I’ll never forget what James Carville, Bill Clinton’s lead strategist said to us at our high school commencement, “Always leave a place better than you found it.” His words have made me a more thoughtful person – always trying to pay for the bill, cleaning up after others long after a high school tennis match is over at a public park, and giving consulting clients more time without charging more.
The problem with being a thoughtful person is that unthoughtful people can drive you NUTS. If you want to save yourself from a lot of agitation, I suggest being a selfish person who only thinks about yourself. You won’t go very far in life because nobody will want to help you or do business with you. But at least you’ll be impervious to the negative affects of the selfishness of others!
For the past two years, I’ve had five tenants in my Marina single family house. They seemed like nice enough guys with nice enough jobs to pay the nice enough rent. There was just one problem. They didn’t give a FLYING F*CK about my property or the terms of the lease!
I’m writing this post to warn all of you folks who are considering being landlords that bad things can happen that will test your sanity. Anybody who believes that achieving financial independence early doesn’t take a lot of sacrifice is fooling themselves!
The other reason why I’m writing this post is to encourage myself to STOP trying to buy more physical property. I put in a all cash bid this week for $100,000 over asking for a house with ocean views. I lost because there were 10 other offers and the house was purposefully underpriced. I just want to buy all the property I can because I strongly believe San Francisco prices are undervalued compared to other international cities. Perhaps this post will help fight my property accumulation addiction!
My Pain In The Ass Tenants
If you haven’t figured it out by now, renting your house to five guys usually equals DISASTER, especially if all the guys were in a fraternity. I knew this when we agreed to the lease, but I also secretly hoped I wouldn’t find blowup dolls, pong tables, and kegs in the house (found them all in the first year!). Hope is a funny thing that makes people go against their best judgment.
Of course my good neighbors texted me to tell me whenever they threw parties way past curfew. Of course I also got notifications when they’d run across my neighbors’ roofs, drunk. If there was a San Francisco Tenant Blacklist, half of them would be on the list for sure.
The First Thoughtless Situation
Out of the 24 months they rented my house, their rent was late EIGHT times. Per the lease, any rent paid after the 4th day is considered late and subject to a $250 fine (1/36 the monthly rent).
The first late payment, I wasn’t sweating it. I wasn’t worried about the second late payment either. But when the third late payment rolled around, I had a heart-to-heart conversation with the master tenant to start being more responsible and considerate since I had my own expenses associated with the house I had to pay every month. He agreed, apologized, and promised not to be late again.
Five months passed and they were late again. I asked him what was up, and he told me that his bank had some type of error. Uh huh. I knew he was lying, but I let it slide because the rent showed up a day later. Once again, I was too nice to enforce the $250/day penalty.
Then on July 4th weekend last year their rent payment was late again. This time, none of the tenants could get back to me about where the money was because they were all traveling. They finally paid the rent on the 10th, six days past the deadline. I was trying to find someway to get it through to the master tenant’s head that he was being completely irresponsible. So I used this analogy:
Imagine if your employer didn’t pay you on time every two weeks. Imagine if they decided to pay you whenever they felt like it? How would you feel? Because that is how I feel every time you’re late.
Once again, he nodded his head, apologized, and agreed to be more diligent. I forgave him again because I never felt he and the crew would not pay. I just felt they were completely thoughtless.
After the 8th late payment, I had a BRILLIANT idea.
I told the master tenant, “Hey man, I know you’re having a tough time paying rent on time because you have to collect rent from four other guys, make sure everything clears, and then pay me at the bank. It sucks you can’t just automatically wire transfer the $9,000 each month. So here’s a solution! How about you cut me a written check and send it in the mail by the first of each month. I’ll wait until the 5th of each month before depositing it so that you’ve got enough money. This way, I’ll feel better knowing that at least I have a check in hand to deposit.”
He told me this was a fine idea, but never followed through. He proceeded to just go to my bank and deposit a check or cash into my account. At least I was getting paid. Then just recently, they finally gave me their 31 day move-out notice, HOORAY!
One tenant needed to save money so he moved back home with his parents. Another tenant’s father bought him a one bedroom condo and will rent out his living room to one of the housemates. I’m not sure about the other two.
The Second Thoughtless Situation
Part of the lease states to maintain the yard and return it in the condition it was originally in. Maintaining the yard meant not letting the yard get overgrown with weeds, regularly watering the fruit trees, and not using it like a dumpster. I spent about $2,500 making the yard look nice a couple years before they moved in. They agreed to hire a gardener to maintain the yard twice a month.
Of course, they did no such thing. Here’s a picture of the yard during their time there.
Thanks guys for littering beer cans, breaking my bench, and letting the yard get overgrown!
They promised to get a gardener to make the yard look good again. But of course, the gardener never showed up four days before they planned to move out. Given they were consistently unreliable, I told them I’d do some leg work to make the yard look good again with my guy Luis, who ended up landscaping the back and front yard at my other single family home.
The tenants said OK. But then balked when I came back with the labor only price of $1,000. Then I told them if they were not willing to pay they should go ahead and do the work themselves, and they finally acquiesced to $800.
After spending $1,400 (including materials) and two days completely overhauling the yard, a funny thing happened. As I was proudly showing the backyard to a leasing agent, I almost stepped in a pile of dog sh*t!
One of the tenants once again didn’t give a sh*t and decided after all that time and money spent, they’d bring a dog into the backyard, let him drop a deuce, and just leave it there. Don’t you just LOVE it when dog owners let their dogs sh*t all over the sidewalk and never clean up after them? It’s infuriating. If you see a dog owner do such a thing, tell them to pick it up with their hands and dump it in their own house.
One tenant fessed up, “Sorry Sam, my girlfriend brought her dog to the house via the garage the other night for probably 5-10 minutes. I had no idea that happened, but my apologies. If not already cleaned up I will do it personally.”
Unbelievable.
The Third Thoughtless Situation
Two weeks before their move out date, I told the tenants to start getting rid of trash ASAP because the trash man would not pick up tons of extra trash that wouldn’t fit in the bins on their move out date. He might pick up one or two extra bags if he was in a good mood, but not a massive pile of trash.
My tenants ignored me.
Upon the final walk through, they were already running 1.5 hours late trying to get things out of the house. When I saw the mounds of trash on the side walk, I told them there was less than a 10% chance all of their trash would be picked up the next day. I told them to take some trash with them. They refused.
I told them to come back later that evening to get rid of at least some of the extra trash. Leaving so much trash out is a target for human scavengers and raccoons.
They only consolidated a couple bags. Why? Because I made the cardinal mistake of giving back their deposit. A new set of prospective tenants were already waiting 20 minutes to see the place.
Five extra bags of trash and overflowing bins will not all be picked up by the trash man. But my tenants couldn’t give a f*ck.
They added even more trash on the sidewalk the night before. I told them there was no way the trash would be picked up.
So guess what happened the very next morning when I came by to meet my floor refinishing guy and some prospective realtors?
Nothing! All the trash was still there and exploded on the sidewalk. I got another text message from my neighbor with this picture:
I couldn’t believe it. I texted the tenants to get their asses over there to pick up the trash. And in the meantime, because I was so embarrassed with people coming over, I picked up the trash around the trash can.
Of course they didn’t come over. They apologized, and called 1-800-JUNK to pick everything up 2.5 hours after I shot them the picture.
All I Could Do Was Laugh
The way I get through stressful landlord moments is by reminding myself that everything is fixable with time and money. Then I remind myself I have a nice big deposit. If I didn’t cut them their deposit before the trash explosion, I would have felt less stressed.
All I could do was laugh at the situation. I texted the trash picture to the realtors before they came and jokingly asked, “will this show well?”
I will do my best never to rent to a bunch of irresponsible guys anymore. Further, I absolutely will not buy another physical property for rental income. Every time I have an itch to buy physical real estate, I will refer back to this post to keep myself in check.
I’m all about simplicity now. Two rental properties plus a vacation property is the maximum I can handle. All new money that I originally planned to use for physical real estate will now go towards buying municipal bonds, REITs and real estate crowdfunded projects outside of San Francisco. A 4% – 12% potential annual gain with no tenants to deal with is good enough for me!
I’m too old for being a hands on landlord anymore. Before I retired in 2012, I thought real estate would pay for my living expenses happily ever after. Thank goodness for online income instead. I’m at the point where I’d rather just keep my house empty like a shady foreigner trying to park illicit money and forgo any rental income. I may even want to sell the rental house, but the 5% commission (~$130,000+) plus $20,000 in transfer taxes keeps me holding tight.
Lessons For Landlords
1) Wait at least a week after your tenants have moved out before giving back their rental deposit. There will often be some items you will have missed during the walkthrough.
2) Be kind, but firm. Enforce the lease after the first warning. Collect the penalty fee and incentivize a return of the penalty fee if conditions are followed for the remainder of the lease.
3) No matter how much money you make or have, continue to treat your property as a business. Hire a property manager if you’re too empathetic towards others.
Recommendations
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Hi Sam,
Thanks for sharing that story. I thought you never had a bad tenant. I am renting out below market rates to have a stable and careful tenant who respects the property. He also pays 6 months in advance and is always a week earlier than the required date, so I’m happy to give him a deal. He also is more apt to stay for a long time.
I’m surprised you didn’t try to enforce the late payment penalty and then only waive it after they try and negotiate / apologize- enforcing it will test them and force them to change their behavior. Then again, you may have received a huge backlash and even more lack of respect to your property.
That’s why I do dividend stocks more- there is less work involved. But the return rates are much lower than property. All in all, it has treated you very well and hopefully you have much less hassles to contend with in the future!
-Mike
After about the 5th time the rent was late, I just started adjusting my expectations of receiving the rent by the 6th or the 8th instead of the 4th. There were a couple months where I did forget I hadn’t received the rent by the 4th as well for whatever reason.
I have a little bit of masochism in me. I don’t mind confrontation. So I wanted to see what his excuse was on the 6th, 7th, and 8th time.
Besides, how can I write as exciting of a post if they were only late three times in 24 years? Always thinking positively!
I felt strongly they would eventually pay. They were just disorganized.
Hi Sam,
As a small-time landlord, I’ve learned that you always enforce the late fees and hold the deposit. Perhaps no apparent issues arose during the screening. Stick to the lease and then you have a leg to stand on if you need to remove tenants.
However, since I still have a day job I have started investing passively in apartments. I don’t have to manage anything and I get a portion of the quarterly profits. I’m currently a partner in 10 properties and expect to add more soon. Note these are all in Texas and most performing quite well.
Oh well i have something to say about a bad landlord. I rent from! My rent paid on time! Him & his wife was getting over on me! And they never wanted to fix anything! Thank God i am out of there! And they did not have BBL to even rent out the apartments! My God some of these Landlord is pure Hell & they ask me not to call downtown on them!
Exactly!
Man, that is brutal. It always amazes me how irresponsible some people can be.
We had a guy that rented a house to me and three other guys and did so with extreme hesitation after being burned in what sounds like a similar manner.
He came over once a month to check on the house and get our rent check and he was always so happy and appreciative of us. I never knew why he thought we were such great tenants. I was thinking, all we are doing is mowing the grass, paying you on time and not putting holes in the wall. I guess now I get how in comparison that can seem pretty great.
I used to own property. I don’t anymore. Bottom line, at the time I had a lot going on, a full time job, growing family and all the stories you have written above. Dealing with people with that mentality (or lack of a mentality?) is really draining, and I just couldn’t do it.
I don’t know how many properties you will end up and keep a balance in your life, but good luck!
I had a similar experience renting out to guys. There were many nights that I lost sleep over some of the garbage that they tried to pull. It made me leave the landlord business after some guys were inconsiderate. What passes for clean for some people when they move out is down right nasty. After that experience as a landlord it turned me off and I decided that I didn’t want to deal with it anymore. So I park my money in the market and get my dividends and sleep like a baby.
I was waiting for this story after seeing the pictures on Twitter & FB… We are just like you Sam – way to freaking nice. I’ve given back deposits early before too and been burned. People seem to have no clue that a lease is a legal document either – and if they want to leave early, they still have to pay. We’ve gotten to the point where we make them initial that line in the contract. But you know what – it hardly matters when they live paycheck to paycheck. We always try to make it a win-win and get someone new quickly and then keep the deposit. This line is key “everything is fixable with time and money” – this was a big hassle, but hopefully they didn’t do damage inside too.
Our tenant of almost 23 years moves out tomorrow! And we had a minor flood in the house 2 weeks ago. Again – nothing money & time couldn’t fix, so we were happy. We aren’t buying more physical property either. We even have a property manager coming today to look at our 8-unit place. When we’re on the beach next winter, we don’t want to worry about a clogged sink! They’re going to price it out in case we want to sell too. Might be time to just move on – but hard to give up that money too.
Managing 8 units would make my mind hurt! I’d hire that property manager in a heartbeat!
Sorry to hear your 23 year tenant move. Perhaps you can get better rent with the new one.
Good luck!
I usually put in the lease contract the ability to end their lease early with 45 day notice and 1.5 months rent. Sometimes can come out ahead a full month’s rent that way. Took advantage of that last year at one of my properties and also right now in another property.
I also usually dangle a financial carrot at them to help them keep the place in good shape and let me show the place to tenant (eg: up to 50% of the half month’s rent back if the place is in good shape upon vacating no more than half month of vacancy). So far so good but as the # of rental properties I have & manage for family expands, the odds get higher and higher I’ll have a major issue.
Sam, it’s tough being a landlord! I don’t envy your situations one bit, but I can empathize. You see, my Dad used to do all the property management for some property he owned and some other apartments for his clients (he was a CPA). Anyhow, he did this for 2 or 3 decades and I’d occasionally go out and help him clean up places and help make them rent ready. Then, he had an unexpected stroke which ultimately led to his retirement. But, during that limbo period, I had to take over the PM duties and it was a nightmare!
Tenants just don’t think like owners many times. (If they do, keep them… they’re like gold!). They are more concerned with their own day to day issues and typically could care less for their property. Anyhow, since the properties were completely paid off, the joint partners agreed to hire an outside property management company and I was off the hook… whew! But, that short and rather annoying period made me promise myself to never landlord myself. So, having enough cash flow in a physical real estate deal to cover a PM is a must for me. Sure, I loose out on some additional profits, but it’s worth it for me.
Best of luck with the new tenants!
I wonder if managing tenants partly lead to your father having a heart attack? You and I know the stress of dealing with thoughtless people.
I’m definitely trying my best to optimize for simplicity now, especially given I have almost maintenance free online income.
But I wrestle with the fact that SF property is still SO CHEAP compared to the rest of the international cities. I feel strongly SF property will be much higher 20 years from now. Just gotta hold on!
Oh man. I’m sorry you had to deal with such pricks. I would have lost it. It’s disappointing how disrespectful college educated people can be. One would think they would have learned how to act civilized before entering society as working adults but clearly not. When I was a manager at my previous job I had to oversee a lot of 20 year olds. Some of them were great – responsible and reliable- while others winded up being constantly careless, clueless and disrespectful – which wasn’t obvious at all during the interview process. Hopefully they all will get smacked by reality one way or another and learn to mend their ways but you just never know.
