Rental Real Estate Surprises

[sunsnow]

Hi Everyone --

Here's an update on my rental real estate strategy, 6 years later. During the economic downturn, we decided to purchase deeply discounted properties in Portland, OR, with the plan to use the rental income to fund retirement expenses, and to leave stock market investments alone. We fixed up the properties, probably a little more than we needed to because I kept thinking "you might have to live here one day..." We ended up with some good, low-drama tenants, and a couple more challenging ones. The mom with three kids was the worst, because we felt guilty raising the rent even as market rents doubled, and they trashed the place, requiring us to put in 10K to get it back to a sellable state.

We probably would have kept on being landlords, as the steady income is very reassuring, but Portland changed so much during the time we owned the properties that we now consider it too risky, and are selling all but one of our rental properties. There has been a lot of anger there about rising rents, movement towards implementing rent control, and recently the city council just passed an ordinance requiring landlords who don't want to renew a lease -- or who end a month-to-month tenancy without a for-cause eviction-- to pay thousands of dollars to the tenants. What a huge liability.

Over all, the asset appreciation was considerable -- so I guess the real estate investment wasn't exactly a mistake, but things didn't work out the way I expected. I thought this would be a fairly conservative investment, because I was very knowledgable about the town and its neighborhoods -- but I failed to realize how quickly political changes could come and how much they could affect real estate investments. I feel pretty humbled by the experience and wonder what other new things life will be teaching me... This is especially stressful, because now I need to figure out what to invest in with the proceeds, and I'd like to do a better job this time.

Thanks for reading

[38Chevy454]

I'll say thanks for the story and results. Without getting into political discussion, it sounds like that part was out of your control and the best strategy is to bail out, take the money and run.

In past I have had a rental, I am generally glad to be out of that. Works for some, but for me it was too much like part-time extra work. Mine was a 4-plex, that was really an old house converted into four 1 BR apts. Also had a regular house rental for a bit.

[nun]

I've had good experiences with my rental property that I've owned for almost 20 years. I've kept things simple with a one bedroom apartment so I can only rent to singles or a couple and it's easy to manage it myself. I rented to my last tenant for 10 years and the rent was $1200/month the whole time because she was so good and I didn't want to participate in rental inflation. However, when she moved out I reassessed and have just rented the place at $1600/month....but that was after a $30k renovation. The latest valuation on Zillow indicates that the value has tripled since I bought it. The new tenants are a young couple and also extremely nice and punctual with the rent.

There's no move for rent control in my town, but there are often new building codes. I just had to replace all the smoke and CO2 detectors with either hardwired ones or ones with a 10 year battery.......they use Li ion batteries which are the ones that can burst into flames........

[green night]

Thanks for sharing !

[ERD50]

Quote:

Originally Posted by nun ..........they use Li ion batteries which are the ones that can burst into flames........

Don't worry, I think the flaming ones have been the rechargeable type Li Ion. The 10 year ones in the newer Smoke and CO detectors do not have this problem, that I know of.

Back to the topic... interesting story, goes to show that all investments come with risks. Sounds like the OP got out OK, just not what they were hoping for.

-ERD50

[Sunset]

Thanks for sharing OP.
I have a rental in rent controlled area, it's too much effort to fight it when insurance goes up 6% and water goes up 7% and property taxes go up 4%. And rent control limits me to a 2% increase
And contractors certainly seem to increase their prices by more than 2% per year

I have decided to sell it, once my long term tenants from heaven move out.
Small landlords get treated the same as the millionaire landlord owning multiple apartment building, or thousands of units. The economy of scale does not work in the small landlord favor.

[Markola]

But all the books and blogs say that using leverage with other peoples' money (OPM) to accumulate dozens of units in no time, renovating them with sweat equity , depreciating them, selecting problem-free tenants, avoiding cap gains tax with 1031 exchanges and getting rich on real estate is so easy, why doesn't everyone do it? So far, I've missed out on this easy money and have accumulated 7 figures the hard way, apparently, by doing my job and buying passive index funds. Maybe someday I'll wise up. Congrats to the OP for getting out profitably, as most (not all) real estate investors that I meet seem to be trying to do, unless they treat it as their core business.

[nun]

Maybe I've just been lucky? the income from my rental has allowed me to pay off the mortgage on my home and the rental. I now have $1600/month income coming in, some nice capital appreciation (~5.5% per year) and some diversification. Managing and keeping the place up to code really doesn't take that much time and effort.

[scooterdog]

Thanks for this Sunsnow.

Did you do a calculation of your return (a percentage is fine) over the time you were a landlord?

As a remote landlord myself I made certain choices that there are no regrets (i.e. Buy-and-hold now going on 25 years as a primary residence and for the last 15 years as a rental).

Very different than the ordinary method of stocks and bonds, but I've been working that angle at present.

[travelover]

Interesting. I'm on the other end of this - moving to the greater Portland area and looking to rent, but amazed at the rental prices.

