The Accidental Slumlord Print
Thursday, 18th June 2009 (by J.D.)This article is about Entrepreneurship, House and Home, News
Several years ago — as I was clawing my way out of debt — I did a dumb thing and subscribed to Newsweek. I didn’t subscribe for just one year — I subscribed for four. As penance, I wrote an early GRS article about how having too many magazine subscriptions is un-frugal.
Recently, though, I’ve come to love my Newsweek subscription. The magazine underwent a radical re-design last month, and jettisoned all of the stupid pop culture stuff and bite-sized pablum. Suddenly it’s a magazine filled with long, thoughtful articles about Things That Matter.
This week’s issue, for example, contains a great story from Daniel McGinn called “The Accidental Slumlord”.
In 2005, at the height of the housing bubble, McGinn visited Pocatello, Idaho to write a story for Newsweek about how investors were buying rental homes in unlikely locations. A year later, McGinn decided to join the fray. In 2006, he spent $62,750 for a two-unit rental in Pocatello. He lives in Massachusetts. McGinn bought the property sight unseen.
McGinn’s current Newsweek story describes his recent visit to Pocatello to meet his tenants, and his realization that he isn’t a landlord — he’s a slumlord. The property he owns is a run-down mess. What’s brilliant about this article is how he’s able to not only portray the financial dilemmas he faces, but also the financial situations of his tenants.
Plus, McGinn isn’t a ruthless capitalist. He’s a real guy with a real heart who had hoped to purchase an investment property that might make him a little money. He’s conflicted. He’s you — or me. When one 66-year-old tenant complains about the lousy carpet in his home, McGinn doesn’t just ignore it (which would be the sensible thing to do from a purely monetary perspective). He buys new carpet.
Financially speaking, this $213 purchase is pure stupidity: it doesn’t add to the property value and will hurt this month’s cash flow. But it seems a small price to pay to improve the life of a rock-solid, longtime tenant — and, of course, to assuage my guilt over owning such a run-down property.
My discomfort grows stronger as I spend the morning with Bill, Sarah, Will and Rose [McGinn's tenants]. It’s easier being a landlord from 2,450 miles away, delegating to my property manager all the tough decisions about rent increases, late-payment penalties and potential evictions, and relating to the tenants only as faceless names on leases.
[...]
Taking a final look around, I can’t help but compare the dingy bathrooms to mine at home, with dual sinks in a granite counter and a deep whirlpool tub. Earlier I’d joked to a friend that my visit to Pocatello felt a bit like Robert Kennedy’s tour of impoverished Appalachia. But after watching Will and Rose’s son crawl across the foul carpet, I’m reminded instead of a JFK quote: life is unfair.
McGinn’s article is typical of the new Newsweek. It eschews the superficial approach that used to typify the magazine, and instead gives the reader something complex and meaty to chew on.
This is real personal finance writing.
[Newsweek: How I became an accidental slumlord]

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June 18th, 2009 at 11:51 am
I will NEVER (NEVER EVER EVER) buy a Newsweek again. Several years ago when I was intentionally lapsing my subscription (a subscription I had made directly with Newsweek, which did not have an auto-renewal clause), they automatically renewed it (”as a courtesy”) and then sent me to collections for not paying. And then it took multiple letters by certified mail to get them to drop the charges. I don’t care how good the writing is, I will NEVER buy that magazine again.
June 18th, 2009 at 12:12 pm
“McGinn bought the property sight unseen.”
…
“Plus, McGinn isn’t a ruthless capitalist. He’s a real guy with a real heart who had hoped to purchase an investment property that might make him a little money.”
–
He’s also a gambler and maybe a fool depending on how charitable (or not) you want to be. Why did he buy the property without visiting it first? If you’re not rolling in money and are buying residential property as an investment there aren’t too many valid excuses for not to taking a trip out to the actual site to do - at the very, very least - a drive-by or walk around (if not an actual inspection and walk through).
Edited to add: Maybe I’m being a bit harsh here - I’ve never bought any property at all so I can’t speak from experience. I’m just a bit flabbergasted that someone would take on the responsibility of not only a major real estate investment (even if it was at bargain prices) but also the role of a landlord without doing what I thought would be standard due diligence.
June 18th, 2009 at 12:19 pm
I’ve never wanted to be a landlord, it always seemed like a hassle and I would probably crumble at the first confrontation with a tenant.
Haven’t seen the “new” Newsweek, but I am sad that Time and Newsweek struggle these days — still like to grab those types of mags and do a flip through for good, longer articles. Online is good for headlines, but you lose something when you never read longer articles with more insight.
June 18th, 2009 at 12:20 pm
Sounds like another greedy investor given a pulpit to wax remorseful about his greed.
