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.
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.”
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.
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.
In 2017, I ended up selling the rental property because it was too much of a PITA, especially when my son was born that year. I ended up re-investing $550,000 of the proceeds into real estate crowdfunding and I’m so glad I did! The invest is 100% passive and has returned about a 14% IRR since.
If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise and CrowdStreet, my two favorite real estate marketplaces today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look. I am so glad I do not own this rental property any more and am earning passive income now that I’m a dad!
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Updated for 2020 and beyond.