Becoming a landlord and investing in rental properties was the worst mistake I’ve ever made financially. My story will scare you into thinking twice about trying to become the next “Donald” of your town.
The following is a letter to my children about the pitfalls of investing in real estate.
This page may contain affiliate links, please read our Disclosure for details.
A Word of Caution Aspiring Investors of Rental Properties
Dear Aspiring Landlord,
I’m crafting this letter in case you ever mention a desire to own rental properties. Please understand the risks and emotional downsides before you dive into any sort of property ownership for the purpose of generating rental income as a landlord. I want to share with you my horror story that exposes the negative side of real estate investing.
There are many who have succeeded and the internet is filled with stories of sunshine and rainbows. Your grandfather managed apartment buildings for decades and ended up in positive territory. I’m not saying it can’t be done, but the risks, headaches, and potential to ruin you are greatly understated by the real estate gurus and media.
Let me take you back to 2005. I’m sitting in the living room and this new reality show finishes up called “The Apprentice.” It featured Donald Trump testing a bunch of Entrepreneurs in a series of challenges. “The Donald” evaluated their wits, business savviness, and debate skills in a competition for a lucrative position within the Trump Organization.
Before Trump became President, he was an extremely successful real estate investor and built a brand that is known worldwide. “The Apprentice” captivated me and I was immediately driven to try my hand as a landlord and invest in rental properties.
When the show concluded, I sat your mother down and we discussed purchasing our first rental property. She has always been greatly supportive in my side hustles over the years, but this is the first time that we would need to generate sufficient capital to start. She was hesitant, but agreed. If I could go back in time, I would whisper into her ear, “Fight harder and stop him at all costs.”
I was naive and lacking a very important quality that I now embrace, “Know what you don’t know.” I did not admit to myself that I had no idea what I was getting into. Your grandfather made it seem easy enough, so how hard could it be. The next morning I called our Realtor and told her what I wanted to do. We looked at a number of properties and settled on a 4 unit apartment building in town.
The Apartment Building That Cost Me a Fortune
At the time, the property seemed like a great deal and we purchased it for $231,000 in 2005.
Rental Property Napkin Math
Please don’t ever use a napkin to calculate Return on Investments. Now that I’m recounting this tale, I’m quite frustrated with how poorly I researched this decision. With the newfound motivation from “The Apprentice”, I just wanted to get started and become “The Donald” of town. How immature of me.
My ridiculous napkin math looked good. With all four Units rented out, the property would produce $2,750 a month or $33,000 annually. Some of the utilities were separate so I naively figured annual expenses were:
$1,000 Maintenance and repairs
$2,750 (Income) – $2, 283 (Expenses) = $467 a month PROFIT
In my mind, it was a no lose situation. We would also build equity. Boy was I wrong!
Rental Property Real Math
Looking through the records I still have, we only averaged $23,000 annually instead of the $33,000 predicted. This was due to the tenants you’re about to meet, vacancies, and the lovely Murphy’s Law. In reality, our annual expenses averaged:
$5,700 Maintenance and repairs
$1,916 (Income) – $2, 984 (Expenses) = $1,068 a month LOSS
Over the course of 5 years, that equals roughly $64,080 operational costs that your mom and I put into the property to keep it going…and that’s not even close to the end of it.
Meet The Tenants
Choosing the right tenants was very difficult for me. I had no idea how valuable screening each candidate was and basically went off gut decisions. I never ran background checks, but did validate references and employment history. My choice of tenants were a large contributor to not being cash flow positive. Another oversight was the eviction laws in the state and how they were largely skewed against the Landlord.
Professional welder by trade and made decent income, but had a terrible habit. There would be nearly 3 trash bags full of beer cans every week. He was able to buy beer no problem, but neglected to pay his rent for many months. By the time I was done with the eviction process, he owed us over $3,000 in back rent.