Anyway, I’m glad for you that they have moved out. Hopefully you will find much better tenants soon! Best of luck!!
I’ve been considering investing in property with the aim of being a landlord, either through a dedicated rental property, or through a vacation property that I use AirBnB to rent out when I’m not using it myself. The fear of experiences like what you’ve outlined here, combined with how difficult it is to evict a tenant here, is why I haven’t pulled the trigger on a dedicated rental property. It just seems like a constant worry!
Do you have any personal experiences with short term rentals, through AirBnB or similar? If so, how does it compare to the full time experience?
Sam- sorry this happened. As a landlord in DC since 2005, I can tell you these are “first world” tenant problems. I rent to the identical class of tenants you do- college educated, well-paid folks. Occasionally you get some frat bros like you got. It sounds like they paid you (although a couple weeks late) and didnt destroy the inside of the house. If you want to see “third world” tenant problems, spend a morning in landlord tenant court. I do that once a year in DC so I can remind myself how truly good I have it. In landlord-tenant court, you see situations where tenants havent paid in 6, 8, 10 months and dont ever intend to pay and the landlord cant get them out. The last time I was there, I saw a landlord who told the judge she literally had to file for bankruptcy bc she couldnt afford her own house and her rental house bc the tenant had moved in almost a year earlier and had never paid rent!!! She was almost crying.By comparison, what you and i experience occassonally from frat dude tenants is nada mucho– dont take it personally!!! And dont give up buying more property- there is no better investment!!
I concur, as much bad this is it is still “first world problems”. I am an immigrant and have multiple units with mid to high end rents. Have seen 60+ tenants in last decade and have my share of horror story.
Rent being paid late, gone to courts for evictions, African american tenant suing me for discrimination so I would just settle and the worst case was when I had to pay 3x deposit + lawyer fees just because they transferred deposit into my checking account, which i transferred to an escrow account next day. All while the tenants were airbnb’ing. Chicago is worst for landlords and it is recommended to not take DEPOSIT PERIOD. Tenants know that and abuse it as Landlord has no leverage. I have won few too, where I got money collection order from courts. Question is do I throw more money to collect money ?
It really boils my blood when people cant be reasonable and believe in “Live, let live” The only saving grace is Chicago has good Cap Rate. RE Market has appreciated but not to the levels of Seatle or Denver or SF. Hoping to downsize in few years.
Of course it has a good cap rate. If you only get to keep half the rent you are owed then the cap rate isn’t quite that good.
Fascinating you go to landlord-tenant court to remind yourself how good you got it! That’s pretty brilliant actually, and probably kinda entertaining (?) if you got the time! Maybe I’ll pop by City Hall one day and have a look. More stories I can write about too!
I’m not really mad. I just felt incredulous that some folks would care so little. I always felt strongly they’d eventually pay, and not absolutely destroy the place due to the $17,000 deposit. Things are rational in the end.
I was always interested in hearing what their next excuse would be regarding paying the rent late :)
Damn, I love having a blog to chronicle the journey. So fun!
I am a DCite too. I have some frat bros in a rental. Recently they started destroying the inside of my rental. The outside was long gone.
Luckily i have one cardinal rule with tenants. Every tenant has to have excellent and established credit.
What i do is threaten their credit and i use the fact they they have to pay for damages while they live there to get them back in line.
Landlord tenant court in a tenant friendly town wont do a thing. Use their fear of having something on their credit report for 7 years against them.
It can work.
Nice!
I’ve rented to two military officer families, each on extended leases, and they have been mostly great! Posts like this make me cringe.
I’m sorry to hear about your difficulties. Thanks for sharing. Hang in there! Things tend to get better over time.
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Hang in there Mike! Someday you too may have a disaster to tell!
I guess he hit reply to the wrong message.
I do agree though, military renters do seem to be great tenants
That’s because a call to the base could ruin EVERYTHING for them. Military dudes appear relaxed about it, but the Sword of Damocles (The UCMJ) is always there over their heads.
I’m messing with Mike. I ask at the end of the post to share any landlord horror stories, and he posts how everything is great with his.
Thanks Mike! :)
Hi Sam-
I read Mike’s post like he was just trying to say that renting to Military personnel is usually a good bet. I didn’t see an underlying tease factor. Just some feedback.
On a related topic:. I can’t be a blogger per your and other bloggers’ reco s because it’s too hard to deal with all the random negative comments from people! In my opinion, it’s worse than dealing with a bad tenant. How do you manage all the online haters, but then let the bad tenants really get to you? I think it would be the opposite for me. I have 2 rentals and my heart sinks when I have to deal with bad tenant issues.
Thanks Sam!
I firmly believe you are looking at it all wrong Sam!!
No where in your post do you discuss who your tenants were and what you did for your tenants. Your post sounds very selfish and that is what you got in return.
Having tenants just pay you rent for a place to stay is not good enough. Tenants dont give a shit if you dont give a shit about them! If you had treated your tenants like gold they would have done the same to you in the long run. In your case, you gave the tenants attention whenever they did something wrong. So, they continued the behavior. Its human nature. Nowhere in your post do you talk about your tenants history. Where did they come from? What do they like to do? Who are they? Do they have siblings? What are their dreams? What do they appreaciate about life?
Also, consider this.. Lets say you were my tenant.. How would it make you feel if I showed up to the property every three months to check in on you and the property? And when I show up, I’m not empty handed, I’m holding a $10 gift card to Starbucks. And when I hand it over to you when I arrive, I tell you with sincerity, “Thank you Sam for taking care of my house and paying on time. Here is a small token on my appreciation! Please let me know how I can make your stay here even better. I really appreciate having you here! You are truly an awesome individual and wish all my tenants were like you!” If this happened only once, it wouldn’t be very effective. But over time, it would. Please understand, I’m not telling you this so you go out and do it and think you will get great tenants or something in return. You could still get shitty tenants even if you do this. But, if you go in doing this because you are a giver without expecting anything in return, life seems to have a way of working out.
Just my two cents.
You are right. I should’ve given them a $10 Starbucks gift card while I charged them a $250 late fee each of the eight times they were late. Lesson learned! Thanks for the tip.
Look Sam,
I’m sorry to hear you went thru this. From your response, I can see you are still hurting from the experience. Frankly, you are being really hard on yourself. I know how it feels to make a mistake. We all make mistakes! But now, what will it take for you to find it in your heart to forgive them? Forgiving them will help you more than it will help them. You should never give up trying to do the right thing and be nice to people. Not charging them the $250/day late fee and giving them back their deposit early are what great landlords do. I have done the former (not charging a late fee).
To be honest, your insecurities are holding you back. You should really consider seeing a cognitive therapist. I am currently seeing one and it is helping tremendously. Your rental story reminds me of the times I felt the way you do now. What I have learned has helped me identify situations like yours easier. Just so you know, my therapist has helped me understand what is really going on so I can make better decisions moving forward.
I really think it would help to talk to someone who has been thru your situation to really pull out the anger and frustration you are feeling. I would be happy to help chat with you about this over the phone. I know I will be able to help some. However, to really get to the root cause, a professional might be more appropriate. Let me know what you want to do.
You sound ridiculous
Lol. You sound hilarious!
Sure ,I’m happy to see a cognitive therapist. What are some of things you think I’ll benefit from seeing such a person?
Are you seeing some deep seated issues holding me back from more happiness? I would seriously love to learn more from your observations.
Please share some of the reasons why you went to see a cognitive therapist and how that helped you become a better, and happier person.
My experience will make for a potentially good blog post!
thx!
What are some of things you think I’ll benefit from seeing such a person?
Response: For you, I think you have most of your act together. I think the therapist will help “smooth out the edges”.
Are you seeing some deep seated issues holding me back from more happiness? I would seriously love to learn more from your observations.
Response: One item I haven’t touched on is how you decided to no longer invest in physical real estate because of this particular experience. This is a sign that this experience affected you more than it should have.
Please share some of the reasons why you went to see a cognitive therapist and how that helped you become a better, and happier person.
Response: Job and Relationship stresses were really impacting me for awhile. After seeing the therapist, I find he gives me confidence in dealing with other people. When I explain to him what happened and he says “That was the right way to handle it.” it just helps know I’m doing the right things right. And when he tells me what is really going on in the situation instead of my goofy ideas of what is going on, I know those are the areas I need to focus on and improve.
One key idea I learned is that whenever you interact and get close with others there is always going to be conflict. Its how you manage that conflict that will yield better results. For example, My wife yells at me a lot and constantly telling me all the bad things I do. What the therapist told me is she is suffering from low self esteem and not feeling important. Whenever she gets close to someone, because of her past, she will yield a sword and shield and work to push me away with her words that focus on the negative I had brought to the relationship instead of the positive. It’s her past where she had bad experiences that are causing her to act this way towards me.
Also, I’m not happier because of what the therapist says to me. I’m happier because of how I’m changing my thoughts, actions, and words in the conflicts that I encounter and the better and happier results they product.
Just so you know, I live in Seattle, have a busy schedule, and don’t need to travel to my therapist. I’m able to Skype with my cognitive therapist from Hawaii ). He is really good.. However, you should take the time to interview several therapists and decide which one works for you if you decide to go this route.
Phew. At least my wife never yells at me. I’m glad the therapist has helped you out! How much does he charge an hour?
I actually find this whole situation amusing. I’m glad it happened because it gave me something to write about. The more I write, the better the business!
Great alternative to therapy: start a blog!
Psychologists know the therapeutic value of journaling and having a “third place” outside of work and home to hang out. A blog kills both birds with one bush!
You must have an interesting personality type. It’s pretty simple. He is mad, but he rented to spoiled rich kids, not responsible adults. He doesn’t have to give these douchebags gifts. Yeah maybe being nicer would work, or maybe they would have assumed then they could take more advantage because he is their “bro” then. Rental property can be a good investment, but finding good tenants is part luck and skill. Steady investing in fully passive income like index funds is boring, but eliminates frustration with events such as these. The samarai is just venting. Maybe this is his therapy.
Writing is the best catharsis. It’s free, contains no chemicals, and if you have a platform to write on that actually also brings in revenue, even better!
Related: Blogging For A Living: How Much Can You Really Make?
Don’t forget a participation trophy. Good grief
This is why I never became a landlord. Sadly your story is not that bad compared to stories I hear from friends about people that stop paying completely and they need to be evicted. Late payments and a bit of trash suck but could be the least of your worries. My friend had their dead beat tenet rip out the hot water heater and copper wiring. Then again it was section 8.
Your tenants have to call my tenants “master” when one of my tenant broke the window on purpose because the neighbor played loud music at 1AM. Instead of calling the cop on them, or move to the empty room, or call me to complaint. She just went crazy.
The yard look great! Your contractor really did a nice job.
Never skip the late fee. And you already recognized the deposit problem.
Working as I do, I see this time and time again. You teach and coach your customers (and your employees!) by your policies you set. If you allow them to be abusive, they will be abusive. If you hold them accountable, they’re much less likely to do so again – or you fire/evict them and end the problem there.
Out of curiosity have you ever considered outsourcing the actual landlording responsibilities for your properties?
I don’t own any rental real estate at the moment but I want to get into it when I have the money, but stories like these always make me hesitant. I’d be interested in your thoughts on the matter.
I have, and am considering now. But since I know nobody will care as much about my property as me, and I do like visiting it a couple times a year b/c I’ve had a lot of good memories there, I’ve just managed it on my own. It’s only a 12-18 in drive away. Who will manage the manager?
Part of the reason why I like owning real estate is because I can see, touch, and experience the property. There is still utility even when I just see it because it gives me a sense of pride. It took a lot of hustle to save up for the downpayment. And it took a lot of guts to get into $1.2M in debt at age 28.
Agreed, I wouldn’t ever trust my properties to a PM. Have seen way too may cases of realtors renting to anyone who can fog a mirror just to get that deposit check. After that, you still have to manage eviting the slob they put in your home and the mess left behind. No doubt your PM has a buddy to refer you to for those matters!
I’m so sorry you had to deal with such a big mess. What I’ve realized is that when you rent the rooms individually, you can make much more than renting to a family. But it also means more headache, a higher turnover rate, and more issues with cleaning. No one takes ownership of keeping the place clean and tidy.
That is difficult. This is one reason I stepped into being a landlord with a 940sq ft condo. The ROI was great, but considering I’m just responsible for walls in, it’s a cheap repair/remodel to gut the place and start over. Considering they can’t wreck tile or a kitchen too easily, Home Depot carpet runs $750 for the whole place, and pre-fab bathrooms are cheap enough, I could paint, carpet, and do bathrooms for 6-7k. Considering my tenants have been there 3 years and it nets me $1500 a month, (free and clear), I figure even if they leave I’m way ahead of the game on this run. Still haven’t found a safer, better ROI with not only monthly income, but potential upside for my 297k yet……
Everything is fixable with time and money. As soon as I realized this, I didn’t care as much regarding their tidiness or what they did inside.
I’ve been through a couple huge remodels, so I know in the end it’s just sheet rock, nails, paint, and fixtures.
May you have a good land lording experience!
As a former landlord, I agree with Michael. You cannot expect tenants to think like a landlord because they have no stake in ownership. Even the good ones will not treat the place the same. Over my years I learned to: 1) Hold the security deposit until the clean up was complete, 2) use a video cam during the move in and move out inspections, 3) always plan for extra trash to be found at move out, and 4) know the local landlord laws inside and out. Be careful when renting to lawyers. They are the worst type of tenant. The most important job I had as landlord was screening tenants. Proper screening solves a lot of issues down the road. Finally, I suggest you go to JohnTReed.Com and look at some of his landlording books. I am no relation nor do I get paid for mentioning him. I just found his books to be of high value when investing in real estate or being a landlord. Best of luck with your next tenants.
Once I heard “fraternity” I knew it was going downhill.
I can only imagine what the place would have looked like if I had moved in with four of my frat brothers after college.
You should be thankful the place is still standing…
This reminds me to be thankful for my property manager. They deal with all this sort of crap for me. :)
Sam, your post is exactly why we are not in the “landlord” business anymore. I don’t NEED TO BE. We’ve made it, and I’d much rather have real estate money in 2 great personal residences and in REITs.
Over about 12 years, we had GOOD to INCREDIBLE tenants. I knew my luck would run out so at the first logical recent break point, we got out of the last condo we owned. I COULD NOT BE HAPPIER! All very well said and sorry for your particular terrible, infantile tenants in this house.
I feel exactly like you now. Don’t need to be a landlord anymore. No need to rush to find new tenants. I’m taking my sweet time refinishing the floors, painting the house, getting some new carpets on my time. I feel no stress trying to replicate the income anymore.
I always worry that I’ll be kicking myself 10 years from now if the property goes up another 50%. But I probably won’t b/c I’ll have 10 years of less stress dealing with the property.
I’m seriously thinking about selling, but I just can’t accept the crazy selling costs (~$150,000). I’d rather use that money to help children in need.
With your financial acumen, what additional effort would it take to get licensed as a real estate agent? That could end up paying for itself with this property and others you may eventually buy/sell…just a thought.
