Real Estate Investing Isn’t All Cashflow and Appreciation

It’s amazing how many people think real estate investing is super simple and stress free.  Since Tiktok is an algorithm based on your interests I tend to get a lot of real estate investing content on mine.  Throughout this content I find 2 groups of people consistently preaching that real estate investing is super simple and can be done with little to no money, skill, or value added.  These groups of people are real estate gurus trying to convince everyone to jump in as well as the communists who believe housing is a human right and landlords are scum.  Both of these groups are wrong.  I of course can’t speak for all landlords, but I can tell you that real estate investing is not all cashflow, appreciation, and sunshine.  This year has been difficult, especially the last 4 months. Just in the last 4 months I have spent hundreds of hours and close to $10,000 on rental house repairs.

Rental House #4:

Rental house #4 has been rented out since March of 2020.  We signed the lease the day that Michigan officially shut down and the lockdowns were put in place.  We had no idea when the lockdowns were going to end and we certainly didn’t want this property to sit empty for an unknown amount of time.  Life was uncertain and we had just spent $40,000+ of cash to buy and renovate the property.

Because of the uncertainty of the situation we moved forward with a tenant that demonstrated some red flags.  The rent was paid on time for many months so we let those concerns drop by the wayside.  Some life changes happened to the family and throughout this year they had been late paying multiple times.  We found out that the husband and wife had split up and that the home had become unaffordable for the wife.  She got some assistance to pay her rent for a month but was still behind and decided to move out rather than go through an eviction process.  The timing was bad for us as the move out occurred right as I was starting to work 75 hour weeks at work.  We got the property back at the beginning of September.

When she told us she was out we went over to the house and knew it was going to be bad before ever stepping foot out of the van. We could smell the house from 15 feet away. Inside the smell was atrocious, and this is coming from a guy who has cleaned out septic tanks and restaurant grease traps.  You could tell immediately that the dog(s)? they had used the bathroom in the house.  rodent and bug infestations were obvious, and the place was littered with trash.  The floors were sticky everywhere and a new beige carpet (it came with the house) had turned to brown.  There were holes in the walls, broken windows, and a total of 20 yards of debris.  The backyard was covered in trash as well.  Here’s a video.

@jcrab1986 ♬ original sound – John Crabtree

We had to remove all the trash, remove and replace all the flooring, remove and replace the toilet and bathroom sink, replace the stove, replace the kitchen counter and lower cabinets, patch all the walls, and paint all the walls (after deep cleaning them twice), fixed 2 broken windows, as well as other miscellaneous tasks.  We did 3 pest treatments as well.  It was a long, hard fight.  It was also expensive.  The total cost was right at $6,000, and that’s with us doing all the work.  Had we hired this out I am sure it would have cost over $20,000.  We upgraded the flooring in the living room and kitchen to tile. We are still learning and there are some imperfections, but this is a much more durable flooring option.  It took about 4 times as long as doing sticky back floor tiles, but should last for decades, look better, and be easier to clean.

Because of my work schedule this property took forever.  Every day off I had I worked on the property.  We finally got it ready to rent out in late November.

Summary:

• Repair costs: $5,946
• Lost Rent: $3,500
• Hours (Estimate): 300

Rental House #7:

Rental House 7 had only been rented out for 10 months, and we knew right after signing a lease this would be a problem.  We moved a tenant from Rental house #3 into #7 because she needed more space. Once again we had not been doing walkthroughs and found after signing the lease on #7 that she had caused substantial damage to the house she had been in.  They smoked in the house, the kids drew on all the walls, the hardwood floors I had just refinished were scratched to hell, and a bunch of trash was left behind.  Anyways we knew we screwed up and this house would be a problem.

During the tenancy on house #7 the tenant caused 3 main line blockages in the drain line, and argued that it was our fault, despite the plumbers stating otherwise.  They called us on a Saturday stating the furnace wasn’t working (this was a brand new furnace).  We got a tech out there 3 hours later, and she had left the house, we had to let the furnace tech in.  The furnace tech found that the breaker had been switched off (not blown).  The tenant then tried to say we needed to pay for her hotel stay because she left the house (knowing the tech was en route).

Then they knocked down a suspended ceiling and said it just fell.  We were doing construction throughout this house, including replacing the roof during the rehab and the ceiling was fine, it didn’t just fall.  They were frustrated that when they called on Christmas Eve that we didn’t have the ceiling replaced within 24 hours and reported us to the city.  We then had our drywall guy go to fix it and they repeatedly didn’t let him in.  He eventually was able to get started on it, but it took over a month before we finally said screw it we will fix it and told her we would be going in to fix it rather than letting her coordinate with our tech.  So I got to do some more ceiling drywall.   The inspectors approved everything.

In August the rent didn’t come and we discovered that the tenant had racked up a $1,400 water bill that would go on our taxes (which then increased to over $1,900). The tenant had no desire to pay this bill either, so we filed a notice to pay or quit.  A partial payment was made and we accepted it.  When Mrs. C. went to court the following month the lawyer representing our tenant stated because we accepted any payment from her it negates the notice to pay or quit and we need to start over.  We ended up negotiating for the tenant to be out at the end of that month, giving her another couple weeks, so we got the house back in October, with no rent for September. Because we were working on House #4 we let this house sit until late November.

Thankfully this house didn’t have as much work needed on it as expected. There was some drywall touchup and paint touch up, as well as deep cleaning.  I needed to repair 2 windows, replace all the blinds, reinstall the stair railing, and replace the fridge and stove.  The fridge I had originally bought when the tenant moved into House #3, so it got almost 3 years of life.  I spent $300 on that fridge and another $300 on the stove.  The fridge was super gross, but I probably could have saved the stove with several hours of cleaning.  I spent around $700 replacing these.  We also added a kitchen island so there would be more countertop space.  We spent a total of $2,000 on this one, with $800 being the kitchen island upgrade.