When he finally vacated the premises, I was relieved…until I saw the condition of the unit. All of the closets were filled to capacity with trash bags full of empty beer cans. The stench was unbearable. He also nailed empty 30 pack boxes of his choice of beer to the walls. They were floor to ceiling like some sort of mural shine to Anheuser-Busch.
After many court appearances, the judge finally awarded us a money judgement. The Alcoholic never showed up despite being summoned multiple times. Luckily, I knew where he worked and hired an attorney to apply for wage garnishments I could recoup the $3,000 he owed, but at the cost of legal fees. Most of the money was recovered, but this was a very unpleasant first experience.
Probably not the best choice, but I allowed pets. This lady abused that liberty by adopting every cat she came across. By the time I figured it out, the Zoo was in full swing. One morning, she called to report her toilet malfunctioning. I was working an hour away so I sent a plumber over. He called me from the building and refused to do the work. “Have you seen that place?” he asked me.
I went in that evening and there were 5 cats and ONE litter box right next to the toilet. That litter box was way over capacity and she rarely cleaned it. Cats were stepping in and out trailing their feces all over the unit. The area near the toilet was especially disgusting. No wonder the plumber wouldn’t work in there.
I was furious and went kind of hard on her. She immediately started crying “I lost my job a few weeks ago and I’m really depressed. I’m so sorry.” I spent the next hour helping her clean up the entire unit and deodorizing the place. It took a lot of convincing, but I talked the plumber into coming back the next day to replace her toilet.
Karma didn’t repay the good deed however. She stopping paying rent eventually and dragged out the eviction process for nearly a year. She gamed the system so well and then disappeared entirely. I had no way of contacting her any longer and she had no job or assets to go after. I still have a $4,800 money judgment award on her that I can’t do anything with. She also left the unit a complete disaster. Picture that neglected litter box a year later… now imagine it exploding all over the apartment.
Next door to the cat lady was this enterprising young man. He was a salesmen for sure and talked his way into my good graces with all the random construction projects he’s been doing for years. Never a steady job, but decent money coming in waves. Even said he’d fix some random things around the place free of charge.
He started off well by patching some screens around the porch and other little repairs. Only a few months in, the money dried up. He was very persuasive talking about his next opportunity. Said he’d pay the back rent and then a few months forward. I bought it hook line and sinker. He actually delivered on it the first time so I agreed when it happened again.
Eventually, he got 6 months behind and couldn’t catch up. The constable could never find him to deliver the summons. Turns out… he’s shacking up with the cat lady and she’s teaching him how to extend his stay by gaming the tenant rights laws like she was. I now had 2 units not producing income at the same time, constable fees up the wazoo, and court appearances every other week.
He owed about as much as the cat lady. He disappeared into the sunset with a new girlfriend and 5 cats. I’m stuck with a lousy money judgement that’s no better than the piece of paper it’s written on and another neglected unit.
Goldmine, or so I thought. A single mother, recently divorced, and with a decent job. The perfect candidate I told myself. She lived up to expectations initially, but started only paying 75% of the rent shortly after. She promised she’d get caught up after the divorce settlement.
Ok, I took pity on her. It must be hard going through a divorce, raising a child by yourself, and holding down a career of helping people. Whatever divorce settlement she was expecting never materialized and it would take an act of congress to evict such a person.
We eventually reached an agreement where only a portion of what she owed would be collected in monthly installments after she left the premises. I think she only paid for 2 months and then never heard from her again. I had agreed, just to get her out of the unit to try and find another tenant that can make payments…they had to be out there somewhere. I was one for 5 years, “they must exist” I kept telling myself.
This poor lady lived in the smallest Unit prior to my purchase and still lives there today. I didn’t know I was getting into elder care when I bought the place. She was mildly special needs and required help each month to take out the trash, go through a budget, and file for the various government assistance programs. I even had to buy her a phone so she could dial 911. I spent 5 or so hours a month just taking care of this lady. She had no one else and there would be no rent payment if I didn’t help.
