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How I Failed With My First Rental Property And Turned It Into A Loser…

You Invest In Real Estate for Profits Not To Lose Money

Rental Property Failure monthly lossEveryone who studies Real Estate and rental property (passive income) knows that you rent property to make money, not to lose it.

You don’t rent property for ‘tax breaks’ either  – that gets you nowhere!  Unless you are profitable on your rental, then it can be a ‘bonus’.

My Story

So here is my story on how I screwed up on my (first ever) rental property and why it happened this way.

First of all, I lived in this property for 11 years.

The mortgage still has a fair amount to go and that is part of the reason that I’m not profitable on this property.

This is a condominium so I also pay a monthly maintenance fee.  This fee has more than doubled since the time I moved in.

This is the danger with condominiums, the monthly maintenance  and ‘other’ fees and assessments tend to increase over time.

I also pay a management company because I moved far enough away that I cannot manage this property myself.  Nor would I want to even if I was nearby, truth be told.

The Management company takes an 8% fee for themselves monthly plus 100% of the first months rent.

At the end of the day, all of  this ads up and points to the reality that I do not make any money on this property at all!

In fact, I estimate that I lose about $200 per month on it.

Yes, I knew this ahead of time.  But I was losing more than that on a monthly basis by leaving it empty.

The point of renting it was to stop the loses from mounting.

I did not consider selling an option because the market is ‘so bad’ at the moment.

I was told that it would be a lot easier to rent than to sell.

I was afraid that it would sit empty for many months before selling and that I would lose even more money for a longer period of time.   In addition, leaving it empty would have mandated a return of at least twice-per-year (see below for explanation).

The advice I got appears to be accurate,  we got a renter almost immediately.

Selling it, I figured, would take about 6 months or more in this market.

So now you know my story on my first rental property.

 

Additional Costs That Hit Me

To get the place ready to rent out, I spent an additional 3,000 dollars.

This three thousand was for new carpet and new vinyl in the bathroom and kitchen, painting of one room and some other work that needed to be done.    (looks good btw – too bad I don’t get to live there now)

2 Weeks after the renter moved in the refrigerator which was about 11 years old went out. Compressor was kaput.

The replacement and installation plus the initial service call was about $740 more dollars.

So, I’m closer to about $4000 invested in just the last two months.

In the end. I’ve spent a lot and all that I managed to do was decrease my monthly expenses.   But with the refrigerator going, that obviously increased my monthly expenses.

This is a losing situation all the way around.

Had I sold the property ‘as is”,  even if it took several months, I might have done better.   I would not have had the 4K investment.  But against that would be the monthly losses of letting it sit empty until it sold.

 

Additional Info On This Losing Investment

I had to move away.  I have left this place empty for 3 to 6 month stretches of time over the last 2 years anyway.

Insurance required that I be there physically at least once every 6 months.

Because I was traveling a long distance, the cost of air travel has also been very high.

I thought that renting would help in 2 ways.

1. I would not have the requirement to come back every six months

2. I would earn a little on the property while I am away.

However, no matter how you cut it, I am still losing money.

 

The Questions Are:

 

For Rent - Or For Sale

1. Should I cut my losses and try to sell it before the lease comes due again, effectively  taking advantage of that time.   Or, should I hold on to it and continue to allow it to lose money for me?

2  I am now living outside the area where my condo is  and  have now lost my right to vote in the local area.  Since I don’t live at that address anymore, the state / township wants a physical address for me in exchange for the right to vote.

They will not accept the UPS box in the area where all of my mail is being forwarded too.  What can I do to be able to vote?   I don’t care about the local elections too much, but I do care about State Senator / Reps and of course, the presidential election.

Your Thoughts

This is where I am at now (at the time of this writing) and would like to hear your thoughts, comments, ideas or questions on this matter – comment below.

 

 

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Mortgages and Human Nature

Strategic Mortgage Defaults

The Story Of Johnny The Farmer and The Banker

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20 thoughts on “How I Failed With My First Rental Property And Turned It Into A Loser…

  1. I was about to suggest getting some sort of lease option but then realized the property is a condo not a single family home.
    At least with a tenant buyer you’d not only collect a non-refundable assignment fee (about 2-5K) but charge above market rent as well. They’d be more qualified prospects than any casual renter would be since they’d treat the home as their own.

  2. Hey Dave,
    Sad to hear your story, don’t worry. They say “everything happens for a reason, for our own good”. Do you have any close friends ? Have you considered taking some debt from them ?

    1. Thanks Allen, — I think.

  3. Hi there,
    Have you considered selling it, and perhaps using money made/leftover to build a granny flat as we call them in Oz or Backyard cabin i think you call them, they can typically be approved quickly, if you have the land to fit one. your not having to purchase land, as you already have it. They relatively cheap to build and still fetch similar rents to stand alone housing. Obviously there are some downsides, like loosing some of your backyard, sharing your space, but if you choose the tenant carefully, you will probly not even notice them. In Sydney for example, they typically get a weekly rent from $350-$450 depending on size, location etc. Its the industry i work in here, but reading your blog i thought i might post this alternative for you.

