How I lost money in real estate before it was fashionable, Part IV: I become a Landlord.

Previously:  Part III:  The Battle is Joined

Part IV:  I become a Landlord.

Me in my landlording duds

It is said some are born to greatness, some seek greatness and some have greatness thrust upon them.  So, too, with land-lording.  And I was definitely in category #3.

So now the battles have ended and the dust has begun to settle.  I’m a home (well, condo) owner!  Got my very own personal little slice of the American Dream and all the benefits that entails.  (See Parts I, II & III for benefit details, but in a nut shell:  Higher monthy costs and a depreciating asset.) Whoopee.

My carefree, comfortable $165 apartment is slowly becoming a distant and fond memory.  In its place my condo each month bleeds away $570:  $370 in principle and interest and $200 in association dues.  Plus, it’s lost half its value.  Sweet!

But our newly formed association is hard at work and the building’s common areas are getting done.  It’s actually shaping up to be a nice place to live.  With what we’ve all been thru together, these are neighbors that know and respect each other.  A very nice community.  So, of course, I’m planning to move.

It is the fall of 1981 and I’m engaged to be married come spring.  We’re going to need (OK, want) a bigger place and after months of searching and copious amounts of due diligence (I may be a bit slow but I do learn), I’ve just closed on my 2-flat.  One apartment is occupied with the most miserable tenants I’ll have to endure in my short land-lording career and the other needs major renovations.  Exactly as expected.

I move in to the one needing the work and begin knocking down walls and ceilings.  Seems I’ve developed a fondness for living in construction sites.

this turned out well

This leaves the problem of what to do with the condo.  I can’t sell it.  Or rather, I can but for 20-25k and then I would have to come up with the 15-20k I’m underwater on the mortgage to be rid of it.  But I don’t have that kind of cake laying around to make the bank whole.  I do have my honor (and other assets) to keep me from just walking away.  I’m stuck.

I know!  I’ll rent it.  I’ll become a landlord.  What could be easier?

Now, investment real estate can be a very profitable venture, but trust me when I tell you backing into it like I did is not the path you want to take.  Maybe someday I’ll tell the tale of my 2-flat, a much happier and more profitable story.

In the meantime if real estate investing appeals to you, clearly you haven’t been reading this story very closely.  Oh, and you might check out these guys.  If I had the inclination and ambition I’d follow their lead.  They are are making it work right now:

http://dollardisciple.com/case-study-the-little-flood-house/#comment-765

http://www.mrmoneymustache.com/category/foreclosure/

http://lackingambition.com/?p=871

http://afford-anything.com/2012/03/14/we-bought-a-foreclosed-rental-house/

Mine is more the story of how not to do it.

but I got a great tenant

Renting my apartment turns out to be surprisingly easy.  I pass the word around to my friends in the building and before long a lovely young woman has signed the lease.  She will prove to be a wonderful tenant and she’ll even find me my next and also wonderful tenant as she’s leaving a couple of years later.  Her rent is $375 per month.  The market rate.  This will remain the market rate for the full six years I own the joint.

Opps.  Remember this number:  $570?  I’m now hemorrhaging $195 each and every month for the privilege of owning what has morphed into investment real estate.  This will continue for the first five years I own the place, costing me a total of $11,700.  Then it will get much, much worse.

But on to happier things first.

In January 1982 I get a major promotion at work.  I’m made Publisher of the magazine I work for, the second youngest to hold such a position in the company’s history.  The youngest ever?  He is the current CEO.

This means a move to Cleveland and that means I can now justify turning the finishing work on the 2-flat over to professionals.  I’ve had the fun of demolition and have done just enough of the reconstruction to realize I don’t like it and I’m not good at it.

Finally, and best of all, in June we get married. It is the most wonderful wedding there ever was or ever will be.  The Chicago Sun Times even carried a Page 3 picture of us leaving the church in our horse drawn carriage.  It is the wedding Charles and Diana aspired to, but on a smaller and more tasteful scale.

By the fall the 2-flat is finished.  My pal Steve, who is now married himself, moves into it and for a discounted rent manages the place for me.  The other unit, now minus the miserable tenants, rents quickly and profitably; proving if you are going to do this real estate investing thing it works better with planning.

Cleveland:  Home of the most  beautiful sunsets I’ve ever seen

My bride and I move to Cleveland and we rent a beautiful 17th floor condo overlooking Lake Erie and the most stunning sunsets I’ve ever seen anywhere in the world.  Ah, the blissful, carefree renting life again at last.

I am now both a tenant and a landlord, very likely the best of both worlds.  I have four rental units: Two condos (one in Florida which is the subject for another post) and my 2-flat.

Between my job and my better real estate investments, the $195 monthly bleeding is more than manageable.  Still, it grates and I am always looking to sell.  But the condo market has only gotten worse.  Want to know how bad?  I can’t even get a real estate agent to take the listing.  Yes, you read that correctly.

If you know anything about real estate you are likely re-reading that last line in disbelief.  If you don’t, let me explain just a bit.

Real Estate agents live for listings.  Get the listing and when the property sells, no matter who finds the buyer, no matter what else (if anything) you do, you get half the commission.

Nothing to do but wait

Of course, good agents work hard marketing the properties they list.  But here’s the important thing to understand.  They don’t have to.  They could, and some do, take the listing, put it up on the MLS (multiple-listing service) and do NOTHING but wait.  They don’t even have to show it.  The agents hauling the buyers around do that.

