In my last column, How We Became Actual Real Estate Investors, I detailed the foolproof criteria we used to evaluate potential investment properties. We wanted a steady stream of income independent of the stock market, and we looked for two- or four-unit rental properties in our area that were move-in ready. We found a sweet duplex in a quiet suburban neighborhood that had been well-maintained. I ran the numbers and figured out we would make a decent return on our investment.
The plot twist came at the very end of the story: two days after we bought the property, dozens of state and federal agents descended on the property and arrested one of our tenants on drug and firearms charges.
This possibility had not featured in my calculations. Since I am here both to entertain and to inform, I’m going to give you an update on what’s happened since and some of the lessons learned. The biggest lesson for some people is going to be “never buy rental real estate,” so these will be applicable to general investing as well.
What Happened Next
Our tenant of two days is now in prison awaiting trial on federal charges for possession of heroin, cocaine, fentanyl, and three stolen assault rifles (the other nine guns found are of uncertain provenance). He will not be getting out any time soon. Strangely enough, we still had to formally evict him, because federal drug charges don’t nullify a lease and he still had legal rights to the property as long as the lease was in effect.
This also meant his girlfriend, who was still living in the apartment, had to be evicted as well. She wanted to stay and, after much conversation with our lawyer, we were willing to give her a month-to-month lease. But first, we had to evict them both to end the existing lease. This brings me to my first lesson:
Some Things You Should Not Do Yourself
We live in a fairly tenant-friendly state, which means that it can be hard to evict someone. We were pretty confident that a tenant allegedly dealing drugs from his (our) living room had violated the lease terms, but we didn’t want to run afoul of housing law. The situation was also complicated by the presence of the girlfriend. So, we paid a flat fee of $2,500 to our lawyer to handle the whole thing.
We had to pay an additional $75 for the sheriff to serve the eviction notice to the tenant in prison, but on the bright side, he was easy to find . . . because he is in prison. I sent the eviction notice to the girlfriend via certified mail, and then our lawyer had her served as well.
I am, in general, a fan of do-it-yourself, and everyone should at least understand how and where their money is invested. Handing off your investments to a financial advisor does not absolve you of all responsibility. Having said all that, sometimes you need skilled pros on your team. You may not want the hassle, or you just may be in over your head. If you are uncertain of your next steps and the consequences of getting them wrong are serious, it is probably time to hire someone.
More information here:
How We Became Accidental Landlords: Turning a Primary Residence into a Rental Property
Hope for the Best, Plan for the Worst
We will still be net positive on this property in the long term, even after the unexpected expenses. That’s because we only considered properties that would cash-flow from the start, and I used very conservative numbers to evaluate them. My list of possible one-off expenses was a little more pedestrian than “tenant is an alleged felon,” but it could have been a new chimney, a new furnace, or a prolonged vacancy that threw a wrench in our calculations.
Your financial and investing plans should include a margin of safety. If your plan only works when every single thing goes right, go back and make a different plan.
Stick with the Plan
I spent a lot of time, at least five years, studying up on real estate investing. I read books, listened to podcasts, searched internet forums, and talked to people already in the business. I figured I was ready to take the leap when I understood what was being said and could verify it with more than one additional source. I had that “Oh, I get this” feeling that we all experience somewhere along the line in our medical or professional training. This is the “conscious competence” stage of learning, which isn’t the final stage but which is good enough to act on.
I trusted my plan, and I still do. When the girlfriend-tenant decided to move out, I went back to my sources to learn about finding a new tenant. What I heard over and over was “no tenant is better than a bad tenant.” So, we decided to find the best tenant possible, even if it meant giving up a month or two of rent. We invested about $10,000 in new flooring and paint. I talked to an experienced friend about the best places to list the apartment locally. I read up on tenant screening. I rejected the first applicant because, as tempting as it was to get a warm body in there, she didn’t meet our criteria. We followed the plan.
As of this writing, I have two qualified applicants, and hopefully by the time you read this, one of them will be occupying the property.
More information here:
5 Rules for Evaluating a Rental Property Investment
6 Reasons We Lost Money on Our First Rental Property
Know Yourself, Your Goals, and Your Situation
My husband and I believe that shifting some of our investments to real estate ownership is the right thing to do for multiple reasons: tax advantages, diversification, steady income over time. I was willing to throw in some time and energy. Taking on these legal issues would have been much, much harder to deal with when I was a resident or had little kids at home. I have more bandwidth now than I did then.
If investing in real estate was not a carefully considered goal, this might have made me freak out. I’m not freaking out.
Don’t Freak Out
This duplex is still a good property and a good investment.
If your financial plan was solid to start with, you don’t need to worry about temporary setbacks. If the stock market goes down, you expected that, right? And your stock mix is appropriate to your age and risk tolerance, right? If so, stop checking the daily stock market news and go back to whatever you were doing. If not, re-evaluate your plan.
Real estate investing still has a place in our financial plan. Our next project is to expand our clinic space in the same small town as the duplex. I still peruse the real estate listings. We have even found the humor in this situation. A friend told me how she had a terrible tenant who let his pet bunny run loose in the basement.
I said, “I think I can top that.”
If you own real estate property, what was the worst tenant you ever had? How did you deal with it? What other issues do you have when you're renting out a property?