paid to the management company I hired over the summer.
Finally you have to have the personality for it. Even if you hire a manager you have to be able to go in with an attitude of “This is MY property, you work for me.” Not, “You’re the expert here, so whatever you say is how it must be.” And if you manage it yourself you have to be willing to be mean. You have to be willing to kick people out who will look at you with tears in their eyes saying, “But where will I GO?!” You have to be ready for the sob stories that are all true and say, “I feel for you and wish you luck. But you have until the 5th to pay your rent or you will be evicted.”
With all of that being said I am glad I tried being a landlord for two reasons, one is that like many of you I had the bug and I was going to try it sooner or later and it’s best to start [relatively] small. I can’t imagine starting with 8 units like Baker (though he already had some management experience). The second is that I have learned so much, both about running a business and about myself.
Finally I would say that if you ARE seriously thinking about getting into the market, contrary to popular opinion now is a GREAT time to get into the market because so many people are panicking and selling low. You don’t want to get into the game when everyone else is. The rental market is soft in most places, but it will get better as the job market improves because fewer people are going to be able to buy a house than could 5-10 years ago. They have to live somewhere. Right now they are bunking with parents and such because many don’t have jobs, but that will turn around.
Like I said, it’s an entrepreneurial move. And I have met many people who find a great renter who pays on time and stays for years. As long as you keep in mind the relationship between risk and return you may do very well.
so he just kicked out poor residents who were already having a hard time making rent payments??
sounds kind of mean… Just my $.02
Dave,
You’re right! He’s a meanie for throwing those poor people out!
How utterly heartless of him not to take care of them and cover their rent with his own money!!
What’s your address?
I’ll send them right over!
……crickets chirping………
Socialism is great until you run out of other peoples’ money
– Maggie Thatcher
Can’t wait to read part two! This has sooo lifted my spirits!
Great story Baker! I can’t wait to read the second part.
These kinds of real estate deals seem to be a US only phenomenon. It is much harder to assume mortgages in the rest of the world.
I am always amazed at what a free-for-all the American economy is. I guess that is why Silicon Valley is so successful. It is probably also why Wall Street is such a mess.
Ugh… we just rented our house for a year while we’re away and it was a nightmare, even though so far our tenants (who are paying less than our mortgage) and management company have been fine so far. We avoided a lot of nightmarish people along the way and I understand why we, as good tenants, were able to get a good deal on the place we’re currently renting. I would not want to deal with this hassle on any sort of long term basis. Not my favorite way to make “passive” income. I know someone has to do it, but I’d rather not have that someone be me.
@Dave
I had to sound cruel and heartless, but it sounds like he was trying to start a business and not a charity. Should he have kept tenants who were having a hard time making payments that would help cover his loan and maintenance costs and help him make some money? Should low income renting be a non-profit?
Can’t wait for Part II.
However, I sense impending doom.
Great Post! I’ve just recently become aware of the investment potential of rental property, as well as the tax benefits if you take the time and effort to set-up a proper business. Please keep more posts like this coming and let’s all continue to explore the vast investment potential rental properties offer! Thanks!
Nice writing style. Can’t wait for the rest.
Hey dave, can I borrow some money? I won’t pay it back because things are really tight, but it would be mean for you to ask for it back when I’m so hard up. I mean I’m going to be evicted if you don’t give me money, so if I wind up on the street it’s all your fault for not paying my bills.
That is the same logic as saying someone shouldn’t be evicted. They/you are insisting that the landlord pay their housing costs. It’s no different from asking anyone else to pay for their housing. If you want to be charitable go ahead, but implying someone else should unwillingly bear costs is stupid.
Of course that assumes you were serious in the first place, which I seriously hope you weren’t.
I bought my first house @ 22. I had 2 roommates who paid the mortgage, utilities and a monthly house cleaning service (literally – they wrote the checks every month in exchange for a small discount on the rent). I would say it was one of the best financial decisions I have ever made. I did NOT know the roommates before living together — but I screened 5 different potential roommates before finding the right pair. Oddly enough (I don’t know why), many of my friends made fun of me for this move (don’t know why).
I am now married (24) and the roommates are gone (I tried to convince my wife to live like that for another 2 years to pay the house off – but she wouldn’t go for it…). This was a wonderful experience. This is a great way to enjoy extra income while you are young (or old) — you own the house — you live in the house — and you have roommates who pay for the house. Awesome!