    1. hi Serge, that is a great idea. Thank you for sharing that one! I do not think this is something that can be done in the US. It is good to know that you can do it in Australia though.
      that’s an Amazing rent for making them so inexpensively!

      The ‘back yard’ in this case is owned by the HOA. But this is still a great idea. Thanks for sharing it Serge – I will tweet a link to your comment. TKS.

  4. David –
    How are you calculating that $200 loss/month? Are you just including rents minus mortgage plus HOA? Most new landlords fail to account for all the other expenses which you’re running into, which could make your losses even larger. Google the 50% rule and you’ll run across many discussions on our site that discuss these calculations.

    As to your question on whether or not you should sell, that all depends on you. If you had your note paid off, you’d certainly be in a better position, but how long will that take? You said you’ve owned the property for 11 years. If you’ve got a 30 year note (which I’m guessing you’ve refi’d at some point in the past decade), you’d have 19 years left before that expense went down (or more if you did refinance), and as you mentioned, your HOA fees are definitely not dropping. While you are building up equity, could you not 1031 into a different income property that isn’t a monthly loser?

    Most real estate investors that I know would not hold a property that was slowly eating away at their bank accounts, but everyone has their own determinants for what they can put up with.

    Lots of luck with your decision; let us know what you decide to do. And, if you need any help with the REI stuff, don’t hesitate to drop in and connect.

    Regards,
    Josh

    1. Hi Josh,

      Yes, I think you have it figured out well. But I was thinking that even if I paid the note off after the HOA, & Taxes, Rental management fees, I would still only make about $150 per month – maybe $200 and of course, that does not include any interior maintenance issues.

      Windows may need to be replaced in the next 5 years.

      Maybe I should listen to your advice and just go ahead and sell it.

      There are other non-financial issues at play as well. I want to keep this property in case I ever need to return to it.
      Selling it would leave me with a feeling that I had no place to go . I’m not sure if that made any sense to you, but that is one of the factors involved in this decision.

      Thanks for your input Josh. Your expertise and insight is much appreciated.

  5. Wow, David this situation is pretty close to mine. I would sell instead of taking more losses. I know things are tough, but maybe you can rent while it is on the market as long as your tenant knows. I have a timeshare in AZ and i live in Arkansas. i try to visit every other year but it is tough. One day I will find a good option. Good Luck.

    1. Hi Michael, Thanks for adding your thoughts and experience to this discussion. It would indeed be a good idea for me to sell it and cut the losses. The other option is to pay off that mortgage which would allow me to start realizing a profit.

      The other problem is maintenance. There will obviously be more problems.

      This is an interesting problem that I have and I am not entirely sure what to do about it. In the local area is a two year college. There has been speculation that it will turn into a university. If that happens, the property value will increase drastically.

      However, I do not think this will happen.

      There are many factors to consider. Thanks for providing your thoughts Michael. This discussion helps me to clarify my thinking and to try and find the ‘right’ answer.

  6. Loved this article Dave! I thought I had left a comment the other day but must of forgot to hit “submit”. When I bought my house it was all about location and location. Sure the dropping prices and low interest rates were a factor. But I can guarantee you I wouldn’t buy a place in Detroit right now.

  7. Been there done that. Just hang onto the property, and watch your management company even more closely than you would a renter. Examine all bills for repairs the company provides, and double check with your renters. Your mortgage payment is paying down the principle every month, so that is building equity. Couldn’t tell if that was calculated into your $200/month loss. Condo fees do suck, and they go up with inflation. But I assume your mortgage is fixed, and that you have re-fied at the current excellent interest rates (if not, do so!). Even if your $200/month loss is real, my advice is to hang in there. The upside potential is high for such a leveraged investment, that is, a small percentage increase in price affects the total value, not just your investment. At some point, rents will rise and you can start breaking even on cash flow. I’ve been there and was advised to hang on. It worked out fine in the long haul. So passing on that encouragement. Just relax and get yourself a Blu-ray player to pass the time. Time, after all, is on your side. :)

    1. Hi Corky, Thank you – that is the best advice I’ve heard yet. You deserve an A+ for this comment. I’ll be tweeting out a link to your exact comment at least twice today!

      Yes, the mortgage is figured into that loss figure.

      Thanks for the encouragement. I really appreciate it. Getting this to work out will be a big relief.

      Thanks for the advice on the management company. I think you are right, they need to be closely watched. I do not like that they could not get me a better deal on the refrigerator. (I doubt that is true actually). They have their vendors that they like to work with and they are not necessarily the best.