One issue that came from this property was that we neglected to have the gas transferred to us after the tenant moved out.  Although the water was shutoff there was still water in the lines. You see where I’m going with this?  In November it got cold enough for the lines to freeze and when the water was turned on the lines going to the upstairs tub busted.  I had to replace these lines and repair the ceiling below it.  This was relatively inexpensive as CPVC and drywall is cheap, but it was a major pain.

We listed the house and were inundated with dozens of applications.  Of the applications we received only 4 met the minimum requirements and we are moving forward with the most qualified applicant.  It seems like we got a good tenant this time.

I do wish, in retrospect that I had worked on this property after work each day.  My round trip from leaving the house to coming home was 14 hours a day during this time, 6 days a week.  I spent every day off working on the House #4.  Or I wish that I had hired out some of this work.  With how little time this house took in comparison I should have been able to get it rented out sooner than we did. Although we required the tenant to put utilities in their name, the water bill reverts to the owner if the tenant doesn’t pay.  We learned that there is a form with the city that as long as it is filled out and notarized prior to move in, will fully transfer the responsibility of the water bill to the tenant, and it will not revert back to us.  We will be using this going forward and checking every month to ensure our tenants are not getting far behind.

Summary:

• Repair costs: $2,051 ($700 new appliances, $800 kitchen island, $551 misc. repairs / cleaning)
• Utility Bill: $1,914
• Lost Rent: $2,850
• Hours (Estimate): 60

Late payments:

So during the fall I had both of these units not producing income AND costing a bunch of money in repairs for about 3 months.  In addition to this we had 2 other tenants falling behind on rent, as well as bookings for the Airbnb property dried up.  This was expected as we were entering the winter season. We are working with the tenants who are late to get caught back up, which will likely happen sometime in January.

We just got a 3 month booking on one of our Airbnb units from mid December through mid March, which will put the property in the black for all of these months.  Things are looking up.

Increased Cost of Capital:

There’s a famous quote about when the tide pulls back you see who has been swimming naked.  I’m not naked, but damn close to it.  The Federal Reserve has been hiking up interest rates throughout the year and the tide just went out on our HELOC (home equity line of credit).  We originally paid off our house and had a home equity line of credit for financing rental properties.  In September, with a balance of $150,000 on our HELOC ($50,000 down payment on the apartment building, $50,000 on apartment improvements, $35,000 on a new rental house, and $15,000 repairs on other properties) our interest rate exploded from the 3% it has been this whole time to 6.5%.  The payment on that $150,000 leaped from a negligible $375 per month to $812 per month.

We have since paid down $20,000 from extra liquidity on it, and are planning to not purchase any more properties until at least the fall of 2023.  This will give us some time to reap profits from our portfolio and hedge this HELOC down.  We will also be able to cash out refinance the new rental house in the fall of 2023.  With the Fed continuing to hike interest rates I expect our HELOC to increase to 8% sometime next year.

We are not in any danger with this increase in capital cost, however it is part of the stress that has played into the issues we’ve had with 2 rental houses and some late payments recently.  I am thankful that we were able to get several properties with long term low interest rates over the last few years. I do wish I had been able to snag a few more low interest loans.  I think it will be a long time, if ever, before we see interest rates for rental properties below 4%, even below 5%.

House #9:

We purchased another house at the beginning of September before we got both of those rental houses above back.  This house has been sitting this whole time and we are just now starting to work on it.  This is a large 4 bedroom house, that is potentially 5 bedrooms, or even 6 depending on who is counting. One bedroom leads into another bedroom, which is currently unfinished space.   The house also has a massive garage. The main repairs this house needs is deep cleaning, siding repair/replacement, replace 2 windows, install all new flooring, replace cabinets, toilet, and sink.

I went over there a few days ago and realized I made a mistake when walking through it, the only air register for the entire upstairs is in the hallway.  There is no ductwork going to any of the 3 to 4 bedrooms upstairs, so this will be another learning experience.

I hope to have this house rented in April.

Pole Barn:

Our pole barn is an absolute disaster.  With my work schedule and working across several properties, I have allowed this pole barn to turn into an unorganized dumping ground.  I often unload the van in a hurry and just set stuff inside.  I’ve now spend 2 days cleaning and organizing and still have another day or 2 before it is acceptable, greatness is a far way off. I’m certainly thankful we have the pole barn and am honestly not sure how we could handle the amount of tooling/material we have without it.

Conclusion:

I’m still learning. I’m sure some other real estate investors are reading this counting the amateur mistakes I am making. Trust me, I am too.  I will learn from these mistakes and avoid them in the future.  Real estate investing is not always pleasant. There are ups and downs.  You must have large cash reserves to stomach these problems, especially when several hit at once.  I remember hearing years ago that having 1 rental property is far more risky than having 10, because if 1 tenant stops paying and you only have 1 property, that’s a real problem.  When you have 10 properties the other 9 are still producing cash its not as big of an issue.  Despite the issues we have had over the last 3 to 4 months here, we have still remained cash flow positive for the year, and even for the quarter.  This year our total taxable income from real estate activities will be around $30,000.  Next year we should be north of $60,000, with our rental income exceeding our spending for the first time.  Failure is how we learn and what I’ve learned over the last year, and especially the last 4 months will serve us well going into the future.

People ask me frequently to give them advice on getting started, and that is precisely what they need to do. The experience from each house we have done has taught me far more that any book or blog I have read.  Learning from those sources is important for ideas and sparks, but the true learning comes from doing.

Have you ever had large setbacks with rental properties? What did you learn from the experience?