Tales from my 20 years as a landlord: One former tenant phoned months after disappearing into the night -- and leaving a horrific mess -- to berate me for letting the city junk the broken-down car he'd abandoned out front.
Another tenant called to have me referee a dispute with a plumber. I could hear his wife and the plumber screaming so viciously in the background that I thought about calling 911.
And, of course, I had tenants who fell behind in the rent, racked up huge, unnecessary repair bills, clogged the toilet with latex objects, set up meth labs in the basement and used the disposal to get rid of dead bodies.
Okay, those last two weren't real -- just the stuff of my nightmares. Every single night.
I'll stop here, before I seem like a moustache-twisting villain from a silent movie. The point isn't that I had bad tenants. In fact, for the most part I had really, really good ones. The point is that being a landlord is miserable even under the best circumstances.
Yet lots of people are surely considering this move. Renting your property out may look like a good option if you cannot sell your home and need to relocate for a new job, or if you have a chance to trade up.
That's how I got into the game -- by seeking richer pastures when an economic slump hit the city I was in.
My first rental was a house I'd bought in Minneapolis with a friend, around 1980. We rented out our third bedroom, and after I decamped for Dallas two years later my room was rented as well.
My next "unit" was the garage apartment behind my house in Dallas. This worked out pretty well while I lived there, though I do remember a tenant coming into the backyard to beat a carpet while I was having a candlelit diner on the deck with a young lady.
The car-abandoner took over the garage apartment after I moved to Philadelphia in 1986. I also rented out the house. This long-distance landlording was financially challenging because I had to hire pros for all the little fix-ups I'd normally do myself.
In Philadelphia I ended up with two units -- my house and my wife's former house. Both were rented out when we lived in Manhattan in the early '90s. During this period, we were tenants at the same time we were landlords. In fact, the places we lived in included a roach-infested walk-up on 122nd Street that was far inferior to the stone and brick three-bedroom Tudor we were renting out in Philly.
I referred to myself as the "hippie landlord," because, as a child of the 60s, I kind of felt that property was theft and business should be done on a handshake. I required minimal security deposits, which I almost always returned. I was a soft touch for tenant requests, installing expensive security systems and garage door openers even though the lease didn't require me to. I let the rent slide for months when one tenant was preoccupied with his wife's terminal illness. I dropped everything to deal with unanticipated crises, like the squirrel that got into a master bedroom.
So why was the whole experience so awful? Mainly because it took so much work, money and emotional energy, and was never very profitable. And because, no matter how well-meaning the two parties, the relationship between landlord and tenant has built-in conflicts, like cats and dogs.
As a homeowner, I'll go for years tolerating a lock that needs a little jiggling to open. Before calling a plumber, I'll spend hours trying a plunger and snake. But the tenant, who won't expend any time, effort or money to resolve these problems, has no reason to live with them for another minute.
Of course, there are lots of other issues to consider before taking the life-altering plunge into landlordship -- issues involving the real estate market, alternate investments and taxes, for instance. I'll deal with those next time.
But the threshold question is: can you live with the aggravation?
At its peak, my real estate empire had four units -- two in Texas and two in Philadelphia. By the late '90s my wife and I had a young son and I wanted to end the 70-mile round trip to Philadelphia to deal with every squeaky hinge. The Texas place was overdue for an expensive exterior paint job. The market perked up and I sold everything.
And never, not for one moment, have I regretted that I did.
Jeff Brown is an experienced business journalist and personal finance columnist who has written for The Philadelphia Inquirer, The New York Times, and TheStreet.com. Read his bio to learn more about him.
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Comments
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Landlord is a mugs game. I would not recommend it to my enemy. Between judges who think landlords should be a branch of the Salvation Army ( but will not put a dime of their own money where their mouth is ), to nightmare tenents, to city and state regulations, there are much better and safer investment oppotunities out there.
I too tried the landlord route many years ago and the stock market. I got out of both them many years ago and invested in government I-Bonds and I've been singing all the way home, everyday.
I live in a Los Angeles suburb of California.
I graduated from high school and only my husband received an AA degree in college. Still, we managed to accumulate 5 homes before the age of 35 (I was 35 and he 40) mostly by circumstance . One of which was a home that I was unable to sell as a young Realtor with seller financing. It had had motorcycles in a family room, not a fine selling point. In all cases we helped the sellers, and I like to think the tenants - who helped us back.
I agree that being a landlord requires more than a handshake and while those tenants may become friends, it's not the best idea to start out renting to friends. I agree that it's best to do your own work and management and that careful screening is good, but GUT INSTINCT sure seems to work best for me.
In the end, a spiritual relationship can develop between someone who you entrust to make your home theirs, and that you respect and trust likewise. I have had people live in my properties for over 8 years, and watched their children grow.
Owning rental properties is not for pussycats, or whiners-fer sure, but I agree with the comment about the 401K and there is something much deeper in the relationships that can develop in the process.
How many thousands of would-be landlords who borrowed to invest in properties in 2005-2007 are now hopelessly underwater and looking at possibly never seeing rents rise enough to cash flow their mortgages again? How can you recover from a 50 percent drop in property value soon after you buy it, unless you walk away and default? I would think the last two years have proven that betting that home prices will always go up is a high-risk gamble.