Over the last couple years of ownership, she became quite unsanitary by storing trash all over her porch that contains human and animal fecal matter. She wore elderly diapers for some medical condition and just let the soiled ones pile up. I paid roughly $2,000 for professionals to come and clean up the place only to have the trash build up and become unsanitary a month later.
Evicting her is almost impossible as she has no family or anywhere else to go. It would end up costing me thousands to go through the eviction process resulting in having to store her belongings in a storage unit and forcibly remove her via the Sheriff. Then I’d have to pay a boatload to renovate the unit so it’s livable for anyone else.
Apartment Vacancies and Repairs
I had grossly underestimated the length of time Units would go unoccupied. It was costly and an extreme burden to get each apartment back into rentable condition after these types of tenants. Showing the Units were also very time consuming and interfered with work and family schedules. You kids were young and probably never noticed how often I was there. I kept your mother away from the building entirely. I took the brunt of it so she could keep her sanity. Although, she handled the books and her point of view wasn’t much prettier.
I had no idea prior to purchasing the rental property how much the various maintenance and repairs would add up to. It was roughly $5,700 a year, but some years were over 10K when something like the furnace would go. With a negative $1,068 a month operating cost and large repairs, we completely exhausted our family’s emergency fund and some equity in our home.
During the 5 years we owned the place, the stress level was through the roof. Both your Mom and I were working full time. I was putting in 50-60 hours a week and both of you kids were infants. This apartment building was supposed to be a nice boost of passive income, but it was a drain on our accounts and no where near passive. We fought a lot, but I kept telling your Mom that “It would get better…we’ve at least built equity in the property.”
Enter the 2008 subprime mortgage crisis. I won’t get into detail on what this is, but essentially the housing market collapsed reducing the value of the property to less than half what we purchased it for. Equity in the rental property was all we had at this point. Your Mom would cry herself to sleep and I basically transformed a third of my hair from brown to gray. The nail in the coffin came in late December 2009.
A frozen pipe and the resulting water damage caused a chain of events that wiped us out financially. The pipe burst in 3 locations and flooded the first floor and basement. The special needs case lost much of her furniture and we had to supply a bed so she could sleep that night. I called a plumber who came in and found a creative way to limit the water flow so that the flooding stopped.
The scope of the work to repair all the pipes and corroded shutoff valves was enormous. It cost nearly $4,000 to fix all the breaks and update the piping where needed. We also had to fix the ceilings and floors that were damaged, which resulted in another few thousand dollars. Minor leaks continued to spring up at various places because the rest of the piping was so old. We tried to file a claim with our insurance company, but received notification that they were dropped our policy instead.
Your mother and I scrambled to find another insurance agency to cover the building. One finally decided to come out for an inspection, but the policy would cost twice as much as before. During the inspection, the insurance company levied thousands of dollars worth of additional repairs and an upgrade to the 2nd egress. The 2nd egress was the death blow. The building inspector met with a contractor I used in the past. To become complaint with current codes, the whole thing needs to be rebuilt.
Multiple contractors looked at the job and every single quote was in the $40,000 range. The platforms aren’t long enough, the garage needs to be torn down to make room for the longer platforms, the roof is in shambles, there is not enough lighting, rotten support beams…the list went on and on. One of the contractors quoting the job took a look at other parts of the building. He came to me after and said, “Roughly $100,000 will need to be put into the rest of the building to bring it up to code. Let the bank take it, this building is not even worth a $40,000 repair. It’s practically uninsurable.” I wish I could recall who did the inspection prior to purchase because I’d leave some nasty feedback.
We were given a deadline by the insurance company to fix the 2nd egress and other repairs, but we did not have the funds nor the desire to do so. We were told that on the deadline we would no longer be insured and the bank will call in the full mortgage as part of the terms. We did not have the funds to pay the mortgage in full. This put us in a predicament. I couldn’t let it foreclose as it would negatively effect my Career, so the only option was to plead with the bank to accept a shortsale.