June 18th, 2009 at 12:29 pm
I’m not sure if I respect the guy for trying, or feel like he is an inconsiderate jerk. I can understand buying property site unseen to get a deal. The poor people living in the house.
Not sure it’s very ethical to turn over a business you’ve never run to someone else.
Kris
June 18th, 2009 at 12:31 pm
wow - pretty harsh guys. Yeah, McGinn made a bad decision, but at least he recognizes that there are real people at the end of his bad decisions and he is willing to make good on it.
There are a lot of people that could learn from that lesson.
June 18th, 2009 at 12:46 pm
@ Moxiequz:
The Author DID say: “I didn’t expect to get rich; my main motivation was to have a good story for the book.”
So, he wasn’t really just investing in a property for investing sakes’, but rather, he was doing an experiment for the sake of retelling an interesting story to be put into a book that will be sold. Buying a property sight unseen might make for a better story (which sells more books) than doing things the conventional way.
JD: Interesting article! Thanks for pointing it out. I really sympathize with the tenants. I’m way closer to the tenant’s financial predicament than I am to the author’s. Although, at least he tried to improve their lives, where other landlords didn’t bother.
June 18th, 2009 at 12:56 pm
I read that article after seeing your Tweet - very interesting reading.
June 18th, 2009 at 12:59 pm
Interesting read. I don’t feel as sympathetic towards the landlord though.
While he may not be a ruthless capitalist, he certainly isn’t a caring landlord either.
Buying a property sight unseen seems like a gamble. While he makes it seem like he didn’t do it for the money, I find that hard to believe. Regardless of if it was to make money off of rent, selling the property, or the book, he was out to make money.
And buying a $213 scrap of carpet doesn’t make you a good, caring landlord when you’ve never bothered to even visit your property in the three years you owned it.
He’s as bad as all the other slum-lords. Just because he seems to feel guilty about it doesn’t mean he’s got a heart.
June 18th, 2009 at 1:06 pm
It’s nice that some journalists are starting to act like grown-ups again - but there is still an awful lot of elitist, left-wing bias at Newsweek and the others.
This article could be seen as an example of this sort of limousine-liberal navel-gazing.
June 18th, 2009 at 1:09 pm
I’ll have to watch for the article. I’m very cautious, so I’ll probably be less sympathetic than I could be. Also, as landlords, we strive not to own anything we wouldn’t be willing to live in.
As for Newsweek — I didn’t like the new Newsweek at all at first. The new layout seems to be taken from their old “special advertising supplements”.
And as much as I enjoy Stephen Colbert, I thought the guest editing gig was a bit too precious on both sides.
I agree with you about the in-depth articles. After reading the issue highlighting Iran (4-5 articles + timeline of the history of Iran from ancient times), I have found myself following the Iranian elections with enormous interest and empathy. What timing!
I think Newsweek is trying to go after The Economist territory. After all, The Economist is still niche and respected enough to charge $6.99 at the newsstand.
June 18th, 2009 at 1:48 pm
I have a couple of issues with this post.
A) Anyone who buys rental property without seeing it and having it inspected is an idiot.
B) I don’t think slumlording is as terrible as it is often made out to be. I am a landlord of a fairly nice piece of property. I charge more rent because it is nice. I make a little bit of profit, but not a great deal. If you want a cheap place to live, you will have to live in a place that is not as nice. If you want to live very cheaply, you will have to live in a place that is a dump. That is how supply and demand work.
If you force landlords to maintain nice properties, you will price poorer people out of the community.
As for rent control “the only way faster to destroy a city is to bomb it, and the bombed city will be rebuilt sooner.”
I’ll grant there are scenarios of awful, abusive landlords. There are also awful, abusive tenants. I’m inclined to think the latter is more common.
June 18th, 2009 at 1:51 pm
I can’t stand the new Newsweek format. I loved it before and would read it cover to cover. Now I just find it ridiculous. (Plus, I can no longer tell where any of the articles end until I turn the page and it’s a different article. They’ve lost their formatting that signified the end.) I won’t be renewing.
June 18th, 2009 at 1:52 pm
I totally agree that the new Newsweek is a much better magazine, and it was a complete dissapointment for me!
Guilty secret: I bought Newsweek because I wanted “popcorn news.” I read the NYTs and listen to NPR every day to get my “real news,” and Newsweek was my escape! Oh well–it is good to see they’ve upped their standards… I guess
June 18th, 2009 at 2:21 pm
I agree buying property sight unseen is a bad idea. Although I have chosen cities and areas to buy property in based on real estate mathematics even before setting foot there.