I guess I would plan on owning rental property in the future – but with the knowledge that you make your money on the purchase price (don’t assume unlimited appreciation). Great article btw (love how it is written)!!!
Real-Estate investing using leverage (borrowed money) is insanity. It would be like maxing out all your credit cards to buy shares of only one stock.
The only case where it makes sense is if the investment is a small part of your portfolio.
Buying a house as opposed to renting is different, since in that case, the move is to reduce the cost of having to live somewhere, i.e. with a small chance of turning the cost stream into a mediocre return.
Good story. I’m looking forward to the conclusion.
Seems like they took on way too much risk.
Rentals can be a good investment. But you don’t want to bite off more than you can chew and its risky. You really have to be aware that its more of a part time business than an investment.
I think the best advice for potential landlords is to really crunch the numbers and make sure you end up with positive monthly cash flow. Sure, you MIGHT profit handsomely upon sale because the rental property appreciated in value over time, but you might not. I say that as someone who owns rental property purchased pre-housing crash that is worth dramatically less than it was at the time of purchase.
JKC comment #10 makes very good points.
Shara (#23) wrote, “One fallacy about owning a rental unit is that it is a great ‘passive’ investment. Unless you are going to immediately turn it over to a property manager it is a business, not an investment.”
AMEN!
My husband owns a three-unit rental in a university town, and we do our own property management. Yes, it is a business and it is work — much less work than a 40-hour-a-week salaried job, but work nonetheless.
@dave, I don’t know details about evictions and what not, but it seems that they could be kicked out but then reapply imediately. yes you have to scrounge for a temporary place to live but they have to do that anyway. Sometimes it’s best to start with a clean slate.
@ Nate, my uncle did exactly that. He had 2 roommates for a while, then 1, then he got married, and eventually the 1 roommate moved out and he lived there with just his wife for a while. (they’ve since sold it and bought one they could raise kids in.) It seemed like a brilliant idea to me; cut the costs of home ownership without giving up any of the benefits. At least one of the roommates was previously and is still a good friend.
My neighbor tried it, but she must have personality problems as she has gone through more roommates than anyone I’ve known since college. 😉
@ Jenzer
We decided to turn our rental over to a manager in large part because of the hours involved even more than the headache or even the work. There are many things that can only be taken care of during business hours. After taking a lot of vacation in order to show up in court repeatedly for a difficult eviction we decided it was worth a cut to allow us to concentrate on our primary jobs.
I believe that ANYONE pining to get into the real-estate business, or to simply enter the business world in general for that matter should read COMMENTARY #10.
It was excellently deailed and accurate, a very effective template to be utilized to gauge your risk, guide your desires and future endeavours.
Looking forward to part 2 Adam.
We want part 2!
My wife and I did our homework but we failed to adequately assess our emotional tolerance for being landlords. We bought a 4-plex in SE Portland 5 years ago and it was the worst experience of our lives. Luckily we got out in 2006 before the crash.
You better have an extremely strong stomach to be a landlord. Hiring a good property manager was a life-saver.
If you’re interested in getting into this I suggest you go down to the local courthouse and sit in on a morning of landlord/tenant trials. As I remember, they have a separate room for these disputes b/c there are so many of them. Look at all the landlords faces. If you are comfortable with your face looking like this, then proceed to commentary #10.
The best thing about this experience was that it made us really appreciate the life we already have.
Adam, can’t wait for part 2. Real estate rentals are definitely not passive. The closest thing to passive is when you have a management firm handle things for you. We do this with a short term beach rental and its as easy as talking to the manager about once a year. Good cash flow but they take 30% off the top, but we would never be able to fill it at the rate that they do and it’s worth not having to deal with out of state people issues.
We just did a Stocks vs. Real Estate on LiveCheap and went through a lot of the concentration, tenant, leverage, etc. issues. The thing that is always true is that you can make an absolute killing on a concentrated position: whether it be a privately held company, rental properties, or having 100% of your portfolio in Apple. You can also get killed. The difference in rental properties is every time something goes wrong, you can muster your personal efforts to make things right again. It is that personal effort that is a zero recorded cost that gives you much of your return. In some ways, its like getting a part time second job and your salary ultimately gets paid in rental income and appreciation.
@jd: I don’t agree that leveraging to buy real estate is insanity, it depends on your loan terms, skills, experience, and the cash flow of what you are buying. Some people are handy, deal well with people, and like being landlords.
@ 26 – John,
Depends on what part of the world you are talking about … in the UK, this is wide-spread and it is regular for people to declare bankruptcy because they are unable to pay the mortgage using the rent.