Seth, that’s a great point. Sam, you should seriously consider that. Imagine all the additional interesting people you would meet as fodder for FS storytelling.
You can always sell to your tenant without a realtor. Credit their deposit in full back to them at closing.
Unfortunately, they probably would come up $2.6M short. They are the typical American who spends 95% of what they make, lease luxury cars and then wonder where their money went. But, they have the Bank of Mom & Dad, so that’s good I guess.
That stinks! Sorry to hear about these trouble tenants. I tried being a landlord a couple of times and decided it just wasn’t for me. With two properties, held for years, I also saw some thoughtless treatment. Not as bad as you though, and for that I’m thankful. Still, the entire process adds too much stress to my life. When I put a value on that stress, it brings the “returns” of rental properties well below my other options.
Hope your future tenants are much better!
I rented a college house with 4 other guys for 3 years right off campus, we did our fair share of partying, but weren’t slobs and picked up after ourselves. I would be embarrassed to have a back yard littered like that – glad they are moving on.
That’s a lot of trash, looks like they are planning on buying a lot of new shit!
These are affluent tenants – can you imagine how much more difficult it would be if you had middle class tenants who may not actually have the money for rent, etc?
Also, there is zero reason to use a Realtor if you are in a hot market. List your house online on your local MLS, Zillow, and other local papers (in NYC, NYT Real Estate is the ‘go to’ place). I’ve sold all of my previous homes FSBO for top dollar.
It’s unfortunate guys in college have such a bad rep. I def feel for you though man that is ridiculous! It’s awesome your able to laugh and learn from it, as we think this is how life is supposed to be loved .
When I lived in DC, my neighbor across the hall was a nightmare for our landlord. She paid on time, but was a hoarder. Mice were everywhere. Worse, she was a lawyer, so she fought her eviction tooth and nail in court. I moved out before I saw the end of the drama.
Sam,
You are a very capable do-it-yourself-er! Pay yourself 2-3% and sell the property yourself. I’ve done it myself and it isn’t difficult if you do the research, plus you could write several posts about the process to educate your readers on the topic and process first hand. It would be an all around profitable value added experience in that you’ll also feel more capable and in control of your own outcomes.
I was able to sell my house to an individual (who happened to be a licensed agent) for 6% higher than the highest Realtor estimated sale price (which I received from 3 different Realtors prior to me placing the house for sale) and I paid no commissions and only $500 flat fee to list it in the MLS and 1% in closing cost assistance.
In a todays market, you need to list it on the MLS, but you don’t need to hire a sellers agent.
On a landlord note, you should always follow your lease terms to the letter or your tenants will feel that it is flexible and they will test you. Enforce your late fee the first time and every time!
Cheers,
Aaron
I have often wondered if an app modeled after airbnb’s success would work for renters. I have rented a house with both a traditional long term lease arrangement and through airbnb. Aside from having to clean the house between guests, I can honestly say that the airbnb experience has been enjoyable while the tenants have been a never ending string of problems. If the airbnb guest has several 5 star reviews you can almost guarantee they will be great guests. How about an app where potential tenants are screened using traditional methods and also have a rating system based on any previous rental history. Rent would be collected through the app and renters with long and spotless records would be offered the best prices on the best properties.
That already exists. It’s called cozy.co.
Love it!
I guess I’m lucky I haven’t had any bad tenants yet. However, I use a property manager because I don’t want to deal with the headache. While I know the fees are right off my bottom line, to me it’s worth it to not have to deal with day to day issues. I know in my younger years, I did not treat my rentals very well. But I do love owning physical property, so I think I’ll keep it up for now.
I think you should use a management company. You are too nice and it would be better if you didn’t have to deal directly with your tenants so you wouldn’t feel empathy for people who truly deserve none (late rent from a single mom whose child support is late is one thing, late rent from a schmuck who is still living off of his parents is a whole ‘nother ball game). But even with true sad stories, you still have to be a dick if it means getting your money to keep the lights on–a single mom who is constantly late on rent because of money problems probably needs to live somewhere with cheaper rent. So I don’t think you should sell or stop believing in real estate, I just think you need to have a management company who doesn’t take shit from anybody who can ensure this crap doesn’t happen again. Also, perhaps you can offer bad tenants a chance to break their lease with little or no expenses to them if rent is becoming a problem. You’re in an area where apartment inventory is low, you wouldn’t have a chance filling the place earlier than you planned.
Also, never give deposits back earlier than 15 days after people leave. In NYC it’s common not to be paid back until 30-60 days after move out. That ensures you have verified any damage or other issues. Put it in writing in your lease so tenants know what to expect.
Really good to know about deposits not being paid back until 30-60 days AFTER move out.
Now I won’t feel bad waiting at least a couple days in the future. The trash thing is one of the real issues here in SF.
I was making a decision on the fly because everything I saw was OK. They did have a pro cleaning crew come in for about 6 hours, and they were hustling to get things out. Prospective tenants waiting 20 minutes to check out the house was another factor, b/c my tenants were 1.5 hours late moving out.
Part of me was probably anxious to severe ties ASAP as well.
If I’m not mistaken, California law requires you to pay back the deposit within 21 days of move-out.
But you can always offer to FedEx them the deposit check (signature required so there is no chance of lawsuit over non payment). That way you get your 20 days, of whatever is legal in CA, to ensure there are no problems worth taking the deposit out for.
Also, if you increase rent, do you make sure tenants add to the deposit or last months rent at lease renewals? Meaning, if rent goes up $50, you require an extra $100 for the first higher-level rent, to ensure deposit and last months rent matches current rent?
When you’re in a competitive area like SF, you can afford to be more demanding with your tenants. At the same token, you appear to be a friendly landlord so any tenant with common sense would understand.
Nah, I just keep the deposit as is. In retrospect, $17,000 deposit may have been a barrier to get more prospective tenants interested.
But $17,000 is basically almost 2X monthly rent, which is often the maximum in many cities.
A $15,000 deposit or perhaps would have done the same thing of motivating tenants not to screw up the house.
I got insight from the other side when I moved out of my first apartment. When I told the LL I was moving (very early – way before formal notice required) he was crushed. He said I was their best tenant because I was the only one who paid on time. In a 50 unit apartment building. Yeah.
The first thoughtless situation, renting to 5 frat guys.
The second thoughtless situation, giving back the deposit just like that.
I’ve rented for 5+ years like 4-5 tenants and never had any serious issues like this. Most was like the fridge not working or garbage disposal. Always screen wisely!
Thanks for your tips and wisdom! Please share more tips. I’m always looking to learn more.
I’ve experienced being a tenant but never a landlord. I would have been terribly embarrassed to have to explain over and over why my rent was late. Ugh.
In all my time as a tenant both here in the U.S. and in India I have never once received my deposit back before I was physically moved out of the house.
Some tenants can be jerks. Some landlords can be jerks too. A certain percentage of human population are infected with jerkiness and most unfortunately are not required to wear identifying badges on their chests.
To be frank, I was also curious to see what the next excuse would be after the third late rent payment. It makes for some good writing, and good humor! Perhaps I could gain some insights into how to make excuses for an extended period of time.
The more ridiculous the situation, the better for me as I just love writing about all this stuff!
Hi Sam,
Have you thought about just investing in real estate via Realtyshares and/or similar companies where you invest but do not run the actual property?
Perhaps you can sell yours and use the money to be more of an ‘investor’ and less hands on like you said
Absolutely. I’ve got $260,000 in RealtyShares so far, and plan to slowly build the position up to $500,000 over the next 2-3 years to try and generate $40,000 a year in passive income. I might also put in $50,000 in the Fundrise Heartland eREIT as well for diversification purposes.
I’m 100% focused on building truly passive income now through muni bonds, REITs, and real estate crowdfunded. I don’t want to deal with tenants anymore!
I rented a house to a friend. This was a big mistake! I did not even charge him the security deposit (because he was a friend). Another mistake on my part. He and his wife have three daughters. My friend told me that he could no long afford to pay the rent. I was OK with this. But they left the house a pigsty! When I saw the condition of my house I wanted to cry. Some people are very selfish and dirty. I learned my lesson. Be careful who you rent to and don’t be flexible with the security deposit (this money can be used to fix up the property). I still like real estate even with all the hassle.
Yikes that’s awful! To me it’s a lack of respect for themselves either, which is disturbing. I always wonder that is REALLY going on in their minds. ugh! But in the meantime, you have to deal with that crap. On a somewhat related note, I used to roll my eyes at middle-type managers who were kind of pain in the ass (to me)…until I became one, and realize everything they have to deal with. Funny how you don’t know until you are on the other side.
And this is why I am not a landlord. In my field you see all sorts of people and many of them don’t care enough to even take care of their own body, so why would I expect them to take care of a property.
My parents had a nightmare rental situation where they had to get the guy escorted by the sheriff. They left dog poop (2 big german sheppards) and torn up floors throughout the 1300 sqft home. Brutal.
When my family and I had rental properties the way we dealt with timely payments was offer an early payment discount.
Rent was due on the 1st of the month. If it was paid a week before they received a “discount” of $200. (this was about 5% off the monthly rent) That being said the rent we wanted to receive fort he house was the discounted amount. There was still a late payment penalty if the payment wasn’t received of $200 if it was a week or more late.
In the 10 years we landlords of between 3-5 different properties we only had late rent once by a tenant who actually fled the state (nightmare tenant, lots of fun stories looking back, nut fund during though).
Anyhow, the method took most of the issues out of having to be the bad guy. The tenants felt they were getting a good deal, we got paid timely, and other than that one issue things went well.
4 of 5 properties ended up being sold to the last long term tenants that had lived in them (yay for no realtor fees!)
~T~
Man that’s rough! Such an honest post about being a landlord and something to think very hard about before leasing and who you are leasing to! I can’t believe all that trash, so disrespectful. Glad to hear they’re gone and hope for better luck in the future!
In Vancouver some people considered it a problem that others purchased homes and left them vacant. (the outside was well maintained). There is a shortage of rental housing.
With rising housing costs, etc. the municipal government decided to levy a charge (I believe it is 1%) annually if your home is vacant more than 6 months a year. With Vancouver housing costs this would be at least $10,000 a year. You need to rent the home or condo out and become a landlord to avoid this. If the amount charged (based on carrying costs) doesn’t attract tenants you are told to lower the price until it does.
Wow your rents and deposit $ amounts are mind blowing….$17k deposit and $250 late fee….wow….
I manage dozens or properties and have stories but I dont give leniency with late rebts and letting yard go. I give 1 warning for yard and then give noncomliance. I have a policy not to rent to more than 2 unrelated parties which is non discriminatory. This way I avoid lots of roomates(which has historically been my biggest problem).
I like real estate and being to depreciate and 1031exchange.
I’ve seen places do joint and several liability for unrelated tenants. Pretty hard core but. . .
Well being a landlord is not the source of the headache. Having bad tenants is. I have been a landlord for years and fortunately never had such disrespect.
Surprised you fell in the trap of giving deposit early!
A few tips that worked so far for me: never buy a house for rent. Ideal is a 2 bedroom you can rent to a couple, they usually like the extra room and when baby 1 comes they may not move right away. No yards headache to take care of. White gloves buildings can sometimes help but fees can be expensive.
The other alternative is to have studios and rent to students / young professionals but the turnover is yearly so require to find new tenants often but looks like you don’t mind that. Last if your $ allows is to buy multiple units in a building so you don’t have to drive all over the place. You just have to be right on location but if you are it’s awesome!
This usually avoids such problem although one person can do serious damage in a small place…
Final comment for the “you need to know your tenants and their siblings and not be selfish” –> really? Was that the problem? They would not have treated you any better…waste of time and time is money.
Enjoy the peace of mind now it is priceless…!
I think you made a great move changing out the landscaping to something that doesn’t require so much upkeep and maintenance.
Thanks for another reminder to always screen the tenants and know what’s going on with the property. It is so easy to get in a habit of not checking in if the rent is coming in each month.
Man that’s rough!! I mean, you should have known with frat boys but that hope often wins out. I did something similar with one of my tenants. I knew she had issues and I hoped she would get her shit together. She didn’t. Instead she paid late, made a mess, then threatened me with a lawyer when I told her she had to move out (long after the lease had expired and 3 months of no rent checks). My lowest of low as having to clean her crusted puke off the toilet bowl when she finally moved out. She was a mess!! Despite all the hassle I still love real estate but, you’re right, the tenants leave much to be desired. Thanks for sharing your story!
Oh yeah, I remember your story. Yikes! At least my tenants did right by me in the end.
I must screen harder next time. Like the CIA!
I’ve got some bad tenant stories for you, albeit not my own but still good. My husband’s best friend, Joe, has owned rental properties since college, 22 years. Joe is up to 5 properties now. Unfortunately, all the properties are located in our hometown whereas Joe moved three hours away to be close to the beaches and opened up a restaurant there. The guy is super frugal so he never hires a professional to fix anything. When there’s an issue with a property Joe drives up to take care of the properties. Just last month Joe drove up for 4 weekends back-to-back to get a house ready after the last tenant was evicted. Joe had to hire a lawyer to represent him because the tenants got a lawyer from a non-profit agency to sue Joe for “harassment” after the eviction notice was served because they didn’t like that Joe kept asking about the late rents. Just before the case was to go in front of a judge, the tenants offered to move out at the end of the month and leave the place clean and in good condition. Clean, apparently, has different meanings depending on who you are. The walls had dirt stains all over, carpet cleaner had to be run over the same spot about 4 times before the water was semi-clear, a couple of doors needed to be replaced due to holes in them, refrigerator had old food in it, and there was enough trash to fill up six cans. This was one of the rentals we got to see firsthand since we offered to help repaint the place. Bathrooms can also be one of the grossest rooms. There was one bathroom at another property that I helped re-tile because it appeared that it hadn’t been cleaned by the tenants EVER and potential tenants were visibly disgusted. Here’s the best story: One of Joe’s property had all-inclusive rent. Joe got concerned when the electricity bill tripled. After trying to reach the tenant without any success, Joe and his father go over to the house to check things out. When there was no answer at the door they walked around the property and noticed all the windows were covered in cardboard. Joe’s dad is about 60 yrs old but he still lifts weights and ain’t afraid of nothing so they let themselves into the house. Not a single person was around. There were, however, rows and rows of weed and grow lights…so of course the electricity bill would be astronomical!
From the time you said “frat boys…”. Ugh. Next tenant should be screened *thoroughly*. And I agree on the deposit. Don’t feel badly about not giving it back. Do what you have to do.
Fraternity brothers have feelings and are real people too though.
If you don’t hold firm about the terms of the lease, why should you expect your tenants to? Being a landlord is a business. You make a lease to protect yourself and your property. If you aren’t comfortable enforcing the lease, then you should hire someone else to manage your property for you.
It’s a terrible situation with your former tenants, but at least they’re out now and you’ve had a useful learning experience. Read about about landlord/tenant laws in California. I believe you have 21 days to return the deposit (less expenses needed to clean/haul trash, and any late fees they’ve incurred during the leasing term can be deducted from the deposit.)
