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owning rental property

My Love Hate Relationship With Owning Rental Property

From an early age, I was convinced owning rental property was the way to wealth, rather than investing in the markets.

I mean, you put 10% down, if that, tenants queue outside the place and beg for the privilege of paying off your property, and then you sell it ten years later for twice the price. That’s how it works, right?

I mean, you put 10% down, if that, tenants queue outside the place and beg for the privilege of paying off your property, and then you sell it ten years later for twice the price. That’s how it works, right?

Property One

At least that’s what I thought until I went to the bank and asked for a mortgage. Hearing them say “No” was the first slap on my college graduating face. I mean, I had the deposit, market rents were above the mortgage installments so the tenants would pay the whole thing, what was wrong with my banker’s risk assessment? I had no job lined up after college and no other streams of income to repay them in case of vacancy was what. So I took my pride and my $25,000 and went to look for a cash property instead.

Lesson 1: Visit a potential property by day, by night, during the week and on weekends.

Even if it was a big chunk of my net worth, fourteen years ago, $25,000 didn’t buy you a lot. I found a 200sqft studio apartment in the worst neighborhood you could imagine. With my innocent eyes, I just saw a rough suburb, where the kids were probably a little bored, and smoke weed to pass the time.

In reality, the estate agent made visits in the morning, because at night gangs emerged, destroyed public infrastructure, occasionally shot each other and made terror reign. Walk around the neighborhood to see it all. You never know what is around the block until you check for yourself.

Lesson 2: Don’t trust previous owners to be objective.

Ask for rent receipts, maintenance bills, etc. My tenant was an old man who had lived there for the past few years and was recommended by the previous owner. A few months later, he stopped paying rent. He would always catch up eventually but sometimes could go as long as three months without paying.

Lesson 3: While you’re at it, take landlord insurance.

Insurance would pay me while they’d chase his rent. I was living abroad and happy to pay for the convenience. Then my tenant died. His widow stayed in and didn’t pay another dime. The eviction process took about 18 months because a law prevented me from evicting in winter, and she was over 70 and had additional protection. When I got the place back, it was in bad shape, and I had spent way more time than I had thought to worry about the property. I had been blinded by a low price and yields of 12% and failed to do my homework properly.

Lesson 4: There is a direct correlation between risk and returns 99% of the time.

12% is high risk. BUT, after eight years, the tenant/insurance had paid me back the property in rents. I sold it shortly after the eviction for $50,000. My $25,000 layout had yielded $50,000 ($25k in rents and $25k in profits) in eight years. A 22.5% interest rate. Suddenly my brain resets and I loved real estate again.

Property Two

To buy my second rental, I knew I needed a mortgage. I had saved another $25,000 but didn’t want to get a second studio. I still owned the disastrous one at the time. So I left sunny Barcelona and moved to the UK with one goal in mind: get a job to get paychecks to make the bank happy and get a mortgage. 18 months later, I was buying a three-bed apartment in a college town South of London. I took in a tenant and lived with my boyfriend. The three of us were paying off my mortgage, and my living in the property allowed me to keep an eye on everything. It was a new build anyway, so not much could go wrong.

Six months later, the boyfriend and I broke up, I gave my boss notice and left the corporate world, the country, and relocated to Morocco. I took in two more tenants to cover the bills and the property started cash flowing a little. It has been seven years, and the three tenants have long gone, replaced by other people I have never met. I am now living in Guatemala and manage the whole property from the distance.

Running the business doesn’t require as much work as you might think. To find tenants, I put an ad on a local ad board, with a long description and high-quality pictures of my place. It took me a while to redact it the first time someone left, but now it is just a matter of copy-pasting.

Then reply to tenant inquiries and make the first selection. I rarely accept couples, prefer young professionals to students, and always take people over 25. I’ve refined my filters based on previous experiences.

The people I select get in touch with the current roommates for an interview. By involving my tenants in the selection process, I am less likely to receive claims that they don’t get along. I’m happy with any candidate I send so I let them pick their favorite.

The person selected scans their passport and a signed contract I have redacted and wired me a month deposit and a month upfront. He/She coordinates a move in date with the tenants.

They pay a rent that is slightly below market, so I get less turnover. My three tenants have all been there for over three years which is unusual for a college town. I pay all the bills and build the cost of the rent. This way no one gets bitter splitting bills or seeing someone else spend too much time in the shower.

I keep them happy by being super responsive, fixing stuff the next day or refunding asap when they have emergency expenses related to the property. It is always cheaper than flying over!

In seven years, only one room has been vacant for one week. The positive cash flow repaid my $25,000 deposit a couple of years ago, and now I am still $500-ish positive every month. An amount I pooled to… yes, buy another property.

Property Three

High with my great UK experience, I thought everything would be perfect again when I moved to Guatemala. Tenant protection is strong there, and I was afraid of another never ending eviction experience. So I decided to Airbnb the place and turned it into a guest house.

I only had $50,000 or so, so I went for a small fixer-upper and invested another $60,000 over the following couple of years, to make it better. The $110,000 property is worth around $150,000. I built in $40,000 worth of equity, which is another reason why I love real estate. But being Guatemala and all, I don’t get such a fabulous rental yield.

Full-time tenants would barely pay $500 a month. Airbnb generates about three times more, but it is not fantastic either. I plan on making the most money with appreciation over the next decade or so. But that means having my money stuck for ten years. Putting $150,000 into the markets at an average return of 8% would give me a fully passive income of $1,000 every month. I could live on that in Guatemala.

Instead, my guest house barely nets more, and requires me to work for the money! Supervising staff, fixing stuff guests break, answering inquiries, making sure people find the place. This was probably my worst hourly rate on any endeavor. What keeps me going? I enjoy having people from all over the world visit my little corner, which I can pay two full-time staff and contribute to the local economy, and the perspective of that big paycheck down the road.

There are many ways to make money with real estate. Appreciation, leverage, cash flow, renovations -they’re just a few of them. But whatever it is, it requires work, or overhead to have someone do the work. You have to enjoy the stuff and be willing to put in the hours to research and upkeep your place. Otherwise, it is probably better to stick to index funds.

 

This is a post from Pauline of InvestmentZen.com

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  • Brent

    Educative and interesting article, thank you for sharing! I’ve had a rental property in NY for a while, but I hired apartment management nyc because I had some problems with tenants and believe me it’s worth having them to take care of everything.