Evidently, it was starting to happen across the Channel in mainland Europe. Plus, don’t forget that this is what happened in Dubai and much earlier (a decade ago) in parts of Asia.
Cheers!
Thanks for all the props. I love your comments Kenny (#44) and I think LiveCheap (#45) is right on.
I like to think that most days I am smiling, but I agree that nobody looks good when they are in landlord/tenant court. 🙁
When you do have the opportunity to take a real estate investor out to lunch, ask a few things like: “What do you like best about the job, what do you like least, and what is your ‘typical day’ like?”
You will find that most people who have a small number of units spend very little time managing their property. The time spent is important, and cannot be ignored, but as several commenters have suggested – it is not a full time job. If you do it right, on most days nothing breaks. On most days, the rent is not late. On most days you don’t have to deal with evictions or cracked sewer pipes. BUT, there are some days you WILL have to deal with these things. They cannot be ignored, and nobody cares more about your investment properties than you do. I recommend you do your own management at first (seasonal rentals are an exception).
If you can’t stand the idea of evicting someone who is not paying the rent that you agreed upon in writing at the start of the lease, then don’t become a landlord. If you can’t stand being responsible for the roof over someone else’s head, then don’t become a landlord. Own up to the responsibility.
If you can be fair and firm and honest and dedicated to your business and have a little bit of time to spare and a little bit of money then you might be a good candidate to become a real estate investor. This is definitely a “third stage” occupation for those of you following this blog. It can also transition very nicely into “fourth stage” FI if you do it long enough. Imagine the day when your mortgages are paid off, and you have X number of units paying you market rent for houses or apartments that are well maintained and require relatively little of your time.
This is great…thank you for posting. It isn’t just about real estate. This is a great post about the emotional thought process we go through when making big financial decisions.
I’m a a bit schizophrenic on this topic. I’m a real estate agent in California (and about to get my Oregon real estate license ahead of a move), yet I have no interest in home ownership myself. On the other hand, I’m very tempted to invest in rental income properties at some point.
I think a good way to enter this arena is to maybe buy a triplex or fourplex to live in while renting out the other units.
Great post!
This is a timely post for us. We live in France. It took us 18 months to get an eviction order for a tenant who stopped paying rent. (Insurance covered the rent, thankfully). She left before she was evicted and SMASHED THE PLACE TO BITS. A 33K reno later, we are still waiting for our insurance settlement after which we should be about 12K out of pocket, just for the reno. We should get the money next week (fingers crossed).
It has been five months of stress and sleepless nights. But the apt has more than doubled in value since we bought it in 2004 so we are hanging on. It seems crazy to go through all that and then sell it. Happily I think these horror stories are a minority, and it seems that drugs were involved with this one. The tenant changed radically in the six years she was there. First two years she paid well, second two years she paid badly. We should have been more pro-active but we knew once we started eviction proceedings she would stop paying altogether, so we actually waited until we were in a better financial position (we did not know then that her rent would indeed be covered by insurance).
We did not trust ourselves to find a good renter when we purchased so we used the agency’s PM. Hah!
If things go badly, you need nerves of steel. We have two rentals, thankfully the other is problem-free.
Here you can get insurance for non-paying renters, since it can take 24 months to evict. Otherwise I don’t know how we would have managed.
If you do your homework it can be a good way to build wealth, but it’s rarely trouble-free. I consider it my “second job” (I have had to manage the PM for the past three-four years, and deal with the contractor and insurance company for the past five months).
The key is to “buy smart”. Happily we did. (“Rent smart”, obviously not so much.) Also, if you are handy and if you have the skills and time, you can save a lot of money on repairs and maintenance.
JKC
I think your posts are spot-on!
I too eagerly await the continuation.
i used to own rental property before so i can tell where this story is going to end.
NEGATIVE CASH FLOW MONTH AFTER MONTH!
I have been in the low income rental business for the past year and a half here in Syracuse.
Screening tenants is very important – you’d be surprised that the nicest seeming people have been evicted multiple times.
A lot of our properties are on programs like section 8 where the rent is paid by the government and not the tenant themselves. These tend to be more successful, though you do have to learn how to get the buildings ready for inspections and navigate through seemingly endless red tape.
Some of our tenants have payees, who take the tenants checks and pay the rent and bills, and give the rest to the tenants in cash. This is a good solution for people with SSD or SSI income who do not have the level of maturity to pay their rent.