After you gave them back their deposit and they left, I’m surprised they paid the 1-800-JUNK guys to come over for the trash. I guess thats a small positive. Unless real estate/ being a landlord is your thing, I’d probably look to scale back and simplify also as you get older. If you dont really need the money, is it worth it for the headaches/ aggravation/ liability etc? People are capable of anything these days.
Why didn’t you keep their deposit? They violated the lease multiple times, and I would’ve been adding up all of their late payments of $250 and taking that out of their deposit too. If people want to act like petulant fools they need to be treated like them. Nothing like a good dose of reality smacking them in the face to drive that point across.
Sorry for your Time of Troubles, Sam!
While this may be your worst experience of 12 years, as a cop I hear the “worst experience” on a regular basis. I know most people are able to get through renting without a regular rush of nightmares, but that’s exactly what it looks like to me from the outside!
You fell into the number 1 trap of “being a good person” and “having feelings.” On the upside: you still got paid & things still happened, unfortunately it took pain and drama each time. A more cutthroat response could have led them to take some toxic revenge.
My least favorite thing is telling a landlord about the eviction process. Often their jaws drop open. “Six MONTHS?! I go to jail if I change the locks?! This is MINE!” I try to ease the blow, but there’s no easy way to tell people our People’s Republic of California has a bigger heart for renters over owners. I’m no advocate one way or the other, but it is what it is. At least you kept your humanity, employed Luis again, and did ANOTHER B-n landscaping job!
I am not a landlord for all the reasons you have listed. I prefer the significant and hassle free returns of stock market index funds, even if they are extremely choppy.
I think you’re best bet would have been to have a landscaping service built into the rent, that way the space could have been kept up nicely but perhaps not. As having been renters in a house before, I just wouldn’t trust tenants to keep up the property like an owner would. It’s just not the way renting works, in my opinion. You must assume that renters act like renters.
I do think people should be respectful of other people, but our HOA has a facebook page and it’s ridiculous how often people complain about the wrong problem. People always complain about dogsh$t on the sidewalk ,and I understand why. However, how many teens and people hire dog walkers that don’t pick up the sh%%? Many, yet people who complain not once mention that it’s the kids, inexperienced, that are the problem and not the owners of the houses, in most cases.
Someone recently complained about a bush being destroyed by a golf card, and someone commented that there was a “jerk” in the neighborhood. Ya, that jerk is probably a 12-15 year old girl that didn’t understand that knocking down a bush was a cardinal sin. I think we need to be forgiving in most cases but in your case, I agree these are spoiled brats.
Landscape service built in is a great idea!! We have a ‘change the filters and replace batteries in the smoke alarm’ clause. This way someone sees the inside every quarter.
Glad those bozos are out! I learned a good lesson on my last tenant moving out. I needed to better document the move-in state of the property. The last tenant moved out and many things were super dirty and required cleaning. Because I didn’t have the cleanliness of when they moved in documented, I wasn’t able to deduct cleaning fees from their deposit. I found a super thorough checklist to use for the incoming tenant which should help for when they eventually move out. Live and learn! It’s hard being a nice person and a landlord.
*Also*, you buried a nugget in the post… You’re buying another property?? Do tell where. Golden Gate Heights again? What made you decide to buy now vs. waiting until end of the year like you had planned before?
Lots of nuggets in every post if one looks hard enough!
GGH ocean view property of course. Still so cheap. I used my spray n’ pray method that took a total of 3 minutes to put together an offer. I was on the low end at $1.65M (asking was $1.55M). I think it goes for $1.85M. But, at least I had a dialogue going b/c of the all cash offer.
10-20 years from now, these panoramic ocean view properties will look like a STEAL for anything under $2M imo. But of course, only time will tell if I’m right.
You can’t win what you don’t offer on! I agree about SF being cheap. You opened my eyes to that. Your thesis about GGH seems to be coming true.
Have you spent any time thinking about East Bay real estate with the same lens (Lafayette and Orinda in particular)? It seems like given the last 10 year migration of tech jobs to SF could mean that prices in those cities have more room to run vs. their peninsula/south of SF equivalents (equivalent in terms of quality of public schools and commute times to SF). Price per foot in Lafayette and Orinda is in the 600-700 range for the good housing stock. 700-800 per foot gets you a completely renovated house or new construction on a medium sized lot (10K sq ft) or greater.
I never give back the deposit for at least 2 weeks until they are out of there. Once you give them the deposit back, they have no incentive to help you.
I’d have to say, your experience is not that bad. I also can’t believe they paid someone to come get the trash. You lucked out there.
My worst experience was when a tenant put up a tree house in the backyard. That’s a lawsuit waiting to happen.
You are smart to keep the deposit for 2 weeks. I was not. I did spend 1 hour looking thoroughly around the house to make sure they did everything on the list we talked about doing during the two weeks. I had already been by a couple times to check things out before they left because I had to manage the landscaping and deck staining project.
Yes, after I sent them the ridiculous trash picture, they called 1-800-Junk to pick everything up at their own expense in 2.5 hours.
Sam, LOVE your blog! Thanks so much!
A tip…
Collect the late fee, then make the following offer – “If the next three month’s rent is paid on-time, I’ll refund the late fee to you.”
You’ll be creating motivation and incentive for the tenant to behave as you want them to.
Now that is a great strategy! I’m definitely going to use it next time. I’ll forgive them the first late Occurrence, then collect on the second time and the third time and then institute this new rule.
I was traveling for work and my wife received a letter in the mail stating that we had an ordinance violation because we were renting out individual rooms, which is not allowed in our city. We were renting to a single guy who also lived with his adult daughter. My wife called the ordinance officer and found out that 4 other people were living there. The city found out because there had been a domestic disturbance call. Our tenant had sub-leased individual rooms to other people without our knowledge! After getting everyone else out of the house we agreed not to evict him ( he pleaded ignorance that he didn’t know he couldn’t do that) . When his lease was coming up we gave him advanced notice that we would not be renewing his lease, and we gave him a free full month to move out. On December 31st he was supposed to be gone. We came by and found out that he was an extreme hoarder. There were deep ruts from the Uhaul taking multiple trips in and out of our yard. He said there was no way he would be able to be out tomorrow, as he hadn’t even started on the basement yet. We offered to assist him and spent most of new years eve and new years day moving boxes to his uhaul for him….
There were also several damages done to the property. He did pay us back for those over time, giving us $100 per month for about a year. So glad to be done with that situation!
Yes, landlords do have a difficult role to play. Some tenants do not care. I have never been a landlord because I do not care to deal with tenant problems. I am a tenant and I do care about the property. I have had a reverse situation where I wonder if landlords just want to pad pockets and be slumlords. The current rural property we are on, WE have had to clear of debris because the landlord and previous tenant did not do their job and clean it own. Instead he pulled that we did it. We have made multiple trips to the dump. We have had multiple times that we have been lied to and later found the situation is different than was said. We get deposits back, yet one tried to get us to pay for her renovations on the house after we left. She tried to get a lawyer but could not find one that would help her.
Life is no picnic for landlords who care, but it is equally no picnic for tenants who care.
I bought my first house in 2004 a duplex in NY. Since it was my first time I rented both apartments out and stayed at my parents house to save money. First year went fine and then my 1st floor tenants moved out. I found a different family to move in and from day 1 it was a fight between the two tenants. I didn’t have issues with the rent until the end, but it was a constant battle between the tenants and I was in the middle.
I gave notice to one tenant after their lease was up and they left, but not after 10 days past their lease expired and left junk in the apartment. I found another tenant, but same fighting. I decided to finally move into the larger area and get out the last tenant that caused issues. Gave them notice and they decided to stop paying rent. Had to start eviction proceedings and I lost 2 months rent in the process.
Some lessons learned:
A) Don’t sign a year lease. I now just keep it month to month. If I sign for a year and have issues with them I have to wait to give them notice. If they are going to leave before a year lease is up they are going to do it anyway and trying to get money back from them will be difficult.
B) Living in a duplex with another tenants is better than being an absentee landlord.
I was going to raise the rent on my current tenants who have been there 4 years and very good. I don’t want to rock the boat, just because I know how difficult it is with bad tenants. I also almost bought a house in Vegas a couple of years back and didn’t because I was afraid in being a long distance landlord. Now I’m kicking myself because the value of that house has gone up alot, but in the bad of my head i’ve had that bad experience.
Wow, what a nightmare! I’m glad you put this one behind you in a hurry, Sam.
Just wondering – have you always rented this property out to college students? Is the property perhaps more marketable to young professionals looking to save money and have roommates right out of school? I admittedly don’t know the area, but I’m just trying to gather more perspective on how these guys ended up being the tenants of choice in the first place.
As a realtor, I see landlords really increasing the measures they utilize to review prospective tenants. In particular, I have one client who is looking to secure a rental and she has been denied several times now due to a minor blemish on her credit report from 3-4 years ago. It’s a tough market to be a renter, especially here in the Chicagoland area. Inventory is flying at incredible rates in most neighborhoods.
I had a rent house with a clause that said no dogs over 20 pounds. He obeyed that clause to the letter. But he did let his girlfriend keep her horse in the back yard. Guess since I didn’t say no horses he felt it was OK. Dogshit is nothing compared to large piles of horseshit in the back yard.
Lots of experienced real estate investors here. Not sure but lets say the additional effort is work a few percent in return and that can prove to be substantial. If one can forgo that return why would one go with physical real estate over a crowdfunded real estate investment? Trying to understand.. Thanks!
Inconsiderate people really annoy me. Lesson learned about renting to college frat boys. Screening prospective tenants is the most important thing in rental real estate. I can’t say that this was too different from what I experienced when I was in college and rented out a house with a bunch of guys…I won’t take most of the blame but can’t be blameless either. Of course we did not receive one cent of the deposit. You definitely were too quick to give them back that deposit. As much as this sucks, if this is your worst experience in 12 years being a landlord, I don’t think it should put you off of rental real estate…I’ve heard much worse…generally with tenant is C/D neighborhoods…
Ugh. Sorry to hear you had to deal with such a bunch of a$$bags.
In terms of where you’re going to put your money going forward, no thoughts of a bit in an S&P 500 index? I know from previous posts you’re in capital preservation mode and think the market is on the expensive side..while I don’t disagree, given how many years you have to make that investment work I’ve gotta believe you’d look back and be glad you did.
I’ve luckily had decent tenants thus far in my condo in the Chicagoland area, but I want out. Land lording is challenging living 1700 miles away and if something goes wrong I want to be able to be more responsive and not have to worry what’s going on. Unfortunately unlike San Francisco, the Chicago condo market didn’t really rebound all that well. I work in the insurance industry and I’ve seen hard living in properties and the stories I hear definitely turn me off to owning more than just where I will live.
Ouch. Some friends of mine had a similar experience but on a smaller scale. This is one of the reasons I chuckle when people refer to rental properties as “passive” income.
Mannn…whatever. Try this on for size:
Haha. My tenant not only destroyed my home but was late for 3 months in a row before finally moving out without even letting me know.
Wow! I feel better now Romeo. Thanks for sharing your story! I’m going to go get some black sesame ice cream now and go walk in the park.
I saw the pictures but I want to read what you did to get your money back!
Getting the money back… I had to be clever with it. When I rented the place out, I was just happy to have a tenant being that I didn’t want to leave the house vacant. This was my first rental property so I made all types of baby mistakes. The first one being, I never asked for a security deposit. The second being, I never looked for a property manager or even had an idea that professional property managers existed. So, I became an out of state, long distance landlord. I figured, as long as I was getting paid every month what did I care what happened to the house, you can always have it fixed up. ( I definitely regretted that mind set later but it did turn out to be a true statement.)
Anyway, to answer your question, instead of getting into all of the details of what happened, I threatened to file a lawsuit if the tenant didn’t pay me for at least half of the damages. It was all through email. Little did the tenant know, it was a long shot because I didn’t have a forwarding address, a social security number..nothing.
Here was the email I sent:
> I received the invoice from the general contractor who had to repair the
> damages that was left to the property. It is attached to this email. The
> cost of the property’s damange is $5867. I have all the pictures to show
> the damage that was done.
>
> Also, the refrigerator could not be marketed as it was so, I had to get rid
> of it. I estimate the refrigerator’s value at $1,000.
>
> These costs does not include the cost of the cleaning crew that had to
> get rid of all the trash and clean the inside garage door.
>
> There are two ways that we can approach this situation.
>
> I can file the appropriate legal documentation via a law suite for damages.
> If I go this route, I’d have to file for damages totaling at least
> $6,780.07, and you would also have to pay your legal fees. This approach
> will go on public record and your credit report.
>
> Or, we can settle the charges for $3,500.
>
> How you would like to proceed?
>
> If I do not receive a reply from you by the end of the week I will file a
> law suite before the end of the year.
It’s important to note that even though the situation sucked, I didn’t stop buying property or rental properties. I currently have another rental property that I bought after this incident. Now, though, I pay a property manager 8% of the rent per month. So, I only have to worry about managing the management company which has been a breeze so far.
Sam, I’ve always been nervous about being a serious property investor precisely because of the reasons you’ve listed above. If property was cheaper to have under management then it would be more attractive to me. Instead, I much prefer the hassle free life of picking up other forms of passive income – mainly dividends, but you could include royalties, coupons or trademarks as well. Online income is an awesome way to go as well.
I think it just depends on who you rent to. I have one rental property (a condo in West LA), I rented it to a single guy who makes over $250,000 year. He has his rent on autopay, it always comes several days before the first of the month when it’s due, he sends me some of my mail that still gets sent there and he even sent me a Christmas card! The place isn’t a money maker for me and I am probably renting it below market but he is so low maintenance that I don’t really want to raise his rent. My parents have 3 rental properties and they have a similar experience. I think the trick is to be super picky about who you rent to and not stretch to get top dollar. Over the long term, you’re probably leaving money on the table but at least you get to keep your sanity! Love this blog btw, but I have a long ways to go as compared to you.
My supervisor at previous work had 5 rental properties. He was almost 60 back then and was planning to retire. One day, he told us that he would start selling all of his rental properties and asked us to let him know if any of us are interested because he is sick of dealing with XX tenants and shared the similar horror stories as you described. Since then, I never thought about buying a rental property, and your post reminded me of the conversation and my decision. I am all about simplicity too.
Being a landlord doesn’t seem like much of passive income to me. It’s definitely another stream, but a lot of time, effort, energy (physical and mental goes with it), therefore it comes closer to the active spectrum. I feel like when I’m not interacting with the tenants, I’ll still be worrying what the heck they are up to at my property, lol. I suppose the alternative is to have a management company take care of things and pay them a fee. You’d still profit and have less headache.
I manage 37 units. Rent to nice girls with solid jobs and credit and you will never have these issues. Been doing property management for 13 years and over time you become immune to the stresses of property management. You’ve seen that, done that. Have an answer, a resource, a plan for everything. Also, if it can be fixed with money, it’s not really an issue, so don’t let it stress you out.
I’ve been on both ends…and get burned on both ends.
The mistake is being nice as a landlord and being nice as a renter. I now have a management company so he can be the jerk. And you need to be. Never let late rent slide. Enforce all rules, hold deposits and charge for everything. Every thing legit that is.