Rental Property Shortsale
In 2010, we still owed $191,000 on the mortgage, but it was a buyers real estate market. We initially listed the property for $159,000, but Realtors would not even bother showing the building to their clients at that price. We subsequently reduced the price to $119,000, which resulted in 4 showings and no offers. We had no choice but to reduce the price further to $99,000. The value of the building was no where near the outstanding mortgage of $191,000.
Even at $99,000, there were still $100,000 worth of repairs needed to bring it up to code. A buyer was going to have to get a good deal to inherit all the issues that need correcting. We eventually sold the building for a cash deal of $93,000, from a guy in jail no less. How ironic. The bank agreed to the price provided your mother and I brought $25,000 as a cash contribution to the closing and signed a $30,000 promissory note for 30 years. We cashed out the remaining equity in our home and took the deal. The bank absorbed the remaining $43,000.
Total LOSS on Rental Property Investment
Let’s see what our 5 year total loss was on this utter failure of an investment.
Operating Costs $64,080
Down Payment $40,000
Closing Contribution $25,000
Promissory Note $30,000
Total Loss of $159,080
That’s not including the expected equity appreciation of around $6000. Even worse – Consider how much we lost in opportunity cost had we invested in the methods I employ today. Portfolio Visualizer estimates our real loss during that time period to be $202,525…even during the 2008 stock market crash. I wish I could blame Donald Trump and “The Apprentice”, but I won’t. This is the perfect case of uneducated decision making and getting into a market you don’t understand.
This rental property was the worst investment of my life, and your mother didn’t even want me to purchase it. It created years of unhappiness and stress. Throughout it all, your mother was a trooper. She never blamed me, criticized my motivations, and only now holds it over my head in a joking manner. She quips, “We’d be Financially Independent now if you never bought that place my dear.” She’s not far off. By the beginning of 2018, that $202,525 loss would have grown to $551,450. That’s the true loss of the investment property and it grows every year.
Still Want to Be a Landlord?
When I discovered the concept of Financial Independence, I spent nearly a year consuming every FI Resource I could find before making any decisions. I wanted to fully understand the market, investment vehicles, tax consequences, etc. I was not going to jump into anything blind again.If you really want to invest in rental properties and are strong enough to be a landlord, you need to educate yourself. Click To Tweet
Do not be the slumlord I was. I don’t think I’ll ever have the stomach to invest in real estate directly again, but maybe some other property owners will share their story with you.
I’m sticking to lower risk REITs indexes and crowd funded real estate investing now. If landlording still interests you, start with finding a good mentor. Someone who is running a successful property management enterprise and learn everything you can. Research the laws in your state as it makes a huge difference. Some states are much more friendly to Landlords than others. Engage in the Real Estate and Landlord subreddits. Listen to knowledgeable podcasts, such as Paula Pant. Join the Bigger Pockets real estate network and absorb it all.
You can do well in the industry if you understand it and have the capacity to manage the activities of running rental properties. I encourage you to think not once, not twice, but thrice before jumping in. I’ll leave you with a parting quote…the best line of dialog from the Rocky movies.
The world ain’t all sunshine and rainbows. It’s a very mean and nasty place. And I don’t care how tough you are, it will beat you to your knees and keep you there if you let it. You me or nobody is going to hit as hard as life. But it ain’t about how hard you can hit, it’s about how hard you can get hit and keep moving forward; how much you can take and keep moving forward. – Rocky Balboa
Please share my story with anyone wishing to get into real estate and tell us your Landlord success or failure experience in the comments below.
Kylven Ross is the owner and primary contributor of theFIway.com. He has been married for 17 years and is father to a son and daughter living in New England. Professional accomplishments include a bachelor’s degree and industry certifications in the cyber sector. He has spent the last 18 years working in the U.S. Defense Industry and as a Military Police Officer.
He discovered the concept of Financial Independence (FI) during a rather stressful year in the compliance space. After fully absorbing the benefits of FI, he has since committed to turning his household’s finances in the right direction. His experiences are documented as a series of letters that are used to educate his children and others about money. He does not want the next generation to make the same mistakes, but rather achieve financial freedom and find happiness.