Most of our landlords are making a profit. If you are willing to settle for a lower profit margin, you can usually make a bigger profit margin in reality. You have to spend enough on maintaining the apartments or you will not get quality tenants. People willing to live in a place with badly stained carpets, broken cupboards and dirty walls are not going to take care of your property or pay rent. People buy super cheap places and don’t want to fix them up, that’s a problem. We are not miracle workers.
Now I don’t just rent the properties, I deal with a lot of repairs, especially for properties with a lot of building codes problems. That is another issue people don’t think of. If the tenants are unhappy they can call the codes dept and you will have to fix stuff, even if it’s the tenants who broke it. That’s very frustrating.
I really like my job, and I’m going to be buying my own investment property soon. In Syracuse you can buy rental properties under 50k for a two unit easily. I’m going to look for tenants who are on section 8 and have good references. Since I work in this area I know who to go to for the work, the best area to buy the properties and what areas to avoid. I know what you have to do to get them to pass Section 8 and I think that I’ll be successful.
Hi,
I have a rental property and have had no issues with tenants.
I rent my house to the Department of Housing. They rent it out to people on pensions. They pay me market rent with no agent fees, they pay for all tenant damage.
I have had no issues with maintenance. They do six monthly checks and let me know of any issues and I fix them. They have a list of my preferred contacts for plumbing, electricity and call them on my behalf.
I put the rent up every two years by five percent and so far have had no issues.
Thanks
Sarah
Hi Sassy,
I am in NYC looking to become an investor (2-4) units but do not have any money. I have attended numerious seminars on buying with no money without success.
Do you have any suggestion on how I can do it.
Thanks.
Wayne
Really it’s just like any other investment method, there are those who believe the people that claim this is the best thing since sliced bread and that it will make you money with your eyes closed and little effort.
The best investments are those that you fully understand and have as much control over as possible.
Be sure to visit http://www.Dollarcommentary.com!
For anyone considering rental real estate, a great way to get started with rental real estate is to look into buying a duplex or house with a MIL. Live in one side and rent out the other. It’s less risky than buying a completely separate property.
Advantages: living on the property is convenient if there are any issues, and the tenant you rent to will likely treat the property better (not always, but usually). And obviously the rental upside of getting money to help with your mortgage, savings, or investing.
Disadvantages: Less privacy than a single family home (although getting that first rent check has a way of making you forget that disadvantage :). Also dealing with maintenance/landlord duties. However if you buy a good unit and get a good tenant, this is not as overwhelming as it seems.
We purchased a beautiful home in Seattle (6 bdrm, 4 bath) which includes a two bedroom MIL unit. We did this in February 2009, during the depths of the recession – which resulted in a great deal for us. We put $10K into the rental unit for new kitchen appliances and adding a washer/dryer, but we will make that money back within 11 months.
If there is one thing to say about owning rental units – you absolutely must screen tenants. Must must must. We used a great online screening tool we found through our local Rental Housing Association. We got a great tenant who pays on time and is respectful of our property.
With the rental money coming in we are saving up for another rental property in the area. Our experience has been very positive, and we hope it will continue to provide income for us.
Thanks for the awesome post Baker. Looking forward to Pt. 2
I can definitely relate to what Adam is facing, as I have rental units in that area as well. I am curious to see how it worked out for him.
It was, and continues to be a learning experience for me. To those who think it is easy money, I say don’t even put your money in, as you are sure to lose it. You have to be diligent with everything you do, from researching the property prior to purchase, to checking for repairs, screening clients, collecting rents, hiring people to do work, etc.
I think poster #10 was right on the money with what they said. You have to treat it as a business, because it is, especially according to the IRS. You will get out of it, what you put into it.
To the person who said that purchasing with little down was a bad idea, I have to disagree. If you have a clear idea going in, of your profit potential, and the effort involved, and it is a good property, then from a business perspective, it makes sense to invest as little money as possible in order to minimize your risk and maximize return on investment. On that note, this is not a get rich quick type of investment. Indiana has some good value, but even there, you get what you pay for both with cheap vs mid priced properties, and the tenants that you choose to rent to.
I personally am still am getting the bugs out, and am not in the profit stage as yet. I will get there, as the learning curve has been steep, brutal even, but effective. Even with the troubles I’ve had, and having my eyes open more, I still see it as a long-term positive investment opportunity, though one that needs more care and involvement than others.