I’ve also been a renter. And each and every single one of them kept my entire deposit (larger companies not individuals). I would remove all trash and clean the place top to bottom and they would still pick out ANYTHING to keep the deposit. One place (a building) kept my entire deposit because the screens on the outside of the building were dirty. Yes they were…but we’re on the third f-ing floor with no hose etc.
Learned my lesson. The last one the manager walked through a week before and we went over what needed to be done. I told him we’ll get it all clean and dump all trash in the bin but since we’ll be out 2 days before pickup could you pull the can to the curb (all trash in the can…nothing extra). My response as a landlord would be “sure, no problem thanks for 2 years of on time payments”. I was told it’s my responsibility all trash must be removed and I’d have to take it to the dump myself and leave the can empty.
I realized then that I was dealing with another “we’re gonna keep your entire deposit” group. Everything was left just as it was. Bathroom trash? In the can I didn’t want anymore. Food in the fridge? Not my fridge….I don’t know what you’re gonna do with it.
Felt good walking out saving myself hours of cleaning (and apparently a trip to the dump or at least driving around looking for a dumpster). Deposit. Have at it, you weren’t going to give it back anyway.
In short: it’s a race to the bottom and a side effect of the culture we live in. People learn that they’re gonna get screwed (and they do) so they push back. My final landlord probably didn’t deserve all that but I didn’t deserve to have several deposits taken from me after really doing to work to make the place look as good as it did when I moved in. Now I consider it an understanding. Your deposit is for cleaning, just leave and I’ll take care of it.
Wow that is a few tough breaks. You definitely could have charged for your time out of the security deposit. Glad you were able to at least for the backyard.
Rough experiences in life you can either learn from or give up. If you give up, the learning is wasted. Instead of being a hands-on landlord, you can hire someone. Lesson learned. And make direct deposit a requirement for any new tenants!
When I was renting, I hated writing checks. I do not use checks for anything. Ok, the water bill, but that’s it. Everything else is paid automatically. You want money on time, allow an auto pay system. At least that is my advice. I remember one quote, most people are good, just lazy. It would be at least one less problem in the future.
Hopefully that helps. If not, well, good luck to you either way with your new tenants.
We had tenants stop paying rent, then file bankruptcy. The bankruptcy was dismissed because they never filed anything. But once they file you can’t legally evict them, there is a stay on the county court by the federal court. It bought them 3-4 months more living rent free in my house.
The funny thing was when they left they were mad at ME for embarrassing them and said because of it they wouldn’t pay the water bill.
It took over a dozen trips to the federal or county courthouse to get them out of the house. Thankfully they didn’t do much damage. They just took everything that wasn’t nailed down (like a small set of tools we left for simple jobs).
Hi Sam, honestly this is nothing. While as a landlord in the Bay Area, I haven’t had bad tenant experiences, I do know other landlords who have been sued for hundreds of thousands of dollars, and have heard stories of rental properties being used for growing weed or manufacturing meth.
I did have a tenant in my SF property who decided to put up a wall to subdivide a living space, and subleased to other tenants, but they didn’t cause damage. I was glad to have them move out so I could increase the rent to market prices.
You were trying to buy another SF house? With cash? Why…
Hi Joe – do you think my experience would be nothing if you actually had a bad experience?
Answer to your question: https://www.financialsamurai.com/the-cheapest-international-city-in-the-world-san-francisco/
Maybe my tolerance level is high? Haha…
I spent $20k buying out that SF tenant, and then spent $90k fixing up the property after they moved (I took over the property from my sister who hadn’t raised the rent in 20 years, so she was charging $1000/mo for a $4000/mo property, with 0 maintenance done during that time). I may have spent more than she made in rent in 10+ years.
I’ve also bought rentals that were trashed by the previous owners/tenants (2 inches of rotten food and family memorabilia under the appliances, urine on the carpets, holes in the walls and doors, etc). And am a passive investor in a partnership that was frivolously sued by a tenant.
And dealt with the aftermath of my aunt’s rental that had a dead body and starving pitbulls inside.
So I’ve had bad landlord experiences, just not so much with the tenants I’ve placed myself…
Sam – I’ve been a reader and occasional poster on your site for at about 2-3 years. I remember having justified my case for not owning property at all, specially not rental property, and specially not in places like NYC or SF where cap rates are low and landlords can get screwed. For everyone the rent vs. buy calculation (for a primary residence) involves many many variables and assumptions that should be played with carefully before proclaiming that buying is always the better option. Yes I’m aware that getting ‘neutral inflation’ is your big argument for buying property instead of renting, along with tax deductions, but to me its all about alternatives. My alternative is using the money that I haven’t put toward home buying and aggressively managing it myself earning a decent return. Meanwhile I’ve kept my rent under control by being an easy tenant and negotiating every few years with my landlord during down cycles. While I can’t say I made a highly leveraged huge return with low rates by investing in an up and coming neighborhood, I can say that I outpaced general home price and rent inflation (over 10 years) while keeping my options open, keeping my net worth liquid, and without any headaches of home ownership. Of course customization of a rental is more limited in general than an owned home, but everything in life is about trade-offs. I agree with your conclusion in this post, and hope that you will stick to it. Simplify your life, own less ‘stuff’, aim for less headaches and more options and liquidity.
At this point in my life, with little kids, I am actually going to go the other way either now or in a few years, i.e. I will buy a home. Of course being in NYC, the market is frothy and there are cracks appearing in some parts of the market. While I’m buying a home for an improvement in quality of life, I also don’t want to enter an illiquid investment at the worst possible time. Thanks for reading and good luck.
What I’ve founded is that no matter how much someone is against homeownership, or at least getting neutral inflation by owning their primary residence, they tend to ALWAYS end up wanting to buy a home once they start a family.
The media used to say “Millennials don’t want to buy homes!” Now that millennials are in their 30s, millennials are now the biggest homebuyers today who all want the same old stuff every other generation wanted before.
After you done the math on your wealth if you had bought a home 5-10 years ago where you want to live versus your current situation? Are prices still affordable where you want to live? Many people have complained they are not.
It’s not about being a hedge against general inflation. I moved into a 3 bedroom/2 bath apartment after living in my own home for about 9 years. At the time rent was $1300/month. Four years later the rent for the same apartment is $1700/month. My mortgage will be the same 25 years from now as it now. Property taxes and insurance may go up little but not $400 a month in four years.
For me, yes, once I’ve done the math, the homes are roughly just as affordable as they were a few years ago. Yes, the homes have gone up in absolute terms, but during the same time I’ve earned a return on my cash not used for housing and I’ve saved money by renting below market prices (as I’ve been a long term tenant, negotiated well and been subjected to very slight yearly rent increases). You are right, that once we’ve started families, we tend to want to find a stable, comfortable home that we can customize to our family’s needs and wants.
This is my first time reading your article and can say that there are equally as tough owners out there. We have had to deal with rats, mold, wood rot, and lease breahes.
The rats in the home are getting through the underbelly and coming through the air vents. After getting the air vents cleanned the owner was notified that the problems would presume if they did not fix the problem. Their half-ass fix allowed more rats to come through the air vents again.
The mold and rot we have had in the home is a violation and a health hazard. I notified them that was the case and their reply was, “We gave you a new water heater and carpet…what more do you people want?” My reply was, Thank you, however those items were here before I even viewed the home and would have needed to be here with or without us renting.”
The lease breahes we have had to deal with includEd us accepting responsibility for yard work which we were happy to do, however, the bushes and leaves that littered the ground outside would be remedied before we moved in. Guess what? They were not. They weed wacked and that was it.
After serving a 10-day health and safety order they started to get some stuff done. We are still far from over this ordeal. Rats are still nesting in the ductwork and we cannot use the central air or heater in feat of the health effects to our children.
This is a nightmare. I really wish we had an owner who cared about their rental and about the habitable and future sustainability of the home. And I’m talking about a university professor who should have the educational knowing what harm he and his wife could be putting my children in danger of.
You may ask, “how did you not know of the problems?”. The home was vacuumed, items carefully placed over rotten wood and the agent stood over the sagging floor spot in the kitchen.
You may be saying “why not just move?!?” If only it were that easy. Rental prices have climbed about two hundred dollars, deposit money has to be put together, and moving expenses are all factors. So, we fight on.
That sucks. Sorry to hear about it. I am a super attentive landlord because I love my property and want the best for my tenants. I’m very service oriented due to my career in the financial services industry.
For example, my dishwasher wasn’t cleaning as well as it used to because it’s old. I went ahead and bought them a $800 stainless steel Bosch dishwasher because I they are the best, I have one, and I’m sure they appreciated it. I could have spent just $300, but I was happy to give the more.
Give more and you’ll likely get more in the end. Besides, the dishwasher is still mine! :)
Sorry to hear about that Sam. I’m also a landlord in the Bay Area but so far I’ve only had lovely tenants. However it was a close call once. One guy looked great on paper but I ended up Google his name. On his public Twitter account he wrote “Why do I always getting into trouble with my landlords lol”.
Let’s just say he didn’t end up renting my place.
Hah! That dumb ass. Am I allowed to say that? Hell yeah! It’s my site.
Hi, Sam –
That’s a tough situation you went though. Please take this as constructive criticism as I experienced the same thing and learned this the hard way. You were partly to blame just as I was.
First, the tenant was late 8 times in 24 months. That’s 1/3 of the time and yet no late fee was assessed. You taught your tenant that they could treat you with less respect than you wanted.
Secondly, at the end of 24 months you were dealing with the poor condition of the lawn. How often did you stop by to check on the condition of how they were caring for it? Per their lease, they were required to maintain it. You could have enforced that lease provision by putting them in default. The rent you were getting was outstanding (your market is much different than mine). You might have negotiated an amendment to the lease that you maintain the lawn (hire a contractor) and increase their rent accordingly. Things can be dealt with mid-stream much easier than dealing with them at the end of the line.
Hands on management requires a level of involvement that a lot of folks don’t want to take. I understand fully. A lot people don’t want to be the “bad guy.” However, take Brian’s advice and hire a property manager. That’s what they get paid for. I’ve been a property manager and I manage my own portfolio. I’m willing to be the “bad guy” today. As some point, I will shit that responsibility to a property manager and relax.
Hard lessons are often the toughest to learn from, but they offer the best opportunity for growth.
I wish you the best of luck which ever path you choose.
You’re right Colin. I am mostly to blame. Everything starts with me, and I am responsible for their actions. Thank you for your guidance. I have a follow up post to provide more insights.
I need to make it in BOLD in my article about my lessons learned for not being too nice, and to withhold the deposit for at least a week.
I didn’t really care if they wanted to keep the yard like a jungle, so long as they brought it back to the way it was before they left. It just got harder to do so the less the yard was maintained.
I read your site bio. Tell me about your divorce and why it happened? I wrote a post called, Divorce After Kids, that had me scratching my head as to why folks would split after giving birth. Do you have kids?
Thanks!
When I was a landlord, I tried to be a good neighbor – part of that is making sure I kept the yard up.
Indeed. I LOVE renting out to former or current property owners. They know the pain points and care way more.
I’ve got prospective tenants this week coming. One is selling her condo after 18 years due to a divorce. Could be good!
Just two things stand out:
* Before you even think about renting a property, make sure you have at least a 3 month cushion in case of late rent or vacancy.
* Don’t depend on the tenants to do yard work. Charge enough rent to cover the yard work.
I’ll never do rental property again unless I can be part owner of a multiple tenant complex and I can hire professional management profitably.
I am a renter and recently have been guilty of not keeping up on landscape. As a renter, I really don’t have time for upkeep. And since I don’t own the place, it’s very easy not to care. Maybe add a monthly landscaping fee which is mandatory?
In Chicago, a renter would not be responsible for the yard or landscaping. That is the problem of the landlord unless one tenant is paid extra for upkeep.
However, no dogs would be allowed or there would be a dog fee to pay for possible cleaning of dog crap at the end of the lease. The yard would have to be maintained of elimination of dog crap. However, there are few places here that have actual yards.
Yes, I will see if I can agree to a specific landscaping maintenance fee.
OR, I can just raise the rent and say, “$100 a month gardener and $100 a month cleaner INCLUDED.” Sounds good to me since the gardener and cleaner will help maintain my house.
While I’m working on getting a place ready to rent and I’m working thought crap that should have been cleared up by the tenant I just keep thinking “these guys put 20k in my savings.”
Yes, that is a good mind trick beyond my “everything is fixable with time and money.”
So yes… the tenants ended up paying $216,000 in rent over two years, about $50,000 automatically went to paying down principal due to my mortgage. Of course, $42,000 of that went to property taxes! Grr.
But good reminder. I just have to think this way as a business owner whenever I get bummed out with a tenant.
Sam,
Thanks for sharing that story to confirm why I NEVER want to be a landlord. My parents currently have 5 nice tenants. One live there for over 30 years and they paid off the mortgage on one house. They were a nice couple and they moved out last year to retire in Florida. After they left, over 20K was spent to redo the apartment which took 6 months. Changed all new windows, 2 new bathrooms, kitchen and tons of primer and paint.
Both of my parent’s 3 family houses cost under 65K in the 70s and now worth over 1 mil each. Both houses paid by tenants. On the dark side, they had a vacation house rented out to people that consistently wreck the place. They made BIG holes in the walls, broke all interior and exterior doors and the siding glass doors. My brother and I would drive 2.5 hours to the house to fix it. After several bad tenants, Thank goodness that vacation house was sold BUT for far less than what was paid. They had two vacation houses at the time. My parents were strapped for cash and they sold both houses losing 100K combined. Live and learn. I learned to never have tenants and to never buy a vacation home. (I would love to buy a place in Hawaii but my wife said NO but to only rent there so we can leave anytime and not to worry about selling it. Yeah, dang it, she is right.)
My father passed away over 10 years and my brother manages the rentals. There are always calls of leaks, broken stoves, fridges, no heat, heat pump failures, clogged bath tub drains, etc but I don’t get involved. My brother deals with it and gives me the receipts for taxes. My brother does a decent job screening tenants but we are always fearful of a bad tenant. We keep the rent below market value to retain the good tenants.
Since my wife and I don’t have the stomach for being a landlord, we ONLY invest in individual municipal bonds. This year we will get 87K tax free interest for doing NO work!
At this stage of your life, you don’t need the stress and headaches of being a landlord. Sell them and invest in financial instruments that truly generate passive stress free income. I bet you won’t want to deal with bad tenants when you have kids. You don’t need to deal with that BS and stress!
Adam
Wow, LOVE that you are getting $87,000 in tax free interest income! After bonds sold off post election, I’ve been accumulating municipal bonds as well. I’ve got around a $350,000 position, and waiting for rates to go back up to buy more. But $350,000 is only going to spit out maybe $9,000 in tax free interest.
Do you guys have like a ~$3,000,000 muni bond portfolio? Sounds wonderful. It really, really does.
Related:
The Case For Bonds
The Allure Of Zero Coupon Muni Bonds
We been buying muni bonds since 2009. Our portfolio is a bit under 2mil with 3.75 to 5.250% bonds. We avg 4%, yield to worst.
Early 2016, we bought 650K of 4% bonds close to PAR.