I currently landlady two properties. Both properties on the wrong side of the tracks 300 miles apart. One property has a tenant that does all the repairs and improvements (apparently I needed a patio - who knew?) and the other property just had the tenant do a runner.
Slumlording isn’t easy. But I make sure my tenants’ homes are safe and serviceable. Some folks appreciate that and some don’t.
June 18th, 2009 at 2:39 pm
TosaJen (#11) wrote: I think Newsweek is trying to go after The Economist territory.
This is exactly what I think, too! And I think they’re doing a good job. No more one-paragraph blurbs on celebrity sightings. Thank goodness!
@Starving Artist (#14)
Most of my news is popcorn news. My daily news comes from the USA Today website. The new Newsweek gives me a chance to have some in-depth stuff.
Everyone else
Yes, agreed — McGinn made some poor choices, but I think he knows that. I think that like most people, he bought into the get-rick-quick mentality. Like anyone, he wants to improve his financial situation. But I also think he’s a lot more self-aware than most investors, and that’s a good thing…
June 18th, 2009 at 3:08 pm
This made me laugh. I am from Boise and anyone from the state of Idaho could have told him to stay out of Pocatello. Shoulda done his homework a bit better. I’d personally just stay out of Idaho, however thats my own opinion only because I have lived there all my life.
June 18th, 2009 at 3:35 pm
I’ve been a slumlord in Philly… I was ok while the tenants paid, but a downright hassle when they didn’t I eventually set a lawyer on their case and got them out… but the city of brotherly love also loves those who don’t satisfy their obligations, 6 months without rental income, not much fun at all… In hindsight, I should have hired a management company, but hindsight is always 20/20…
At any rate, some people will always live in squalor, it’s just the way the world works, I don’t think being a slumlord is a bad thing.
June 18th, 2009 at 4:24 pm
I am also an Accidental Slumlord. I bought a property in Atlanta, sight unseen, throug a person I had met through a trusted source. It was a bad deal from day 1, but, here I am, 18 monthsand $90,000 later (property + “improvements”). My tenant and her 2 children moved in on May 1st. That was when I learned that the contractor I had hired was a crook and had not done much of the work. I had to scramble for the first 2 weeks just to make the place livable. I am also installing an AC unit (for which I had already paid the previously mentioned contractor). From the first day my tenants moved in, I have felt a responsibility to them and for them. They are human beings who put a certain amount of trust in me. The fact that someone stole from me is not their fault and should not be made their problem. It will be 6-8 months of rent just to pay back the money I have put into the property since May 1, but I did not see any ethical alternative. Anyway, I have learned a lot of lessons the hard way in all this and don’t intend to repeat them.
June 18th, 2009 at 4:50 pm
Interesting article.
First of all nobody should buy property sight unseen and running a rental from the other side of the country is very difficult to do.
Otherwise as a landlord I’m not sure what the guy has done is that wrong and he’s no villian. It sounds as if the place might need some maintenance and repairs. But the one tenant seems to fix everything himself (poorly). The owner has a property manager who is supposed to tell the owner what needs done and give him good advice. To me it seems the property manager is the one who is neglecting the property. Why not throw a couple hundred bucks at new carpet? THe landlord was right to buy the new carpet. Hopefully he’ll continue to spend money on maintenance and repairs. There is absolutely nothing wrong with owning and renting property that is low cost as long as you don’t let it get run down.
$365 a month is cheap even for Pocatello standards. The older tenant has been there 15 years and thats long before the owner bought.
So is it a slum or low income housing? The difference is in a little bit of maintenance that the property manager should have been recommending. There doesn’t need to be any ‘exploitation’ as long as he the owner insists on and pays for adequate maintenance and repairs.
June 18th, 2009 at 5:29 pm
I don’t think there’s anything “accidental” about it. Refusing to acknowledge the natural consequences of your actions doesn’t make them a mistake.
It sounds like he wants to make money, but he doesn’t want to admit what that requires for that kind of property in this economy. I admire a person who is willing to forgo profit, and at least a person who is just out to maximize his income is honest. I get a lot more impatient with people who want to line their pockets without having to accept what that means in terms of their treatment of other people.
June 18th, 2009 at 6:02 pm
They might have gotten rid of the lifestyle columns and the pablum, but they didn’t get rid of the liberal editorial staff.
June 18th, 2009 at 6:15 pm
i had a rental property that just closed for sale last week i made a $22000.00 profit off of it but i learned a lesson too, if you rent to anyone you can`t trust anyone, even a buddy from work as in my experience. i rented it to a guy from work, well he could not pay all the rent at once so i let him pay every two weeks well that lasted about 3 months he moved with making the last months rent payment in full by a NSF check, now he has a warrant out for his arrest because in this state anything over $500.00 is a felony luckily i had a lease agreement and a copy of his drivers licence. i will buy more property but i may be not so eager to rent it.