My parents were really smart and started buying apartments in Boston before the real estate prices exploded. The market in Boston hasn’t really been effected as hard as other areas also. It pays for individuals to do their homework and know your properties before you just head first.
Great story! Don’t make it a real-estate blog but don’t hesitate to add much more real-estate into the mix as it is a great addition to those of us (myself included) who are new to real estate but are in the game!
I will wait patiently (NOT) for the sequel!!!
Here is a good article for y’all to read before taking the rental plunge. It’s titled The Accidental Slumlord.
http://www.newsweek.com/id/201838
To me it’s just not worth all of the hassle for what seem to be pretty slim profits.
My family owns a number of rental properties including a 55 unit luxury apartment complex, and I will say this:
I would be hesitant about buying now unless you will have the cash to put in to the building right now. Why? Rents are way down, lots of competition, and you will probably need money to fix (and over 20% down).
Most buildings also don’t take in to account in the cap rate management costs. I dunno about you, but having been a business manager for the 55 unit building? Yea, not my cup of tea to get calls at all hour of the day and night, and maintenance is a b*tch, even when you have someone full time to do it.
I will say though, if the price were right I would absolutely go by a 4 or 8 plex in the right area (not a low income one!) for the right price. But…I have been around property management and know how much it can suck, so I know what I would be getting in to.
I’m excited to read the next post. Thanks
I came up with the perfect failing formula when I wanted to go into real estate:
1) Rent to the first tenant who comes along without any screening. (My tenant had all kinds of bad credit and I had no idea.)
2) Have no emergency money to cover vacancy problems.
3) Buy at market value, not a penny less.
4) Give almost nothing down.
5) Take no deposit.
6) Buy in the poorest side of the town.
The result, the destructive tenants moved away without warning. I knocked at their door when the rent check did not arrive. The next-door neighbor told me, “they moved away recently.” When my wife and I walked in, there were holes everywhere in the house. One door had been destroyed, a ceiling fan was missing and the master bedroom had some 10 holes just in the ceiling for some reason.
The end.
I’m reading post # 49. Up to 24 months to evict? In my opinion, and I am not a landlord anymore, 24 months is a system that basically rewards the irresponsible. It sounds evil to me. I was a tenant before, and I sleep well at night knowing that I left the place actually better than when I found it, and I mailed my rent check a couple of days earlier than the due date each month. But I was raised by the two most honest people I have ever known, and I am lucky to call them mom and dad. Also, I am not from the entitlement generation that we now have. This generation thinks it’s entitled to handouts. Hey, you are a mean landlord if you expect your rent on time. It seems like times are changing, and changing to worse. And that’s “change” we can’t live with, so watch out!
I am intrigued by rental properties as well, even though I know they can be a nightmare to maintain and tenants are hit or miss. Still, it’d be really nice to collect rent checks every month. I know that Dave Ramsey advises to only pay cash for rental properties, but that singles out the very wealthy to owning rental properties. Maybe if you were picking them up for 40 to 50k, then paying cash is do-able.
Real estate is a funny thing. In some ways it’s like what Warren Buffett used to do– do a zillion hours of research first, and buy all of a great company. Because you own the thing directly, there are no corporate shenanigans with creative accounting and off-the-balance-sheet liabilities. There are no intermediate stages in which the actual owner of the revenue source takes this part of the revenue for bonuses and that for insurance at a questionably necessary level and the other for fees, and only then decides whether to pay you anything as a dividend.
On the other hand, because you’re in among the nuts and bolts of the whole thing, you have to learn to do a lot of stuff by doing it. Background checks, being basically a general contractor, appealing the real estate tax valuation, dealing with insurance yourself, worrying about fire codes, getting trashy and possibly violent nonpayers evicted. It’s definitely work, but the profit in it is comes from the fact that many people look at the work and think, “Ugh, too complicated for me.”
Good post; I’m looking forward to the next part.
We have two rental properties (4 tenants total) and they are a LOT of work. I do a lot of stuff myself but man, being a wife, Mom to four kids and a landlord sure makes life busy.
I’m not so much interested in how someone gets into that situation, more like, how they hang on. We probably go into debt $5,000 per property each year. Sure it’ll pay off when we retire and we might be (personal) mortgage free in 10 years (we are 30yo now) but it’s still a high price to pay.
Baker, cool post! Many people are fearful of real estate investing because it can be risky. Two rules that are used on the real estate investing website biggerpockets.com that work well are the 2% Rule & the 50% Rule.