I am so glad that you are getting into munis! Yeah, they are “boring” to some ppl but they are exciting to us and we love them!! I find it fun hunting for munis greater than 3.5% YTW.
We don’t have any zero coupons bonds because we want monthly income. I know you like them because they are like your existing long term CDs where you get your money when it matures.
Adam
Inspirational. I’ve shot off an email to my banker to highlight various California miscible bonds this week. I would love for rates rise a little bit more so I can go Allin again.
Are you not worried about future Puerto Rico’s in US municipal bonds? While they may be tax free income, I’m concerned they aren’t really that safe. While it is tax free, I’d much rather buy a 4% dividend yield over 30 diversified companies that should grow the dividend and appreciate over time than rely on California, Illinois, etc to pay their bills, especially in the next recession.
Rob,
I only buy individual muni bonds from our state, NY. I dont have any muni bond funds so I am NOT worried. You should only buy munis from your state if it is financially strong. I agree that you should avoid areas that are having financial problems like Puerto Rico, Detriot, etc.
I like buying muni bonds for Mass Transit, water, well known hospitals and universities. People will always need these services.
People should invest in whatever they are comfortable with. Dividents and rentals are great for passive income but not for me. We have NO money in the stock market so we sleep very well at nights. We will also have 3 streams of income from munis, pensions and 401Ks to cover our expenses separately so that if we lose 1 or 2 streams of income we would still be OK. Plus, we have 7-8 years of savings.
Adam
at least they didn’t trash the house when leaving or squatted on the place. i’ve never been positive on renting due to past experience and i think we had disagreements about house ownership in previous posts due to it (or at least in my head as i read your overwhelming positive feels on house ownership and renting).
think you got off light. my family’s situation, had to drive from different state multiple times to evict and around 3-4 court hearings because they kept coming up with reasons to avoid showing up. took around 3-6 months to finally get them out. they literally trashed the entire house afterwards.
I was honestly just saying to my wife last night how glad I am we sold our vacation rental recently. Even with very few bad tenants there was a constant commitment to it even just in terms of time. I had a decent property manager but guests still preferred to contact me when they had issues. After selling it the money has been put into a mixture of investments that require zero thought on a daily basis and I get back more of my most valuable resource- time. Net worth continues to increase by six figures a month and life is more relaxed.
Doesn’t seem too out of the norm.
It is hard to find a tenant that actually takes pride in the property and will maintain it well. We have a few investment properties and we have found, overall, people are good and they can be trusted. If someone wants to screw you over, they will.
That’s what I’m finding from the feedback so far. It’s not that bad. And that’s the thing, if I cared less about things, I wouldn’t have been as annoyed. Hence, the secret is to care less and just deduct from their deposit more aggressively.
Sam, as always, thanks for sharing your experience. My wife and I are first time landlords (100% occupancy coming up on 2 yrs…very short horizon, I know). We’ve also had ups and downs with our 2br/2ba rental condo. But, every month when we do get paid, I think about the equity our tenants our building for us and the additional cash flow they’re providing independently of our day jobs. For where we are in our journey, our rental property gives us a glimpse of the financial independence we’re working for. As new parents, our plan is to use our (growing) rental portfolio to spend less time at our day jobs and more time with our little girl. And to me, that is worth picking up after less than considerate tenants.
you let your tenants pay late multiple times without charging late fees and not tell them to clean up and let go of other violations, I am also like that, I wish I were more strict, but I try to avoid confrontation and hard feeling, but in the end it makes things worse because they think they can get away with it, by character I am not cut out to be a landlord……I am also pretty tired of being a landlord after 25 years, but I am keeping one that’s close to the city so when I get old and can’t drive, I may move back
there are always exceptions, however according to my experience Asian tenants (especially immigrants) are usually more punctual in paying rent and don’t cause trouble…. my current Asian lady with her Hispanic boyfriend sometimes actually pay a week ahead of 1st of the month, and that’s been my experience with my Asian tenants in the past
like you I’ve renting a unit to singles for a long time, there were Asians and Hispanics who don’t bring a lot of personal stuffs and put everything in their own rooms, help to bring out the trash, etc….but I had this one white guy who hog space by moving a lot of his stuffs in the common areas and put personal belongings all over the yard as if he alone rents the whole place…..paying rent on time is also not high on his list, don’t help with trash and leave dirty dishes in the sink
Sam, Because this situation is so similar to my own, I have been reading the comments and wanted to offer you a few thoughts…..
— Keeping one rental property in your “home town” city is good for diversification and for a plan B, in case life goes wrong you have somewhere you or someone you care much about can live if needed. As long as it has a decent return on equity after expenses, why not?
— I am a very “nice guy” to tenants I love. They get what they ask for (sometimes without asking). I do everything I can to motivate them to stay for a long time.
— I keep my lease terms very strict so I have ultimate control, and if I have “bad tenants” or tenants who are mediocre I enforce those terms to varying degrees (late payments, tenants responsible for exterior upkeep, tenants responsible for minor repairs). You put terms in your lease agreement that you hope you don’t have to use.
— In big cities, tenants who know how to play it have the upper hand over landlords. So your overall plan should be to screen in advance heavily, ZERO tenants without excellent established credit. Zero tenants who seem like they might have drama (obey the law carefully here). When you do run into problems, these heavily screened tenants won’t risk the damage to their credit or references and when push comes to shove they usually pay up. Your leverage over tenants in a big city is their credit report and their references, not the courts.
— Part of my strict terms application and lease allows me to contact references before, during and after tenancy. This last one came in handy when one tenant trashed the place to the tune of $6500 and I used this clause to “call her mother”. Net of it is, she went on a $1000 monthly payment plan and paid the debt.
Yes, I will screen like the CIA next time. I have a lot of patience now and am willing to forgo 1-2 months of lost rent to find the perfect tenant.
I do wonder though: why do some tenants not care?
Is there a different mindset between a homeowner and a renter? Can this mindset be a reason for the massive wealth difference between homeowner and renter as well? I wonder if I can write a post about this. Hmmm.
I’ve learned over the years that you can’t become your tenants’ friend. That’s unfortunate because you’re going to meet some nice people along the way. But situations can change in the blink of an eye. A missed rent payment, a hole punched in a wall, or an appliance that isn’t replaced quickly can turn a good relationship, adversarial. You must remain respectful, though.
For example, I had an older gentleman as a tenant for several years in one of my condos. He paid on time each month, never a problem. And we would have coffee in his kitchen whenever I’d stop by. He seemed like a nice guy, and we got along well.
One Friday night he left me a voice mail screaming and cursing about the refrigerator. I returned the call within 30 minutes, and he wouldn’t stop carrying on. He had just bought groceries and said he was going to sue me for the hundreds of dollars he was going to lose because the refrigerator stopped working.
I tried to calm him down, and offered to bring ice chests over. But he didn’t want to hear anything about it. And of course I couldn’t get a new refrigerator that time of night.
I had a new one delivered the next afternoon. But he was still upset and moved out the following month.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord. How to build a portfolio of investment properties for an income that lasts a lifetime.
Sounds like an irrational tenant, especially after all those coffee conversations.
I would have paid for new groceries and told him help is on the way. But if he wanted to move out b/c of an act of God, good riddance!
I wish I had you as a landlord, my fridge hasn’t been working right for months. I did notify the property management company months ago. They sent their “handyman” to look at it, he said he would order a part for it. I am tired of waiting and having my food go bad, so I went and bought a used fridge to replace it yesterday!
I’m curious what is your cap rate? We own 2-bedrm condos in Sunnyvale and Dublin, and the cap rate is ~3.5% (after property tax + HOA). We also claim depreciation to reduce tax.
About 5.3% after all costs. This is based off my purchase price of $1,520,000 and $108,000 a year in gross annual income.
It’s not bad given the 10-year yield is at 2.35%, especially given I’m bullish on SF real estate over the next 30 years.
I don’t want to sell the property…………………. but every year I long to do so. Just gotta hold on!
When we moved from Hollywood to Houston, we rented our house to this guy from one of the biggest rap groups at the time.. What a mistake that was. Complaints from the neighbors, parties all the time, late payments because they had to get all the money together among all the bums! Soft like you, l didn’t charge for late payments. When they finally moved out, we swore no more rappers. Rented to a sportscaster who l thought had load of money and traveled with the big sports team and he promptly got fired very shortly after and was in the middle of a divorce. Long story short..another bum! Late payments and even once got to the point where the sheriff was at the door after court dates. My husband said let the sheriff kick him out. He pleaded, he begged and deposited the money that morning. I made the mistake of not kicking him out and yep..next month..late again. It took months to evict him and even with a judgement, we haven’t collected a penny. Switched everything to his girlfriend’s name etc.. Don’t feel so bad, we sold our other rentals except for 2 when we left. Being a landlord sucks for the most part.
Switched everything to his GFs name? Ha! Don’t worry he’ll get screwed in the long run if that’s the case.
I was recently vindicated in a situation with my sister in-law who walked away from a mortgage she could (but didn’t want to pay). She married a guy and they decided together to just stop paying her old mortgage, rented the house and collected rent till the bank foreclosed. I bit my tongue at family gatherings but did voice my opinions to my wife.
Happy couple bought a new large home just in new husbands name (since her credit was ruined) sister in law signed all the paperwork that she had no stake in the house.
2 years later? Divorce. She’s gonna end up with nothing and ruined credit. It sucks but…so does sticking people with your bad debt while collecting rent from people that are about to get kicked out of their home by a bank.
I was just amazed at the justifications I heard. Not just from her but from her family as well.
That’s a long way of saying to take some comfort because if what you said is true this guys gonna get totally hosed in the future.
Thanks for that. Sometimes l have felt guilty for wishing something horrible would happen to him, and l confess a few times l have wished his girlfriend would stiff him and take everything. Yikes..bet your sister-in-law has major regrets now. I really do hope he gets his. It burns my hide that he even stole my Barcalounger when he finally vacated the house.
Sam, great input (as always), posts like this keep me out of thinking about getting residential real estate into my investment portfolio, instead I focus on retail/industrial properties, however I think I could manage few residential units “on the side”, because of lack of diversification I am thinking about buying a triplex at the moment, and I’m convinced that should be the last move and I would not touch the size of my real estate portfolio afterwards, remaining assets are going straight to stocks.
I have been renting out retail space in Europe since 2008, everything from 500 sq ft to 4000 sq ft units, statistically 2 tenants out of 10 are always late on rent and cause problems that they themselves should deal with, its usually “small” guys, new companies or brand new businesses that cause the most fuss, established multinational companies or companies with at least a functioning management team or companies with more than one business premises are the best tenants.
I was gonna say I wish I had a commercial property portfolio. Bash away folks! It’s just an office space.
But now I realize that small businesses might be even tougher to deal w/ b/c they may be even more insecure and stressed about money since most small businesses fail!
I’d love to own a property large enough to rent to Safeway, Walmart, etc.
I own shares in National Retail Properties (NNN). https://www.nnnreit.com/. Single tenant retail properties with a sweet dividend, 4.5%, and no problems … unlike my rental properties.
It’s not only about the size of the property, my best tenant who pays two months ahead of deadline and does not ask any questions and even invested into interior renovation with its own sources is an insurance company that uses only 900 sq ft and does not require any more. These days its more about quality of services, accessibility and location than space quantity. Having property large enough to offer to Safeway or Walmart can be a big fuss too, especially, if you can’t find those big tenants in time or after they vacate the property. The bigger the space the smaller the market and worse liquidity. My largest tenant so far was multinational car dealer (showroom, service station and offices). And even though the tenant paid 12 months of rent in advance, I had huge problem finding new tenant that was prepared to pay comparable rent for same space after he left. It took almost a year to find three prospective tenants, from which I could facilitate to none because of local land use planning permit. I had to cut space into smaller units in the end, which resulted in immediate higher demand, better tenant diversification and slightly more administrative tasks. Currently fully rented and still separated into smaller units. So it really is not always about quantity in the long term if you are after achieving stability of your portfolio. Most businesses these days (at least in Europe) require less physical space and more virtual space, naturally most businesses still prefer existing and accessible physical location, but they shrink it in favour of having more resources available for virtual space (e-commerce viability and infrastructure in general) or other purposes which are generally more important for successful marketing nowadays. Some of my tenants, whose business is based on individual services use their space only as a small showroom in which they can facilitate individual presentations to their clients on TVs or projection screens, even if they sell things like furniture.
Normally people think that the life of a landlord is just collecting money and walk away. Well this post definitely proves them wrong.
Renting a place does mean a lot of work. And sometimes a lot of problems.
I’m glad that it all turn out ok with you.
Keep it up with the good work.
And keep it up with all those insightful posts!
Sam,
I have to agree with the others you were being too nice. One thing I have learnt over the last 3 years managing our tenants is that unless you enforce the lease as it is written they will repeat behavior. we have a 4 plex so have 4 tenants and one of them was late the once we gave a warning and let it go. two months later they were late again so this time my husband and I talked and make sure he paid the late fee. After this over the last 2.5 years he was late once more and we made him pay the late fee again. Now he actually gives the rent before the others :)
I think the key here is following the lease and for things that they break you point to the lease.
So we give one warning for anything and after that we enforce. This is just like parenting if you just have rules but don’t enforce them the kids will not follow them :)
Was there a reason you returned the deposit before they cleaned the place?
They cleaned the place. A professional cleaner was there from about 8:30am – 4pm.
My recommendation is to include the maximum withholding period you can for the deposit, which will vary by location. For instance, my Colorado properties allow me to withhold the deposit for up to 30 days and that is in the lease and I always verbally remind my tenants of this when their lease is nearly up so they can move swiftly on making sure everything is in the same condition as when they moved in (also documented by iPhone photos and video walk-through with them).
Even if you think everything is accounted for during the final tenant move-out, many times you will find more problems in the following days (e.g. additional cleaning, trash, broken things). With the deposit still under your control it’s amazing how quickly things get rectified. I always tell my tenants I want to give back 100% so they can fix whatever issues there are before I take any deductions. It’s their choice which makes any withholding that much easier.
I have never withheld the deposit for 30 days; usually within 10 days my tenants have it all back. The peace you will get from not trying to make a rushed deposit-return decision on move-out day is simply invaluable and a smart way to keep from getting hosed by a little surprise a day later.
Why don’t you just hire a property manager? Is that the solution everyone uses these days when they’re told landlording/real-estate investing is a lot of work?
I may just do so. But the property is only 15-18 minutes away and I’m a handy guy who is also always on the hunt for stories to write on FS.
If I had a property manager, I wouldn’t have been able to write three posts about this funny situation! (two more posts in the piple line whoo hoo! I’m gonna give it one more shot and see what I can do. Each round is a new adventure. Gives me something exciting to do in early retirement!
That’s an interesting way of looking at it :P
I am so sorry that happed to all of you but am on the opposite side of things i pay my rent on time every month i take good care of the home and yard i follow the rules but my land lord harrasses me over silly things like stalking his x wife to ckean other rentals for free and rent out his other properties walks in to my home any time he wants calls constintly ant all hours and crazy obsessive texts when hes angry i wont do as he demands i finally had to report the harrassment and now hes raising rentand trying to put us out for standing up for myself. Somewhere he is confused and believes if you rent from him you work for him i have text after text if i dont do as he says witch has nothing to do with the home he will oush me out.