[harley]

Quote:

Originally Posted by Markola But all the books and blogs say that using leverage with other peoples' money (OPM) to accumulate dozens of units in no time, renovating them with sweat equity , depreciating them, selecting problem-free tenants, avoiding cap gains tax with 1031 exchanges and getting rich on real estate is so easy, why doesn't everyone do it? So far, I've missed out on this easy money and have accumulated 7 figures the hard way, apparently, by doing my job and buying passive index funds. Maybe someday I'll wise up. Congrats to the OP for getting out profitably, as most (not all) real estate investors that I meet seem to be trying to do, unless they treat it as their core business.

Well, I didn't use OPM, and didn't get into rental real estate until after accumulating my stash and FIREing. But during the RE meltdown I was able to buy a couple of rental properties in Reno really cheap. I could sell them now for a significant gain. The income stream from them has been great, although there are occasional expenditures required for upkeep. The income from the rentals covers almost half of my yearly expenditures, allowing my other investments to continue growing. And the tax breaks have allowed me to have room to do some Roth conversions. Also, having an income stream allowed me to do a refi on my mortgage that saved me a significant amount. I wasn't able to do it before I had the rentals. So overall I'd say they have been an excellent decision. However, if I ever got into a rent control situation like the OP is experiencing I would bail immediately.

[Choices]

Yup, the OP is right to bail.
I sold my last rental in 2016 and DH says it WILL be the last. I had rental property since 1988, some I made money on, some not so much. I enjoyed the "sows ears into silk purses" stage, but the rest.....
It is not the easy, gold paved road that I hear the commercials tout. Hard on the manicure, knees, day job and more

[Luck_Club]

Quote:

Originally Posted by sunsnow Hi Everyone -- The mom with three kids was the worst, because we felt guilty raising the rent even as market rents doubled, and they trashed the place, requiring us to put in 10K to get it back to a sellable state.

I can't condone what she did. But I'd be pretty mad if you jacked my rent by double, and would look to leverage every protection afforded me under the law.

With that being said. As a landlord myself, getting a 4% raise from 1 year to the next is like pulling teeth. I never raise rent during a tenancy, but will raise it when a unit turns over.

I've got a large single family that has been a challenge over the years. Not a good location. My rents on that place have ranged from $1450 down to $1200. I had 1 tenant the $1200 lady which ended in eviction, when I tried to bring the rent closer to the market rent I had been getting. Despite cutting her a deal for 2 years because I bought her story, I got screwed and she was a royal pain leaving. During arbitration she was in the process of buying a house, with my kindness. The $6,000 in discount would have been better in my retirement portfolio.

With rental real estate you make your money when you buy. Set the rents at the start and leave them there unless the market gets way out of wack, then only adjust between tenants. Your costs are pretty much set from the start and the small nickle and dime increases you are talking about aren't worth the aggravation of changing tenants to recoup. For example insurance and taxes 5% on $4000 is less than $20 a month. Turning over an apartment is typically 1.5 months rent.

keep them happily padding your retirement cash flow.

[HadEnuff]

Quote:

Originally Posted by Lucky-Sperm-Club I can't condone what she did. But I'd be pretty mad if you jacked my rent by double, and would look to leverage every protection afforded me under the law. With that being said. As a landlord myself, getting a 4% raise from 1 year to the next is like pulling teeth. I never raise rent during a tenancy, but will raise it when a unit turns over. I've got a large single family that has been a challenge over the years. Not a good location. My rents on that place have ranged from $1450 down to $1200. I had 1 tenant the $1200 lady which ended in eviction, when I tried to bring the rent closer to the market rent I had been getting. Despite cutting her a deal for 2 years because I bought her story, I got screwed and she was a royal pain leaving. During arbitration she was in the process of buying a house, with my kindness. The $6,000 in discount would have been better in my retirement portfolio. With rental real estate you make your money when you buy. Set the rents at the start and leave them there unless the market gets way out of wack, then only adjust between tenants. Your costs are pretty much set from the start and the small nickle and dime increases you are talking about aren't worth the aggravation of changing tenants to recoup. For example insurance and taxes 5% on $4000 is less than $20 a month. Turning over an apartment is typically 1.5 months rent. keep them happily padding your retirement cash flow.

I was a landlord for awhile. I hated it. But I had some factors working against me from the get-go, the biggest factor being that where I had chosen to live and work was a smallish (40K population) Upstate NY town, perfectly emblematic of the decaying, rustbelt Northeast US economy. I benefited neither from having a decent market to rent to, nor from appreciation of real estate values. I owned a duplex that I bought because it was right next to my dental office, and I wanted to keep a hand in what went on next door. The only tenants I could get were via Section 8. One Monday morning I was reading the local paper and BOTH of my tenants had been arrested, independently of each other, on separate issues. Both trashed their respective apartments. I hired a fixer-upper, and sold it ASAP.

My hat is off to anybody who can make a decent go of it, and most of the success stories I have read about, were instances where, largely due to factors beyond the owner's control, things went well because the neighborhoods did well. Things could have, just as easily, gone the other way.