2% Rule: If you cannot get 2% of the purchase price in monthly rent, it will not cash flow (ex. $100,000 dollar property must rent for at least $2,000 a month)
50% Rule: Expenses such as bad tenants, repairs, insurance, ect, will eat up 50% of your profits.
These are just quick baseline rules to gauge whether a property is a good investment or not. You also have to consider location and your overall investment strategy. Using the above math and guessing you were getting $500 dollars in rent for each unit, you purchase would cash flow at 14% a year. However, because of the already existing bad tenants and potential high expense repairs this doesn’t sound like a property worth saving! Bad tenants are everywhere, but generally low income housing is very difficult for first time RE Investors. My strategy is to invest in single family rentals in quality towns, that will hopefully attract better tenants.
Single family rentals are typically better stepping stones for those interested in the rental game. You generally get better tenants and their are more escape routes if your plan goes sour. You can only sell a multi-family to an investor, while a single family can be sold to anyone increasing the liquidity of the property if you need to get it off your hands.
Just like any investment, if you do your homework and research your market real estate investing can be an excellent way to get rich slowly. I look forward to part II of this article.
It kinda rhymes with what I have figured out already, that real estate investing is really a business rather than a “passive” investment.
It’ll be interesting to see how this plays out, especially since the economy today is nothing like the one that enabled you to get that apartment complex!
I did the same thing. 24yrs old, i bought a 2 unit duplex, the year after i bought my first house.
I paid 46k for it (minimum that hte bank would lend is 50k), so with a side deal, i financed 105% (included closing) and walked away with almost 3k.
Luckily i sold it a few years later and broke even. Made a little cash at tax time over the years, bad move. Young and nothing can happen to you, i could do it now smarter than i did then. But I think smarter would be to use my money elsewhere and let others be teh slum lords…
The guy who wrote this story had absolutely no business getting a loan for this property. Zero down on a commercial building that needed work? And the guy didn’t have any money to make the repairs? Wow.
I know that fortune favors the bold, but this is ridiculous. And then we wonder why there was such a massive bubble in real estate.
@Dave-
I don’t know your background, but it sounds like you might be a little sheltered from the real world.
When people don’t pay their rent/mortgages, they get kicked out of the house/apartment.
As a landlord, I’m not going to put MY family out on the streets so that some deadbeat can have a nice place to live rent-free.
Awesome. I really want to get into RE to develop some passive income streams. To get rich slowly, it will help to have passive income streams. You can always cut expenses, but increasing income is the other option. I look forward to more first hand experience stories in RE.
Brian, rentals are not passive. They are a hell of a lot of work. I guess if you want to change tenants every couple months and be in the courts more then out then you’d make a great passive income.
Just not worth it. Put your time and energy into it because that’s all you get that’s free from any income property.
I have already posted once here regarding my bad experience with tenants who moved away and left many holes in the walls and without paying the last month. But I also assume full responsibility because I failed to screen the tenants. I was desperate to rent it, I was out of funds and the mortgage was due.
But I did rent another house I had once using a property management company. The house was not in a poor area, and the family was screened and had great credit. What I didn’t expect was something like, “Hello, we need a second water heater, this one can’t keep up.” They were having several relatives spending the night for days, and of course a regular water heater can’t keep up with 12 people taking long showers. Also, they decided to turn down the sprinklers to the point that the grass started dying. They were picky.
Another phone call, “the laundry room feels a little too cold.”
During a very hot summer day, I received a phone call from the lady. She said the air conditioner wasn’t working right, and that the air wasn’t cold. I hung up the phone and drove by the house. The front door was totally open. Her kids ran in and out and left the front door totally open the whole time when it was 100 degrees outside. What air-conditioner can keep up with that? *sigh* (There, my blood pressure is going up writing this.)
By the time they moved out, the wear and tear on the house wasn’t too bad, but don’t expect to find tenants that will take care of your house like you would. I had to change some of the flooring (we wore no shoes in the house when we lived there, tenants could care less), so there was no chance for any profit there. You better not get into real estate with the idea that you will survive having a big loan on the property whose rent income is about the price of the rent. One vacancy problem can give you ulcers. I don’t think 20% as a down payment is nearly enough. Now, if it’s paid for, or your mortgage is VERY low compared to the rent, and do you what your are supposed to do to screen prospective tenants accordingly, then I think it might be worth it. It wasn’t worth it, and I was lucky to sell both houses.