      The vendor also charged me a service charge which I think they should have waived considering the outcome was the installation (by them) of the new refrigerator. Thanks again Corky. Great comment and great info!

      1. Glad you liked my comment, Dave (and was flattered to see you used it as an example on your other post :) I’ll tell you what will eat you alive is vacancies. I had a tenant on a month-to-month lease move at the end of October because she wanted a change of scenery. Well, that put me in the position of trying to rent the place during the holidays. People don’t usually move during the holidays! Well, I learned my lesson Solution: A one-year lease, or at least six months, that ends in a good season for moving. June, July tend to be good. Even if the lease starts in November, have it end in a good time. Vacancy is money you never recoup (well you do with appreciation, but that’s your money!). Vacancy pressures you into accepting flaky renters. Don’t do it. Check their credit, ask lots of questions, if they give you the number of their current landlord, the guy may sing their praises TO GET RID OF THEM. Get a strong lease, with a clause to inspect annually and/or with notice. Renters just don’t treat properties like their own — it’s easier to fix things before they move, unless they’re complete Troglodytes, and get the place in shape for the next renter (without down time). I’ve had vacancies and they can be bad. Plan for them with a cash buffer, and work your tail off until you get a good renter. But better a vacancy that a bad tenant. Some tenants have refrigerators, BTW, but they tear the place up moving them in and out. I tend to supply refrigerators. Buy them myself. I learned from a book that properties that welcome small pets rent faster. I tried it. Yes, pets do have accidents, but you can ask for a higher deposit, tenants have a tougher time moving and tend to be mature, long-time renters. Did you smell that? That’s not cat pee, that’s the smell of no vacancies. :)

  8. David,

    Thanks for sharing that. That is a tough situation. I don’t know that I have a recommendation on the voting issue. It seems like condo situation does differ from a house situation. Although, there are restrictions that may come into play with a house in an HOA (similar to condo restrictions). If there is hope for the market to turn around, then I see the logic in renting until selling. Have you thought of doing just that, listing the condo but retaining the renters until it sells for the price that you want? But, then, maybe there are restrictions on that, too.

    Have you done a projected cost analysis on what you will lose, over time, versus selling. Granted, in this market, it is sometimes hard to “project” what you make make/lose on a sale.

    Just thinking out loud, here…

    -Deborah

    1. Hi Deborah, good idea on cost analysis. I know that I’m losing approximately $200 per month plus maintenance costs (such as appliances). But I was losing more by leaving it sit empty.

      I’m going to have to pay off the mortgage to make it profitable – but that will take time.

      Not sure what to do – but certainly estimated the long term costs vs selling is a good place to start. Good tip.

  9. That’s so pathetic to see that how did you suffer. There is a lesson for everyone in your post.

    1. Hi Nolan

      What suggestions would you have for me or anyone else with rental property to do better? Any thoughts to share?

      1. Always add an expiry date to the LOI, usually one week later. That way the landlord will have to return the good faith deposit immediately upon expiry.

  10. Hi, David….

    No I am not a property expert, only someone who owns a property, and who keeps an eye on the market.
    Also, someone who has relatives who buy investment properties(houses, units, ) and businesses(shops)…..

    When you say management company, what we(my wife and I) have is “Strata Management ” .
    Over here most units, townhouses, villa’s etc, are managed by strata agencies and also through real estate agents, who also do strata management…..
    You pay quarterly levees that cover insurance, public liability, cleaning, repairs, utilities access….water..electricity…etc,etc

    David, are you living in your own fully paid off home?
    If yes, at least you have some leverage……

    What many people do is to get into investment properties mid way through their mortgage.
    So, then there are two loans to pay off, and the additional costs(including capital gains tax over here) etc,etc…

    It seems much easier than it often is….

    Most people think the rent from the Investment property will somehow pay for everything…(pay off the property itself).

    For question (1). How well do you know the Property market, as far as trends, fluctuations, and projections of prices?
    Why? Well, the last thing you would want to do, is to sell(or buy) at the wrong time….

    We have had massive jumps in values in some areas(locations) over here, both up and down….so timing is crucial, as far as deciding whether to buy or sell.is concerned……..

    My wife was wishing to buy an investment property.
    After I mentioned some of the fiscal considerations, and what actual profit margin(if any) ..we could expect…. and also, what property investment was really going to require(what many people forget to tell you)….she decided to not commit at this time….

    1. Hi Danny, That certainly is the tricky part – knowing when to sell. The more I think on this, I might have them star to show the place, It might be best. I am not completely sure though.

      I think your wife was wise not to commit at this time.

      I think that there is a lot more involved than people think and it is not necessarily easy to turn a profit.

      What is probably best is to rent a mortgage free property. Instead of trying to make it work with a mortgage.

      Then, you basically only have to overcome maintenance and taxes. When you throw a mortgage on top of that, there is a good chance that you will make very little or no money at all. Worse, a person could even lose money as is happening to me.

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