Although I’m bullish about investing in rental properties long term, being a landlord can sometimes be a terrible experience. If you are unfortunate enough to land bad tenants, they may not only pay rent late, but they may also trash your place. Being a landlord tests my faith in humanity sometimes.
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!
Let me share a previous terrible landlord experience with you and why I ultimately sold the rental property. As a new father, I didn’t want to spend extra time dealing with bad tenants.
Being A Landlord Has Been A Struggle
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 an all-cash bid this week for $100,000 over asking for a house with ocean views. Unfortunately, I lost because there were 10 other offers and the house was purposefully underpriced.
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. However, 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.
Here are some reasons why being a landlord has been so painful.
The First Thoughtless Situation By My Tenants
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.
Constantly Late With Rent
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 By My Tenants
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.
Spending Money To Make The Yard Better
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. Being a landlord sucks.
The Third Thoughtless Situation By My Tenants
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.
Tenants Left So Much Trash Left Outside
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.
As A Landlord, 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.
Related: Rising Rents, Rising Fortunes For Landlords
Simplified Life Is Worth Living
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 as well.
Making money online can be much more lucrative and much more passive.
Lessons For Landlords To Avoid Bad Tenants
If you want to increase your chances of having a good landlord experience, do the following things.
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.
4) Spend more time screening your tenants than you think you need. Don’t fall in love with the first tenant you meet. It’s easier to do so because you’re very motivated to lock someone in and start earning rental income.
You need to interview at least 3-5 tenants in order to get a good idea of the applicant pool. If you start feeling a weird feeling or unsure, keep on looking. Once you lock in bad tenants, it can be a real nightmare.
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. Although I miss the property, I don’t miss dealing with tenants and maintenance issues.
Invest In Real Estate More Surgically
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 real estate crowdfunding.
After I sold my rental property for $2,742,000, I reinvested $550,000 of the proceeds into real estate crowdfunding to earn income 100% passively and simplify. I also invested $500,000 in bonds and $500,000 in stocks to diversify. I have to say, as a dad to two young children, earning income passively is the way to go.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most investors, investing in a diversified fund with Fundrise is one of the easiest ways to gain exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot of capital and more time, you can build your own select real estate portfolio with CrowdStreet.
My real estate investments account for roughly 50% of my current passive income of ~$300,000. I am so happy to be diversified and earning income 100% passively. Not having to deal with PITA has been a blessing!
Refinance Your Mortgage
Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free.
Personally, I refinanced a property to a 5/1 ARM at 2.25% with no fees. Then I purchased my latest home with a 7/1 ARM at 2.125% with no fees. It’s crazy how low rates have gotten. We can all live in nicer houses for the same amount of money as 10 years ago because of lower funding costs.
I am just a small time landlord. This is not (yet) an affiliate link. But bill.com can save you from a world of hurt in rent collection.
Through Bill.com, the tenant signs an agreement allowing the landlord to pull the rent from their account, rather than them sending the rent to you. You set up a recurring draw, and many of the problems in this post are completely avoided. You also have the right to do a draw of the late fee if the regular draw has insufficient funds.
Tenants receive reminder emails, but the rent just draws. On time. While you all sleep. On the 1st of the month usually, but I have no problem accommodating someone who asks nicely for the 5th, because I know it will reliably come in on that date. Suddenly, it is just as important to the tenant to have money in their account for the rent draw as it is to have money for their car loan, cable, Netflix etc.
Caveat: You can only use bill.com to draw rent if you hold the property in an LLC or a corporation. You cannot use it to draw if you are just a private individual who owns property directly.
Sounds to me like adults are living in a home the way they want. If you want people to live by your rules under your roof, have a kid. They are already paying exorbitant rent because of the location — SF is not cheap. Only allowing someone access to a necessity like housing if they follow your rules seems pretty monarchical to me.
Leaving trash on the street is not a big deal — let the city get mad at them.
Dog poop *in your own yard* is not a big deal. Buy the dog a colostomy bag if you’re that upset.
Poor college students being a week or even one month late on rent is not a big deal. If you can’t afford the mortgage on the home without tenants, then you can’t afford the home. BaSic EcONoMiCs
I also saw a lot of “an empty unit is better than a unit with bad tenants.” I would rather have someone throwing darts at the drywall in my house than be homeless if that was their only other option. An empty unit is a way to show off your selfishness — ESPECIALLY in a city like SF. Let people live, literally. They need shelter and you pussyfooting around and carefully avoiding the phrase “I hate poor people who don’t respect that I have more money than them” even though it is clear from your post is not providing that for them.
And just to be clear, I have rented for the past 8 years, have never had a complaint from a landlord, and have always received 100% of my security deposit back with the exception of a new construction apartment where I forgot to take move-in day pictures and was charged for the drywall not being painted as a result. I have never trashed a place, and at most places I have rented I have increased the property value because every landlord I have encountered — big city and small town — is a slumlord at heart.
Once again I will reiterate that holding housing hostage until someone agrees to follow your rules is draconian and disgusting.