[calmloki]

Our rentals are all in the Salem Oregon area and I've been watching the hard swing toward rent control with some interest. The unintended consequence for my tenants has been that I've raised their rents about 5%/year the last couple years. I used to just raise rents a tiny amount when I got a vacancy, but that was dumb. I would have long term tenants who were paying 25% below market rate and when I raised their rent a small amount they acted like I was telling them they had ugly babies.

Now I raise rents in vacant units to market rate and bump existing tenants 5%/year (about $25/month). The long term tenants see that their new neighbors are paying substantially more, so that $25 bump doesn't insult them as much. Makes about a $12k difference to our annual income - and pretty much all because I saw our rents were moving toward being curtailed.

[Rambler]

We had four rentals at one point. When I was young, rental income was my retirement strategy...until I found out that only about 1 in 4 renters are decent people who won't trash the property. For example, one of our renters was so lazy that they wouldn't walk their dirty diaper filled garbage to the trash can (which we paid, BTW and didn't charge extra when we started paying it for all our renters), and instead, opened the door between the house and 2-car garage, and just tossed it in. When they finally moved, they left it all behind. The garage was filled, floor to ceiling with reeking diaper garbage. We had to have a construction site sized waste bin delivered to get rid of it all. In another instance, I had pity on a "down on their luck" couple with two kids, who were on section 8, and went thru the process to rent to them. At the time, the husband was clean cut and presentable, and we had been in a recession, so I wasn't too worried that as the economy was improving, so would his job prospects (he had a job, but not a great one). Soon, the couple was fighting, and the wife kicked him out. During that period, I had decided to sell all my rentals due to having a full time plus a lot of overtime job during the week, and the rentals being 40 miles in the opposite direction of my job, plus the continual upkeep issues. I waited to sell this home with the section 8 couple because I had to wait out the section 8 contract. Two months prior to the end of the contract, according to the t&c's I gave notice. She didn't move. I had too much compassion on her sob story, gave her another month, then another. Finally, I told her that I had to fix the place up to sell it, and that she had to be out by Friday of a certain week, and that if they could not be out, they could move their stuff into the garage for another week. I went over Saturday morning to start the work, and they were still there...nothing moved, nothing changed. So, I told her I'd help her move the stuff to the garage, and she said she had a friend and would stay with them until she could secure a place. So we moved her stuff, and I changed the locks. She called me for something or other, and I just had this horrible feeling. I called her phone number at the rental, and she answered. I asked her how she could get the phone when she had moved her stuff to the garage, and wasn't staying there...and she said she'd come back for some stuff and plugged the phone into the jack on the phone panel outside. Cue more feeling of dread. That weekend, I made the trek out there again...cue shock and horror: she had stacked stuff up in the garage to climb onto, used a saw to cut a hole in the garage Sheetrock, climbed thru the hole into the attic, back down into the house, opened the locks, and moved herself back in. I was furious, but had to control my temper, as you've got to treat these govt handout folks with a kid glove, even though the contract was over and I hadn't been paid any rent for a few months. Anyway, with all the kindness I could muster, I told her that we had to move her things elsewhere, and that I'd be back with a crew and a truck the following week to do so. I told her that I would pay for six months at a storage unit for her, if she had no place for her things (this was back when storage facilities had "first six months for $1" trial offers). Anyway, she did find a friend who would allow her to keep her stuff in their garage, and we moved her stuff there. I changed the locks again, just in case, painted and repair all the damage (all the doors had been kicked in, holes in the Sheetrock, carpet had to be replaced because the husband had decided to tear down a motorcycle in the living room...oil everywhere, etc. Long story short, DW and I said "never again will we own rentals". Although we've had a couple of homes that would have made great places to rent out, each time we think about it, we get cold chills, and of course, sell instead of renting.

[RobbieB]

A guy I knew told me that;

"All the really good tenants eventually become home owners and you get to deal with the rest of them"

[HadEnuff]

Quote:

Originally Posted by RobbieB A guy I knew told me that; "All the really good tenants eventually become home owners and you get to deal with the rest of them"

In addition to the ill-fated duplex next to my office, the office building itself had a nice, large upstairs apartment. When I started in practice in 1977, my partner-uncle had owned the building for 12 years, and always had a nice tenant upstairs.

As the neighborhood declined, it got harder and harder to find anyone I wanted to have living above my place of business, and when I did, I bent over backwards to not lose them. I felt totally at their mercy. Eventually I just stopped renting it, unless I got a referral word-of-mouth from someone I deeply trusted. Which was a rarity. A bad tenant is an awful thing to endure, and to have it happen above my dental practice would have been many times worse than the value of the rent received.

[Danmar]

Was a landlord when I was younger. Way too much effort. Found a much better way to amass wealth (save a lot and invest in equities). But I'm sure it works for some. Good for them.

[HadEnuff]

IMHO, being a landlord is not retirement. It may be a career change, but it isn't retirement.