Wow, that’s one though situation you got in.
We are actually pursuing being landlords, so I could use some extra lessons any time. We are going to use a property manager to handle this kind of business. Not only because it saves us the trouble, but also because we have to pay less taxes (property will fall in another bracket). So it’s double interesting for us!
Hi:
We too invested in income property as part of our retirement plan, We are not there yet but we have determined that, rental property has really good cash flow, easily beating any other investment we have, but dealing with people can be a pain I do not want to be involved with in retirement.
We figured that, when retired, caring for income property would be a good diversion, and we would have the time. Unfortunately, we found that it is more than meets the eye.
We bought 3 properties, 1 a 3 family, another a single family, and the other, a waterfront Florida Condo.
The Florida property is too far away so we hired a management company, this property has been rented consistently for years, and we don’t have any problems, easily the success of the three. Using a management company takes money, but I have found that no contact with the tenant to be priceless.
The single family also has been easy to manage, as the tenants think f the house as their own, we never hear anything from them, and they pay the rent on time. I think we have spoke 3 times in 4 years. They do not keep it up the way we would, but they never complain either.
The 3 family was the worst. We owned it for 5 years, (sold it last year) and we had to be there pretty much every weekend, and on vacation needed to provide backup. I think we had every issue you can have, constantly babysitting these adult, who never got along. Constant back biting and complaining from all 3. One even brought us to court on a baseless allegation (when we evicted her for smoking on the premises). It made great money, in fact we probably would still own it if we had gotten a good management company. Our mistake was thinking “how tough can it be” . Well it can be plenty tough. We tried to be good landlords, but the tenants saw that as weakness and exploited it in every way. Most were late with rents, complained about damaged that they caused, had fights with their neighbors, plugged the plumbing, when leaving, left the place a shambles with piles of junk and belongings left. I have to admit, it wasn’t the work, it was the people. We did thorough background checks and the first few we got seemed ok (even though they were always late, complained about nothing, and fought with the others). But the last ones were horrible, Everyone fighting and threatening legal action, probably caused by the chain smoker that pissed everyone off.
Anyway, if this doesn’t bother you, or you can just use a rental company, you will make a lot of money, have great tax write offs, not to mention the capital gains when selling, then this is for you. I really can’t know it, but just be aware, it isn’t all roses, just daisies.
I’ve also found that multi-family properties can be the biggest pain to manage. But like you said, it made you great money. Condos aren’t always a cakewalk, though. Neighbors can fight, association fees can skyrocket, and with a stroke of a pen assessments can kill your cash flow.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
Wait…you only paid 1400k to have that back yard hardscaped? all that flagstone? Really?! Your renters were not too. As, there are real horror stories out there. Count your blessings all went well. Minor irritations, that’s all.
Yes, not bad. The stepping stones were already there. I just had to buy more mulch and center pebbles after everything was removed and tarped. The cost was about $1,200 ($400 for materials).
Related: Landscaping As An Investment: Focus On Aesthetics And Functionality
Nice post Sam. I had a similar problem with my rental properties…thoughtless tenants cause damage and there’s no way I’ll ever be able to get the money from them. I also had major problems with the property managers that I hired to look after the properties. One was an outright fraud, while the other just was neglectful. I sold both duplexes and next time I get involved in investment properties, they will be local where I can manage them myself.
That’s a good point. Property managers can be a problem as well.
I take the same line with them as with the tenants….don’t let anything slide.
They replace something I have them email me before and after pics with the receipt for materials. I have no reason to suspect anything but I want to be sure if they’re going to rip someone off it’ll just be easier to rip someone else off. they’re good folks though and so far so good. Never had to change companies but threatened to once.
“Toilets, Tenants, and Taxes”. Yep that’s pretty much why I’ve always steered away from direct RE investments. Heard too many horror stories like yours. Sounds great on paper. But just one bad set of tenants kill your model.
We own 8 rentals in the Seattle area and have our fair share of bad experiences. One time we had to evict an 80 year old tenant for failing to pay the rent on time despite 3 years of no issues. It took MULTIPLE trips to the courthouse and many thousands of dollars to get the property into a rentable condition again. He DESTROYED the interior and during the eviction we found a dead bird under the couch which almost made me puke. I was so distressed I vowed to never buy another rental property again.
On the other hand, he paid over $90,000 in rent with roughly one third of that paying down our mortgage and the remaining going towards interest and taxes (which we wrote off). In addition the property appreciated nicely which is a nice side effect due to our impeccable timing.
I look at the experience as the “cost of doing business”. Financially, real estate is a leveraged investment assuming you hold for the long term and IMO provides superior returns to dividend paying stocks even when factoring in the maintenance/eviction issues (see my post — https://www.quora.com/Is-it-better-to-invest-in-rental-properties-or-dividend-stocks/answer/Ryan-Thurston)
Since the eviction we have bought 4 more properties. We accept the fact we will have terrible tenants. When we retire in 15-20 years our plan is to shift away from these “semi passive” assets and move the funds into muni bonds or other low risk “passive” investments.
Sam, another fine post.
You got off very easy. After 12 years of landlording, this is a drop in the bucket in terms of what could have happened; especially in a tenant friendly city like San Francisco.
I have numerous horror stories I could share, but they never prevented me from continuing to purchase more rentals.
For instance, I once rented out a triplex to a fraternity. These 9 boys absolutely destroyed the place including taking a samurai sword to walls and door knobs. There were numerous police calls, massive parties and angry neighbors. The worst was when the city inspector was called and I had to dump thousands into it, knowing it would be destroyed again.
Don’t get discouraged. You received all your rent for 2 years and can now raise the rent to market since SF has rent controls. This is a great situation for you.
When it comes to tenants, the Pareto principal will rule the day. 80% of all your problems will come from 20% of your tenants. The key is to accept this and quickly correct issues with problem tenants and then politely ask them to leave.
Better yet, there is always a great tenant who is looking for a good landlord like you. Maybe this post will help you find a solid one.
A couple of pointers to make your business easier.
1. Allow one late payment each year as a courtesy. After that, charge the late fee. Don’t feel bad. You are simply enforcing the lease. If you still feel bad, tell em your partner is brutal and is making you do it. You partner can be your dog, wife or kid.
2. Making tenants take care of the lawn never works in my experience. Better to hire a service.
3. Sign up for cost effective property management program that allows tenants to pay rent online like cozy.co. I have no affiliations with them and use a professional program that would be too expensive for a small time landlord. In your scenario, each roomate could have paid separately and you would charge the late fee to the 1 or 2 roommates that always pay late.
You are definitely in a unique market where the name of the game is appreciation versus cash flow. I used to live in the same area as your rental back in my 20’s. It was one fun neighborhood. I decided to leave so I could pursue real estate in the Midwest. Way more cash flow, but less appreciation potential unless you pursue value added deals.
Keep crushing it in SF.
Great article, Sam.
I have a rental property here in Tucson that I am about to receive a 60 day move out notice on. The property has been self managed for the past year and this article was helpful as I will be strict with the condition of the property before releasing the security deposit.
I have a second property near the University of Arizona that is going to rent for twice the amount of the mortgage payment that I have hired a property manager to oversee as there will be college students in the property. My property manager in some cases will require the parents of the students to guaranty the lease so the property, and myself are protected. Maybe this could be a way for you to protect this property in the future? Maybe a master guarantor?
Hi Josh,
Funny you mention U of Arizona, b/c I just invested $25,000 via RealtyShares on April 11 in an 88-unit, 247-bed student housing apartment complex several blocks from the main campus of the University of Arizona in Tucson, AZ called College Town. Their target IRR over five years is 16.5%.
Heard of it? That project would be a nightmare for me to personally own. But if I can get 12%+ a year passively, it could be a homerun.
Sam
I feel your pain! A business partner and I own 90 units, self manage about 60, and many of those are college rentals. These kinds of situations are bound to happen, as you have said. But it is still infuriating.
Knowing your financial situation, it definitely makes a lot of sense to simplify with more hands off, low stress investments. But for those who are just working to achieve financial independence, I still think real estate investing is about as good as it gets for consistently generating life-freeing income.
And you obviously had a lot of lessons learned in this situation (I have made the same mistakes of course). By enforcing your own rules, communicating more firmly, and choosing better tenants, a lot of these problems may not have arisen.
So, my point is that it is possible to have much better experiences as a direct property owner. These problems are not inevitable. And over the years a smart landlord can have fewer and fewer of them as you get better. So, prospective and current direct property investors should keep that in mind.
Dang, 90 units! My head would explode. I wouldn’t even be able to keep track of which unit was what, let alone their addresses!
I love learning lessons, sharing them with the community, and getting better. Can’t get better otherwise!
I’ve personally had enough of landlording and will invest as much of my income as possible in bonds, REITs, and real estate crowdfunding. Good luck with your property empire! What type of cash flow does it generate?
Coach Carson is awesome! I learned a lot on the tax benefits of RE from his posts and guest posts and brought them up again during tax filings, saved me a ton of money!
Thanks for the shout out, DI1k! Glad the tax benefit post at MadFientist.com was helpful. Very cool you used it on your taxes and saved money. I love it!
Ha, ha. Thankfully no head exploding (yet). For 62 of those units, I have a bookkeeper who has transitioned into an awesome admin/do-every-thing person. So, systems and an awesome person helps. The other 28 are with a 3rd party manager. I use Buildium and a big spreadsheet to keep up with all of the units. And they’re all within a 15-minute drive if I need to check them out. Plus I’m less hands on with repairs. I call repair people to do work in a heartbeat.
But no matter what – we are over our happy place for number of units. I have a 50:50 business partner, and we’d probably be happier at 30-35 of our best units free and clear. That’s the path long run. And I certainly like your approach of valuing simplicity over performance after you approach certain thresholds.
Opportunistically we bought 34 units last year, 28 in one project. It’s a value-add property with a lot of extra density available in the zoning. Because our college town (Clemson, SC) is growing and getting a lot of national developer interest, we may be able to sell it a year or two from now and make a big chunk.
Most of our new properties aren’t cashflowing great now because we’re raising rents and putting a bunch of money into repairs as we speak. But hopefully they will add a big boost later this year once stabilized. Our others are cash flowing well enough for me to hang out in Ecuador this year with the family and focus on writing:)
We’ve also been selling off the losers (and still have a few) that we acquired in the 2005-2007 run up. They’ve been a drag on overall performance. We were those geniuses that bought as many as we could right before the 2008-2010 cliff. Lol. Many were good deals, but a handful we would have loved to never have bought. Makes for good stories though:)
Thanks for all your awesome content. I’m always impressed on many levels. Hope we can stay connected.
Another good post Sam, sorry to hear it was so unfortunate!
Maybe the culture in the US is different to Australia, but in Australia it’s almost unheard of to self-manage your own properties.
I have an investment property (here in Aus) and pay a property manager to look after it.
Why?
Because the property is an investment.
I don’t want to fix toilets or find tenants or chase rent. The property manager does all of that (much better than me), and all I do is get a direct deposit of rent every month (nobody uses cheques in 2017).
I also have to approve the occasional repair, but this is just via email.
I know you like real estate so hopefully this experience doesn’t turn you off investing in property!
Interesting about Australia. AND you guys have the largest inheritance per capita in the world as well! No wonder why you guys are so happy. So what’s the property manager fee in Auz? It’s usually 8% – 10% of annual income here.
Because I’m a real estate addict, I actually enjoy going over when something is in need of attendance. It gives me a chance to talk to the tenant (maybe a story is there), inspect the property, and fix things that could cause more damage along the way. I feel a lot of pride going back to my properties that I sweated so hard to buy. It’s more than just a financial asset to me.
A very successful real estate investor gave me this advice when I was first starting out:
“Don’t fall in love with something that can’t love you back.”
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
The fee is about 6%-8% from what I’ve seen.
Good to hear you get enjoyment out of visiting the tenants. That’s a positive that not many people have!
First thanks for the post, I think a lot of people want to get a rental and the “passive” income it generates, but have no idea the headaches it can be. I recently sold my only rental to put a down-payment on a much more expensive coastal California condo for myself and future wife. Your situation sounds fairly bad but it could have been worse. I had to kick out my tenets, one of which worked for me but after he quit out of the blue one day couldn’t come up with rent, he moved out a month after I asked him to, but the people renting from him basically squared there for 2 months. I got them to do some work around the house to make up for free rent and after much coaxing got them out without having to involve the courts. Of course they left a giant pile of trash and a house with some of their stuff in it. My only recourse was to take as much to goodwill and leave the rest in the alley with a free ad on Craigslist and pay my rehab guys to haul the rest. They didn’t even pay a deposit because they worked for me and were friends, moral of the story is being a landlord can be tough and always follow proper procedures even for people you know and trust.
I feel your pain.
I’ve had renters, some good and some okay. My wife has a renter who has been very good, and my in-laws have renter in two different properties (my in-laws live overseas most of the year, but spend a few months with us).
The renters at one of my in-laws’ properties are bad renters. Every couple of months, we get a letter in the mail (addressed to my father-in-law) about yet another rule violation – there is too much trash outside the house, the water bill hasn’t been paid in months, the yard looks terrible and requires mowing… etc, etc, etc. Even though it’s not my property, I can’t wait for their lease to expire later this year so we can *not* renew it and find new renters.
The only drawback is I am sure that the house will require a lot of upgrades once this bunch moves out.
Real estate has its advantages, for sure – “passive” income, it pays down your mortgage, and tax breaks. But the “passivity” isn’t that passive because you still have to keep a close eye on it, and you end up doing a lot of the running around for maintenance issues even if you have a property manager.
This is not for every property, but with enough of them, eventually this will be the case.
Condos are the answer. No /low maintenance issues. I have some crap condos in a crap area of Nevada. They are cinder block. I buy the unit and stick about 3k in. New tile, reglazed tub, new small kitchen. I am in for around 25k per unit and get $500 per month in rent. Hoa+ taxes+management= about $200 per month. The key is getting a landlord friendly state. If they don’t pay by the first they receive notice and are out by the 10th.
Tenants are good at making you feel bad about the late fee. I recently had a tenant come up to me asking for cold and flu medicine while hacking and coughing and keeping his distance under the guise of being sick. It took about a half hour but he then asked if you could pay hi s rent late. If I could forgive him just this one time. And it is Wednesday and he didn’t get paid until Friday. I responded to him by asking him not to put the decision on me. He signed a lease and it is his decision to either pay on time or pay with the late fee. Well all of a sudden he wasn’t so sick. He started trying a bank to bank transfer and he couldn’t figure that out. So he went to the bank the next day and found the cash to pay on Thursday which was 1 day before the late fee was due. You have to enforce the rules swiftly and immediately as they are challenged. Otherwise once you break a rule, the lesson taught is there are no rules.
Ruthless! Guess it worked! I couldn’t lay down the hammer on the poor fella and would probably just have him pay me on Friday. I feel bad when people are sick, b/c when I’m sick, I’d give anything to feel better again.