Housing is a right and should be based on a renter’s rules, even though the landlord owns the property. It’s not fair that renters have to agree to a landlord’s rule to rent the landlords property. I deserve to own property as well and be able to throw house parties and treat the property the way I wish. Even if I agree to the lease terms, I believe I should bend the rules in my favor for my lifestyle.
In general, it is good to follow and respect the lease agreement. If you don’t like the lease agreement, then don’t sign the lease.
Good for you for increasing a landlord’s property. My experience was different. I would much rather buy property, earn rental income and potentially experience capital appreciation than rent. The return on rent is always negative 100%.
Owning rental properties is one of the best ways to generate passive income for financial freedom. However, sometimes, you run into difficult tenants. And that’s just the way things are.
I don’t think the OP is saying that owning property isn’t an excellent financial decision almost all of the time. It sound stop me like they were trying to tell you how much it sounds like you’re trying really hard not to directly say “I hate people who have less money than me” in your article.
You might’ve had tenants who were untimely with their rent payments and had lower lawn maintenance standards than yourself, but the way you talk about them makes it sound like you think of them as ruffians and ingrates who are taking advantage of YOUR property. The fact of the matter is, however, that unless you are charging rental fees that exclusively account for your cost of ownership so that you can cash in on your investment when you sell the house, you are the one taking advantage of your tenants labor. There is no justifiable reason to make “passive” income month to month by simply owning property.
I think it’s fine if you tenants were late paying 8 times or even more. You should give people a break, even if you have a mortgage and expenses to pay. So what if they trash your house, don’t keep up with maintenance, and disturb the neighbors. It’s not their property, it’s yours. It’s not fair that you saved money and took risks to buy the property while we renters don’t get to build equity. I deserve to be rich too.
Ultimately, landlords don’t really care who lives in their place as long as they abide by the lease which are usually sane people with decent hygiene that don’t act like rabid animals. You should see how some people choose to live. You want to live like a rat with garbage all over the floors? Fine. But when move out day comes and your security deposit gets kept because you lived like a pig and cleaning fees had to come out, don’t be surprised.
Owning property is not a “right” otherwise it would be readily available with nothing more than some paperwork just like voting. You need to work and save some money and then take a chance on buying property to rent out. Yes you can live your life but if you choose to do stupid things or act like a pig in someone elses property, don’t be surprised when you get hit with a fine. It’s not YOUR property. You are paying to live there temporarily.
Sam,
I feel for you. I do. As a renter I think it’s wrong – downright wrong what happend to you. After reading all this I’d side with you in any case against those other renters. But there are plenty – plenty of cases in the reverse. As a renter I’ve dealt with damage to my own belongings, illegal entries, changing of locks because “my guy must have gotten the wrong idea from me”, broken water heaters not fixed to the point of having to bring in housing authority, retaliatory increases and charges in rent, and so on.
Recently I moved into an apartment with a friend and her boyfriend. All of us had great credit. All of us work. Since this was happening after a divorce, I wanted to secure a good place once i found it. Me and my roommates decided to pay 2+ mos rent at a time to keep up with good faith between landlord and us tenants. DWP messed up what I had proof of was a change in address for services – i still paid the bill they messed up just to keep things smooth between us and the landlord (billed was incorrectly billed to landlord – a bill I had already paid to DWP, but that’s another story). We keep to ourselves as I am a fulltime student, and all three of us work full time. Contacting the landlord for basic repairs is like pulling teeth. Backed up toilets and tub, and now a gate that has my car trapped inside the property’s garage – this is the state of affairs now. I stressed keeping clear, open lines of communication between renters and landlord – never done. “Call this guy”, “oh no, I meant this guy”, “call me, I’ll send the maintenance guy”, maintenance guy not knowing what landlord is talking about – again, current state of affairs. Now landlord, who poses as a manager, states he’s annoyed with us. What did I miss? What did we three miss? Blows my mind. Be an *ssh*le renter, you’re an *ssh*le; be a good renter, still an *ssh*le.
If the common response is, ‘Well if you dont like it, leave’, then fine, sure. Does this fix the problem? No. Whether you’re a renter or landlord, does this type of response help lessen such occurrences? No, not at all.
I try to sympathetic to landlords as all property owners are taxed to death, but that’s not an excuse to sh*t on renters. This could be symptomatic of Los Angeles, but this seems to be more far reaching than that.
I honestly think that returning to the idea of promoting clear open communication is key, but how? Renters are already scared of landlords, and, sorry to say, but landlords wouldn’t cross the street to piss out a fire if it were a renter.
You’re thoughts?
I have been dogged out and cheated by every landlord I’ve rented from here in Missouri. They don’t care about people and they don’t care about the properties that they rent to people. I am on a mission to stop the evil.
I really hope all these landlords get cancer along with corona.
You should be on a mission to buy a house.
I would be interested in what defines “dogged out and cheated.”
Cost of doing business. Expect the expected.
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.
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. =)
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
It is nobody else’s prerogative but yours to maintain a property how YOU see fit.
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/
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.
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?
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.
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.
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.
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.
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.
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.
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.
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!
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.
You’re a rent racketeer exploiting working families for your own self advancement and you thing tenants are inhumane?
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
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.