My wife and I own and manage several rental properties in the world's most tenant friendly city in the world... San Francisco. Sure we have had a few crazy situations but the vast majority of the people who have resided in our properties have become friends and seriously responsible residents. Sure if the toilet backs up you get the call but that is the business... fix it yourself or call a plumber. Frankly, crazy city regulations aside, being a rental property owner is a lot of fun and wonderful way to get to know a bunch of great people. Oh yes, it is one heck of a lot better than my 401K.
My wife and I own and manage several rental properties in the world's most tenant friendly city in the world... San Francisco. Sure we have had a few crazy situations but the vast majority of the people who have resided in our properties have become friends and seriously responsible residents. Sure if the toilet backs up you get the call but that is the business... fix it yourself or call a plumber. Frankly, crazy city regulations aside, being a rental property owner is a lot of fun and wonderful way to get to know a bunch of great people. Oh yes, it is one heck of a lot better than my 401K.
One advantage you did not mention is that owner occupied apartments are usually easier investments to manage. Being there on premises helps greatly. Also, the initial investment is critical and all that counts is cash flow. Putting yourself in the best possible financial situation before buying a property, putting the maximum down, and paying down the loan in quick order will make the investment a winner.
THIS IS FOR james. I have managed my own rental properties for over 40 years, in fact, have retired on the profits, and I need not add to the others' comments on the difficulties. I will only say that your returns come from two sources. #1 return on invested capital. #2 your management talents. If you hire management THEY will be making your profits from the #2 source and you may as well by mutual funds. That said, common sense and the realization that your tenants are people much like yourself will give you an edge over the "professional" managers who will be your competition.
It definitely takes someone who is of a certain temperament, someone who doesn't mind having to do repairs and maintenance, and to constantly having to think about and plan for and organize and pay for that work.
It is definitely an investment in which you are constantly given the opportunity to re-invest, unfortunately, usually at the times you would rather not. Whenever a tenant moves out and it takes a while to get a tenant (It can take a long while, particularly if you are carefully screening for a well qualified tenant, as mentioned above) you get to make the mortgage payment out of pocket. Oh, and you usually get to pay for some painting at that time, because,virtually every tenants "normal wear and tear" will have resulted in a degradation of the pristine paint job they had when they moved in (and that the next tenant will expect when they move in).
Major repairs WILL crop up from time to time requiring an additional "investment." If one built up reserves, it would help in such an instance. But to do that you would have had to buy a property so cheaply that there is a great difference between your payments and the rent you have coming in and I don't know many people who have been able to buy the "steals" that most of the books and info-mercials talk about that would allow you to do that.
Where in your town do you know of properties selling at such a low price that you can buy them for so little that the rent money will provide you with plenty of overage to apply to unplanned expenses. If you could buy them that cheaply, why wouldn't people buy them to live in themselves?
Real estate investment has a place for investors, but it is HARD work. It requires constant attention and participation (unlike mutual funds, for example). And it will usually involve you spending more money along the line, in addition to the money you initially invested. It is definitely a LONG TERM investment. It can be lucrative if you can last long enough to allow rents to naturally rise due to inflation, thus creating the cash overage needed, and to EVENTUALLY pay off the mortgage. That is when the real benefit of the investment comes about . . . if you can make it that long.
If you buy right (the right rental property in the right neighborhood) screen your tennants well, are handy but not exclusively so, you will never regret becoming a landlord.
Start with one rental property, and the best time to buy is when prices are down and mortgage rates are low (now!) With a decent credit rating and a good job, you'll soon have your investment capital in your hands, and that's when the fun begins!
Look for a mid-range property in a good hood, or even a fixer-upper BUT with good potential, and do the fixing yourself. This will give you the experience and confidence you'll need to manage your property once it's a rental. It'll also help you find the right contratctors that will take your rental property through the years ahead.
So don't be afraid. Take it step by step. And if you don't like the business, you can always sell your house - and most likely at a profit.
Interesting perspective from Mr. Brown and a GREAT follow-up by Pastafarian. I have thought about getting into the landlord game myself, but have always been terrified of experiences like what Mr. Brown had. Can anyone lend their .02 cents regarding the +/- of using a property management company?
Owning rental property is like any other investment, or really, any other job: It can be done poorly leading to long term misery, or it can be done well and be profitable. Mr. Brown has proven in his article that he did the former. I don't think he's cut out to be a landlord, but that shouldn't discourage anyone else.
Poorly screened tenants, handshake deals, minimum security deposits and a soft touch for tenant requests are all big mistakes. Combined, they incur untold liability. You're not doing these people a favor, you're providing a service by allowing them to live in your property. Being unclear about the terms of that service and allowing people to move in who are not qualified for such a service is asking for disaster.
I own 3 investment properties. One is in the middle of renovation, the other 2 (both duplexes) bring in close to $15,000 a year in cash flow. I do some work myself and for the rest I use contractors that I know and trust. Sure, I get calls at inconvenient times but it's just part of the game. As soon as banks start lending again I'll be adding to my portfolio, and look forward to finding mismanagers like Jeff to buy from!