I just have this mentality of “banking credits.” If I show him kindness, hopefully he show me some love back.
It wasn’t as ruthless as it may have appeared. I was very matter of fact about it. I calmly told him it was his choice. It really was about it being inconvenient for him to pay on time.
Owners care. Renters, not so much. (you should see my ex-girlfriends!) Back yard looks great after you fixed it up, but you’ll have to do that again. Keep Louis’ phone number in your book.
I’d suggest a $XXX dollar per month benefit if they give the place back – you have to write them a check when done, if it meets your approval, which is well defined. Now they have a stake, and they’re owners.
i think landlords live to collect/tell tenant horror stories. i learned in the late ’80s not to rent to male underclassmen. But my worst tenants was the son of a tenant who moved out when he bought a house up north. the father’s only problem was that he smoked like a chimney. (I was lazy and didn’t want to clean up the nicotine.) so i figured I’d hope for the best when the son wanted the place with some roommates. Rent was always on time, but other problems caused me to move them out.
TV/movies make us think that we’ll encounter criminal geniuses. The reality is much more like in the morons in the movie Fargo. Happily, my worst tenants were a watered down version thereof. A few weeks into the post-eviction remodel it occurred to me that my tenants had been like the bunnies in Beatrix Potter stories.
This is mere human nature and folks have been griping about petty thievery since before the Stoics. By restricting your business dealings to the financial sphere you’re more likely to encounter Madoff-class criminality. Don’t let it crush your faith in humanity. The man said, “Trust, but verify,” and to do otherwise is to lead others into temptation.
I agree, Steve. Despite the horror stories we all have, I’ve found that most tenants are honest, hard-working people who simply want a decent place to live. So run your rentals like a business that has customers. And if you want to keep good, long-term tenants, be proactive. That means inspect regularly, respond quickly, and be creative.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
I should add that my petty-criminal-class tenants were the exception to the rule. I would have never rented to them had I not been lazy about fixing the house AND had a prior satisfactory relationship with the tenant’s father. I have been a landlord since 1983 and have found that careful screening avoids the drama of bad tenants. Humans are neither angels nor demons. Tenants lie on a spectrum in between. As you say, most tenants are drawn from the better side of the spectrum.
Sam I hate to hear landlord stories like this but as you eluded to in your post a fair amount of the blame comes back on you as the landlord being too lenient.
I’d suggest reading the book Boundaries by Dr. Henry Cloud
Thanks, I know it’s my fault for them not paying on time and following the lease. I also realize it’s not the homeowner’s fault for not paying their mortgage on time in 2008-2009. It’s the banks and the government who are to blame. But I wonder if it is a rape victim’s fault for being too flirty and nice? Or is the damn, evil, morally corrupt rapist’s fault? Where does the line get drawn to take ownership for one’s own actions?
Related: The Downside Of Financial Independence
In reference to the 2008 crisis, I have a different opinion. The homeowner’s are to blame as well as the banks and government. The homeowner knows that they have bought too much house and the payment is too high. The same thing with someone having a $700 car payment making $40-$50K a year (happens all the time around here).
Should the bank lend the homeowner that much money? NO WAY! But on the other side of the coin the homeowner has a responsibility for his/her finances as well. I see it as joint responsibility.
Back to your experience as a landlord, if you were to have enforced the late penalty for the first infraction of late rent do you think it would have happened a total of 8 times? Maybe but maybe not. By being lenient on the rules that were agreed and signed to by you and the tenants you have shown that you as the landlord will not hold them (the tenants) responsible for their actions and therefore they will make the same decision the next month. No consequences = no change or learning from either party
FYI Love the site Sam. Been reading for years.
It’s a balanced risk between enforcement and seeing further violations and damage to my property.
Tell me about your landlord and experience in when you had to make some judgment calls. I’m interested in knowing how you dealt with it.
Thanks!
Basically I see the lease as a contract. If there is a breach of the contract then there are consequences. Late on rent payment? Get it to me when you can but the fee will apply as is stated in the lease. Don’t pay after the 15th? Eviction proceedings will start. Just as is stated in the lease. Clear communication and follow up is the key.
Of course I’ll be somewhat lenient if there are circumstances such as sickness, job issues, etc only if the tenant has been on time with all other payments. However, the late rent fee still applies. The second time rent is late it becomes a pattern and there will be a tough conversation. Third time and we are starting to talk about the tenant moving elsewhere.
Is it a hard nose way to approach being a landlord? Maybe. However we signed a lease and agreed on the terms. It’s not my fault the tenant decided to break their agreement.
When talking to the tenant about being late, I refer to the lease. I’m not the bad guy. The party that broke their end of the lease is in the wrong. If I broke my end of the lease by not providing adequate living arrangements or not fixing a key issue with the house I would be in the wrong for breaking my end of the agreement.
I’ll refer back to my recommendation of Boundaries by Dr. Henry Cloud. An excellent book on this subject.
Sam,
I appreciate you sharing this hard learning experience. It is stories like this that keep me in stocks–this doesn’t seem like passive income at all! (to paraphrase a saying about combat: it’s months of boredom, punctuated by days of rage) Of course, management of companies can behave as badly as your tenants: miss their earnings projections, make stupid acquisitions, and in the extreme cook the books. But while you can also experience loss in stocks, cleanup is easy: sell, sell, sell! It doesn’t interrupt your life for days to get through the process. I wonder how liquid your crowdsourced real estate is? Is it the happy medium, or a halfway house for recovering landlords?
My favorite landlord story was that of my grandparents, a renter came to my grandpa and broke into tears asking him not to pay the rent for couple of months since he was getting married and couldn’t afford the rent!!!
My grandpa being the kind hearted guy that he was, forgave couple of months worth of rent ( it was good amount of money) and from what I hear even cried a bit himself too. My grandma was livid and she was like : If someone can not afford their rent they have no business getting married! Upon hearing the story my aunt felt like my grandma was being too harsh, and greedy and took my grandpa’s side. It became a running joke in our family for years, suffice to say after my grandpa’s death my father and his siblings just sold the property and moved on with their lives..
Sounds like Grandma had a good head on her shoulders.
Your tenant “horror” stories are cute!
I had a nurse stop paying rent for three months. Spent thousands evicting her. And she caused thousands more in damages.
Got $12k judgement against her, and then realized I needed to spend a few thousands more to collect.
On another note, can you write a post about choosing a vacation rental to buy? I love your thought process and like you I have no desire to increase my rental count. But I tick a vacation rental might be a good way to subsidize some personal recreation.
Sounds fun! I hope nothing bad ever happens to you like that again.
Per your request, I wrote this post for you: https://www.financialsamurai.com/a-vacation-property-buying-rule-to-consider/
NEVER return the security deposit until you get the keys back, regardless of whomever you’re renting to. One tenant left a MASSIVE mess in the apartment after moving out, including damaging the bathroom floor, and the entirety of the security deposit ended up being applied to cleaning and fixing the bathroom. So even though he wasn’t happy, I was ambivalent about it since nothing was an out-of-pocket cost for me. Most apartment complexes usually wait until every single aspect is reviewed before returning the deposit, and even then there’s usually some charge for shampooing carpets, repainting, etc. I don’t see why smaller landlords shouldn’t do the same.
It is frustrating to see a home you once lived in end up shabbily taken care of, however once you’ve rented the space to someone else, it becomes their prerogative to maintain the place as you see fit. It’s now more a place of business, or a source of income, than home your son/daughter learned to crawl/walk/ride – you have to ignore the emotional parts of that property.
So far the rent from my properties covers mortgage and property taxes, while I’ve had to spend $$ on making certain improvements (replacing roof, water heaters, etc). I currently bank on the equity in the properties, knowing fully well the market could crash and I could end up underwater – it’s just a risk I’m willing to accept for now. I’ve been relatively fortunate with wonderful tenants, and a lot of this I attribute to having an exemplary property manager. Her tenant-screening rivals Stanford’s admissions process, and she does take a significant cut of the rent, but the peace of mind that comes from her dealing with the tenants makes her worth every cent.
Excellent article, Sam. I would have expected your tenants to also have tried to use their security deposit as last months rent! Luckily they did not do that. I can’t tell you how many tenants through the years have “tried” and a few succeeded doing that in my rental property. I’m not sure about California law but landlords are entitled to withhold the security deposit I believe for 30 days after the final walk through.
In CA it’s 21 days.
Sam, have you ever considered AirBnB? (Not up to date on the legality of it in San Fran right now). They have a co-host option where you can hire someone to do the clean up work for you at 5-15% of the total reservation fee.
AirBnB is the opposite of simplicity. High volume turnover for potentially more money is definitely not worth it.
Not sure how California law works. In Massachusetts, landlords cannot apply a late penalty or interest until it is delinquent for more than 30 days. How ridiculous is that! the state law basically says landlords have no recourse if the tenant choose to pay at the end of the month instead of at the start of the month regardless of the lease agreement.
Stinking bureaucrats. Try paying your property taxes 30 days late. I’ll bet they tack on a late penalty for that.
Thanks for the behind the scene look into your rental experience. I’ve had a rental and two sets of renters the past few years. The first couple boyfriend and girlfriend used my attic to dry pot. I found some remnants after the walk through. I also had my gardener quit on me because the tenants would not clean up after their dog. My current tenants husband and wife with two small children are a dream. I often give them holiday gifts to keep them happy and hopefully not move anytime soon.
Over the years, I’ve found that to keep good tenants it’s necessary to inspect regularly, respond quickly, and be creative. Look at how to improve things while they’re still there. Reward early payments, offer extra services like direct deposit, or tenant insurance. Even a gift certificate to a local pizza joint can go a long way.
New paint or carpet or even a security system if they pay the monthly monitoring fees could be a good gesture when it comes time to renew a lease with an increase in rent.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord. How to build a portfolio of investment properties for an income that lasts a lifetime.
Rule #1 of Landlording: An empty property is better than a bad tenant.
Rule #2 of Landlording: If you are tempted to take a tenant you are not sure about because the place has been empty… see rule #1!
It’s all about screening potential tenants properly. Credit checks, prior landlord references (and not just their current landlord, who may lie to get rid of them), employment checks, criminal checks. You have to do the legwork.
My spouse has a system and has gotten good at developing a good instinct about people. We also keep rents slightly under market to have a better pool of tenants to choose from.
One eviction in 20 years, our system works for us. My tenants are increasing my equity by around $10-12K per month, with another $6K+ in positive cash flow per month. Our cap rates are all in the 8-9% range. Rental real estate can be a great investment. :)
I love your rules? I am absolutely loving having an empty house. I think I plan to rent my house to my business so I can have an office. Keep it in the family and keep things simple.
In my market, most landlords are in charge of landscaping etc and the ones who don’t are generally the slum-lord types. I’m a tenant, and I am not going to hurt anything, but I think green lawns are stupid. They are bad for the earth and take so much time that could be spent more productively. I will do the bare minimum to keep the city happy, because it is not my priority and won’t be. If the landlord cared about it, he would charge higher rent to cover it. I know he doesn’t care, because he has let his house decay (long before I moved in) and is just collecting rent. Why should I care more than he does about his asset? I’ll do no harm, but that’s all.
Great post. After moving out my pain in the @ss tenants of 5 years and selling the property (for a nice profit at least) I empathize with ALL of this. I took the nice guy routine for the first few months and got the same runaround you did on late payments, etc. I was lucky in that I got great advice from a former property manager when I told him my troubles: “You’ve got to be a pr*ck.” After that, I was polite with the tenants, but made it clear I wasn’t putting up with any game playing. “You’re short this month because your dog got sick? That’s sad. Pay me or else.” I always followed through on charging the $100 late fee after the 5 day grace period. You have to train tenants to make sure that that rent payment is the number one priority in their lives. If you give them an inch of breathing room it will fall on their list of priorities. If they don’t believe that you’ll follow through on late fees or eviction, they’ll exploit it.
And, yes, DO NOT GIVE THE SECURITY DEPOSIT BACK UNTIL THEY ARE GONE AND YOU HAVE THOROUGHLY ASSESSED THE PROPERTY. Different states have different rules in terms of timing. In Michigan its 30 days and I took all of that time while I turned the house over in the ensuing weeks. I charged them my time for removing all the junk they left behind and the dog s#it in the yard.
I learned a lot as a property manager. It’s definitely eye opening and requires a certain mentality.
Thanks for sharing Ed. I’ve found that I can’t manage more than two rental properties. I don’t have the patience for it. If this house was smaller, and could only accommodate 1 or 2 tenants, I’d feel better. But dealing with 5 or more guys is not my cup of tea.
From what I’m reading here….tenant laws are for a reason…even though poor people suck…is that you’re all bitching and whiing about problems but most of you are walking away with experience, profit, a building, land, or flip, or good credit or something….you’re all getting rich off the “bonds and work” of slaves. Enjoy the problems…do something for the money. I know. I want no problems as well. I’m sick of selfish people. Go pay 1.00 to fill your tires.
Gee, am I the only one looking at the trash pile your tenants left, and seeing dollar signs? I could have used that rug and music stand…
Sam, after the first time, you should have charged them a late fee. That would have reinforced that they needed to get serious about the business of paying. I did find your article interesting, though.
And yes, you need to sell this place! Take the profits and run.
FS San, Do you think AirBnB is a good way to get around bad tenants since they never become a tenant? The ABB contract makes them just a guest. I’ve heard ppl treat the place nicer when they are ABB renters.
Respectfully, J
Hey Sam,
I’m afraid I’ve had exactly the same experience as you (minus the dog sh*t!)
After thinking I was heading to a comfortable stress-free retirement income through rental property I’ve recently decided I can’t be bothered and am completely changing course to invest for dividends in equities.
It’s a real shame that nice tenants aren’t the norm, but the exception. Plus, my rental incomes actually fell over time, which sucks when you’re cleaning up after everyone else.
All a good reminder of why I decided some time ago to never rent to tenants again! Not that I needed a reminder, after doing it once I learned it’s not my cup of tea – I’m too nice, don’t appreciate the kind of people who always test boundaries & their luck, tenants are too often crappy, and I’m not keen on having to hire a property manager just to deal with lousy tenants. So instead I’ll be B&B’ing my in-law unit (well sort of an in-law unit, no kitchen) this next spring after doing some renovations. That way I can rent it when I want, have guests when I want, and have it empty for some peace & quiet when I want. =)
I used to be jealous and angry of the monopoly man and “owners” “landlords.” But, now, I see, they’re chained to the time and budget calendar like everyone else and few are “rich.” Some are slumlords and abusive but most have owners pride and try to fix stuff when it breaks and keep things up and modern. You get what you pay for for rent. One mistake is that you’re a pleasure power player like they are with the party house mentality. Pleasure people attract pleasure people. One trick my step-dad used when his young (druggy) hand to mouth tenants started falling behind is that he would show up and collect the rent by the week. I hope that helps. I wish there was a better way to collect sub-leases from everyone easier than the barking house leader..something of an app or website like the have now I think. You’re better off with and old lady and a more humble house but that’s illegal. I like my old style landlord just calling place of work to make sure income and job was there…no credit check…three payments and job call enough.
Cost of doing business. Expect the expected.