But in those days in Chicago for condos like mine, the market was so absolutely wretched not a single agent was willing to do even that.  There’s a tough market for you.  Add to to the mix my living in another city and, well, selling just isn’t likely any time soon.

The rays of sunshine in all this turn out to be my tenants.  Each is clean, pleasant, takes  care of the place, pays the rent and causes me no problems.  The first two even find me the next as they leave.  I’ve never even had to advertise the place.  But when the third moves on I find out just how special that’s been.

Unlike the others, my third tenant doesn’t find me her replacement.  Of course, she is under no obligation to do so.

So once again, I pass the word the place is available.  Nothing.  I advertise.  Nothing.  My little unit is in a glutted rental market.  Until now I’d had no idea how lucky I was to have my little parade of good and reliable tenants.  But I do better understand why the market rent had been stuck at $370 during this period of otherwise high inflation.

More $$$ up in smoke

Remember when I told you things would get much worse?  Well, here we are.  The place is not only unsaleable, it’s un-rentable.  My $195 monthly bleeding?  Turns out, those were the good old days.  Now it’s $570 out the door every month.  This will last for 18 tenant-free months before, finally, I get it sold.  Let’s see.  18 x 570 = $10,260.  Add in the $11,700 and we have an operating loss of $21,960.  So that would give us an ROI of…

…ah hell, I don’t want to know.

In that terribly depressing paragraph above, hopefully you noticed the little nugget of gold.  I did, ultimately, get it sold.  Let’s turn next to that happy tale and the snake in its garden.

You knew there’d be more snakes, right?

To be continued…..

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11 Comments

  1. Posted March 26, 2012 at 9:48 am | Permalink

    thanks, 7theaven, for hitting the like button above.

    you made my day!

  2. Posted March 26, 2012 at 10:59 am | Permalink

    I started investing in what could be the best rental market for decades so I haven’t had to deal with that level of vacancy. 18 months would be incredibly painful but at least you sold it! Thanks for the link love!

  3. Posted March 28, 2012 at 1:56 am | Permalink

    Jim, I am in commercial real estate; it’s scary to think about prolonged vacancy in rental property as it can be a major drag on your finances.

    • Posted March 28, 2012 at 7:51 am | Permalink

      I knew you were into hotels. care to place a link to a related article on your blog? I’m always iterated in your perspective and suspect my readers would be too.

  4. Posted March 28, 2012 at 10:05 pm | Permalink

    You look rather spiffy in that landlording getup, top hat and all.

    I have a relative or two with stories so similarly depressing that it keeps me from making the jump.

  5. Posted June 20, 2012 at 1:52 pm | Permalink

    Wow, I’m suddenly feeling much better about my past (and current) mistakes. You recovered from this mess, and that gives me hope that I can recover from mine. Thanks for the inspiration!

    • Posted June 20, 2012 at 4:09 pm | Permalink

      It does amaze me that, with all the mistakes I’ve made, how well it all turned out.

      a 50% savings rate and no debt made all the difference.

      still, if I knew then what I know (and share here now) I’d be a couple of million richer. I know this because, when I’m in the mood to depress myself, I run the numbers. :)

  6. cjb
    Posted March 24, 2013 at 9:27 am | Permalink

    Wow! I’m heart broken, JC….the story ended….I know I’m a year late in finding this post but here I am…similar but different situation.

    2004…getting a divorce…my ex buys me out of our townhouse that had doubled in value, plus I was smart…I had refinanced to get a 15 year conventional loan 3 years after purchasing that to get rid of the PMI…and that had really got us a good momentum on paying it off…

    So, my marriage ended very amicably and peacefully. Which was a huge blessing. I just wanted peace.

    I wanted to rent a nice little apartment near my office…and see where I was a year later but people I looked up to told me how I needed to buy.

    The thought of owning a house by myself was overwhelming….so, the thought of condo ownership was attractive. It was almost like an apartment, but I had ownership.

    I found my little 1 bedroom 1 bath place, Not to big, not too small. After putting in a few offers here and there and being out bid or just not getting my bid in before everyone else. I ended up putting down more than 20%. Condo’s were moving like water in Niagara Falls. I over bit to put my foot in the door…stupid but I didn’t like living with my parents at 32. And instead of being patient and fighting about rending an apartment…I made a stupid choice being desperate.

    Before 2008. I was feeling pretty good about my investment. My property value had soured from 195k (what I paid) to 217K (I pitty the full that purchased the same style unit down the way). Whaaaahooo! I was thinking not such a bad choice after all.

    Well, then the market tanked. We only have 66 units in the community. Some have short sold…some have foreclosed…and some have done strategic walk a ways.

    A 2 bedroom 1 bath sold for 106k. Talk about depressing.

    Now, there are more renters than owners here…and new buyers can’t even get FHA lending here. To buy here, you have to do conventional (still hard to get a lender) or be a cash buyer.

    I’ve since got married…and I went to live with my hubby in a rental and rented out my condo (not a horrible experience) but found it was easier and cheaper to live in my condo. But now, 8 years later, I’m tired of living here…but people are buying houses not condo’s….mostly investors are buying condo’s and I’m not willing to write a check to sell. But we’re on the fix it up and see what happens in a year and a half to 2 years and maybe try renting it out again….if selling isn’t an option.

    Thanks for sharing your story. I Just found your blog last week and I’m enjoying all your posts.

    Thanks for being here.
    CJ

  7. financialblogger23
    Posted March 18, 2014 at 4:39 am | Permalink

    Jim,

    What an awesome series! Makes me think twice about it all! THANKS SO MUCH!

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