You better have a very big emergency fund before you even consider real estate, and you better come up with a very decent down payment so you don’t have to live with a rope around your neck month after month. Expect some property damage with every tenant you have regardless. Expect a more accelerated wear and tear on your property. Expect to have picky tenants, or worse. The “it’s not my house” attitude is standard with most tenants, even the better ones. There are exceptions, but they don’t come a dime a dozen.
Passive income? There is no such thing in my opinion. I believe most tenants are a problem one way or another.
Geez, what a cliffhanger! I’m not sure I’d really have the cohones to do a business deal such as that. I’m eager to hear part deux!
I took the safer route of moving and keeping my first home as a rental. I did take some equity out of that home, but still have a ton of equity left in it (bought it in 97 and lived there 11 years). But we played it safe – between the mortgage on our our home, the rental, and the home eq loan, that’s 35% of our income. We have no other debt, so we feel comfortable with the debt load. I agree, have plenty of cash on hand for those emergencies, they are going to occur!
The rental only provides $35 cash flow monthly, but the key is – we are using other people’s money to build our RE investment. Hugely important: do not cut corners on doing thorough research on prospective tenants, and include credit scores & job histories. If anything seems out of line, or there’s too much song & dance, we move on. We also do most of the repairs and maintainance (which we enjoy); that allows us to be on the property for inspections. However, our wonderful tenant is appreciative of our attention and it’s a pleasant exchange.
Remember, it’s a business, and must be treated as such. But businesses are also about building relationships, strengthening communications, and networking. I don’t look at RE investing any differently. It’s not for everyone, it’s definitely more hands on than most other investing, but for us, it’s rewarding.
Part 2 please!!
In the Seattle area, rents are no where near the deflated values & cash positive is still an unhill climb for anyone just getting in. Know what you’re getting into at auction. Been there, done that ;-(
In regards to poster #69.
2% of the purchase price in rental returns, gosh, I wish I lived there.
Where can you get that kind of return????
I currently make between 0.3 and 0.4% of purchase price in monthly rent.
But that is the problem with rent in Australia, it is sooooooo much lower than your mortgage will ever be for the same property.
I rent out my 300k house for $912 per month. That is considered a HIGH rent for the area. I am extremely luckly to be getting that.
S
How do you find the continuation of the story?
GRS could definitely do a better job at linking to the continuing posts or somehow adding a common header that can be searched for, etc.
As far as I can see there is no good way to easily find the next installment of the story.
Am I wrong?
It took a ridiculous amount of searching, but i found Part 2 of this article if anyone else is looking:
https://axis-monolith.live/lessons-learned-from-rushing-into-real-estate-investing/%3C/a%3E%3C/p%3E
It’s an objective post showing both sides of the coin. Too many investors tend to display the “buy whatever you can” attitude but don’t look hard enough at the details involved, and characteristics of each particular property.
Hopefully potential investors will read this and understand there are many more issues that come into play regarding potentially profiting from an investment property than what they may think.
I stumbled onto this blog post while I was doing a google search on what happens to paying tenants in an apartment complex after a bank takes over a property. I’ve been “warned” that I might have to move because the property is now owned by a bank – even though I’ve been on time with my rental payments for over a year. So, my question is this – and anyone that reads this comment that has the correct knowledge, is free to respond – but can I be evicted from my apartment now that the bank has taken over the ownership of the property? Is it different in every state – what about Nevada? And help will be greatly appreciated – because there are only 11 days left of the month, and this information was given only yesterday, and I have to figure out if I can relax and just stay in my home, or scramble to find another place to live.
This old article is not the best place to post such a question, but I would suggest you look up the Nevada tenant and eviction laws. They will best inform you of how much leeway you have. But it is ultimately time to start looking and I would urge you to think about keeping valuables somewhere other than that house. Whether legal or not if someone hires a company to clear out the house just alone the headache is not worth losing any irreplaceable or valuable things. Get a bank deposit box, store them with family in a safe or something similar. Take pictures of everything. It may all be for nothing, but it takes very little effort in relation to the stress of having to deal with some bullsh!t. It’s definitely time to look to move ASAP and / or talk to the bank if you can. Your lease will technically probably carry over, but you need to clarify that too and whether and what the bank’s plans are. The may be interested in you remaining in the building because that means revenue instead of no revenue on a vacant structure that then also requires security. You might even be able to negotiate a reduction of rent due to the insecurity of the situation and their lack of desire to have to find a new tenant or maintain the property. If smart, which most banks aren’t really, you may represent a certain level of security and value just by living in the building. Just don’t be surprised if the bank is stupid. Don’t wait around to get screwed if they are not more than willing to work with you and put it in a lease.
i almost read all the comments, i just bought a four plex and i think it was the best investment i did, and it is my first four plex to and i did alots research, i bought a four plex in los angeles for 400k and i did fha loan were 1 unit had to owner occupied, i rented all the unit even the owner occupied one and i was getting 4800 a month, and my mortgage payment was 2500. so i was saving 2300. one of my freind was contractor and patner so when there was any repair we did most of the work. and rember always keep all the matierals on hand thats what we did wtv we see on sale we will buy like dry walls and paints and heaters and ac just keep it handy.we will buy it when was on sale and we had extra 10 thousand handy if anything went wrong. and always try to keep couples and older people as tenants they dont brake alots things. most of the tenants we have are older retired people. young kids the one that make altos mess. and always screen. i think it is best business to do if you have the right tool and brains to do it.
Nice article, I cant wait for part2.
I thought I would give some perspective on rental markets in Tokyo, Japan. Over the last 7 months, I went abit crazy and made some big real estate purchases with almost no money down.
I had 9 tenants move out in the first 1-2 months which I was suprisingly not too stressed about. Have had various ups and downs, but its been exciting and all going fine so far. Im looking to buy more so exploring alternative ways of financing.
Despite my Japanese being very weak, I have felt more comfortable investing here than I would maybe in the UK (where i am from) or the US especially when you scale up. The sole reason for this is because japanese tenants are very wellbehaved.
– They pay an upfront deposit which is used to clean the apartment once they vacate
– They pay rent on time and penalties if required for breaking contracts.
– They are not a nusiance
– Some end up staying longterm, 5-10years.
My advice is keep on top of all the numbers and constantly analyse ways to improve, save yourself money etc. If you dont know roughly how much your monthly variable mortgage will go up by if interest rates went up 1%, 5% etc, your probably already over your head.
https://axis-monolith.live/lessons-learned-from-rushing-into-real-estate-investing/%3C/a%3E%3C/p%3E
Being a fellow, Tokyo-based, non-Japanese investor, I’m very interested in how your real estate investments have gone so far in Tokyo, 3-4 years in. Did you find ways to secure alternative-financing to buy more properties? Being a non-Japanese, how have you been able to find tenants? I would think Japanese would not want to rent from a foreigner. Did you off-load the property-management to a vendor-company? How did you manage the “almost no-money down”-aspect of the deals you did? It is my understanding that in Japan it is almost impossible to get a mortgage to buy a rental property.
I look forward to your reply. I’ve got about 10,000,000 yen and am looking to do something similar to what you did.
Thanks.
Dan
I realize this is an older thread, but I just stumbled upon it and have something to add about managing properties. With no experience, I applied to manage a 15 unit apartment building for a property management company who’s office was too far away from the property to effectively manage the property. They wanted an onsite apartment manager. I felt it would be a good opportunity for me to save money toward maybe having my own building one day, as well as informing me whether or not I could handle owning a building of my own. Fast forward 10 years… the job it over. I am no longer manager. What did I learn in a decade of managing a 15 unit building? Lesson #1: If you keep your rents well below market you can cherry pick who you want to live in your building. I realize well below market rents is completely contrart to the mantra for most manager and property manager which is ‘charge as much as the market will bear’. Well, most of these clowns are total idiots and also very evil. So ignore what they say. They are WRONG. I learned this lesson from a multimillionaire. Some of his tenants have been with him over 30 years!! because he keeps rents low. This inspires loyalty, tolerance of imperfections and breakages, and LONGEVITY of tenants. A tenant paying lower than market rents but who stays with you for years and years will more than make up from the money you ‘lost’ because you did not have to deal with turnovers and vacancy. It’s a no brainer. Lesson #2: When in doubt refer to lesson #1.
I am thinking about building a couple of rental units. There is a real need for it and i would like to cash in like a true American. 🙂
Please continue this story so i can learn… Doing my research now as I don’t even know where to start in terms of being in the business.. I do not have any background in real-estate ventures and would rather my first attempt not blow up in my face or cost a price tag I could not pay….
I would like to learn about purchasing small rental unit with cash flow and haw to find a management company in my area.
Cant wait to find out what happens
I feel the same way. I would love to own rental properties and become a landlord in my lifetime.
It sounds great to have tenants pay the mortgage but nothing comes easy.
Woah, this is really nice, great job!