June 18th, 2009 at 6:20 pm
@JimmyDaGeek (#22)
Jimmy, I edited your comment. I spent a long time thinking about how to handle the situation, and I elected to edit it, which is what I used to do with Bush-bashers. This isn’t the place for political name-calling and finger-pointing. There aren’t many rules at GRS, but one tacit guideline is to “live and let live” with politics and religion, unless the post explicitly invites debate. You may not like Obama, and that’s fine. Let’s just keep GRS free of the mudsling that characterizes major media sites.
June 18th, 2009 at 6:58 pm
I, for one, am happy to hear that there is at least one landlord out there who is beginning to realize that owning rental property comes with responsibilities. Not only to the tenants, as McGinn finally saw, but also to the greater neighborhood.
We live in a very upscale area, but we now have FOUR rental houses on our street of 15 homes. Not one of the landlords maintains their property as s/he should. At the very least, the lawns should be mowed and weeds controlled, the siding should have mold removed, and municipal regulations (no parking on the grass,etc) should be obeyed.
I’m a big Dave Ramsey fan, but his habit of encouraging people to own rental property is a real peeve of mine. Never have I heard him tell his listeners to make sure they are responsible landlords if they decide to get into rentals. All rental properties should, at minimum, be maintained as well as the surrounding non-rental properties.
June 18th, 2009 at 7:27 pm
As I think was mentioned in some form above, The Economist is the way to go. It’s certainly a good bit pricier, but that is some high quality material, and lots of it. I also love the fact that the ads really only appear in the front, back, and in between major geographical sections, as opposed to on every corner of every page with a little reporting dispersed around the page.
June 18th, 2009 at 11:01 pm
First off — J.D., thank you for keeping the mudslinging down. It is very distracting.
Secondly, I disagree with people who criticize the author of the article for buying a property sight-unseen. I think that is really the least of the problems here.
The real issue I see here is that the man rented to people he didn’t see as people, and despite spending a few days with them and changing carpet, he still doesn’t see them as people.
I grew up in Idaho, and in our small town rent was cheap, and I mean cheaaaapppppp. You can still buy a house there — a nice one — for less than $100K. A friend of mine got married at 18 and he and his wife rented a very nice 1-bedroom apartment in a tri-plex for $290/month. So $365/month really isn’t as cheap as it might seem to someone from the east coast who pays upward of $1200/mo for rent for a place the same size.
What I thought, when he went shopping for “remnants” to replace the carpeting, was, “You’re replacing carpet, but leaving the hole in the bathroom floor for a ‘drain’ when the toilet overflows?” I cannot imagine the health implications of having human waste flow into the crawlspace under the floor, but I think that the fact that he didn’t even address the issue shows that this guy is not about to treat these people as really human. That, not his “buy before you look” decision, is what makes him a slumlord. Also, it is clearly obvious that this is a “bottom line” choice for him, as every tiny purchase ($215 for carpeting? Really???) is counted as profit or loss.
I rent out a guesthouse on our property, and even though I only charge $350-450/month, I honor my obligations as a landlord and make darn sure that place is critter and mold free. I take care of the grounds and even give every new tenant a full packet of information on lead, as required by law, as well as a full rental agreement. If the toilet leaks — I fix it. If the roof leaks — I’m out in the pouring rain making sure the roof is okay and making sure my tenant isn’t going to be in danger.
This guy might call himself an “accidental” slumlord, but what I think he is is a lazy jerk who isn’t willing to put the work in to his properties and was just looking for a quick buck. As far as most Idahoans consider those from the East Coast, he fits the stereotype to the tee. You don’t own property like you own stock, no matter what the latest finance guru says. Property is land, and there is a responsibility to the land as well as the people who reside on it.
June 19th, 2009 at 5:02 am
I think people are reading too much into this, and being too hard on the property owner. Housing is a monthly expense, just like groceries and utilities. I don’t understand why you people would hold him to some lofty ethical standard, just because he happens to be selling these people housing. He’s their landlord, not their friend. It’s an investment, not a relationship. When you buy groceries, do you expect the cashier to care about you? When you call your cable company to add a new channel package, do you expect them to remember your name and ask about your kids?
Let’s be realistic here. He’s not a “greedy investor,” he’s just an investor. The greed is implied. Nobody makes investments hoping to lose money or even break even. They hope to make a profit. It goes with the territory, and there’s nothing wrong with that. He’s providing a service, and as long as he’s adhering to all the regulations, he’s entitled to try and make a profit. That doesn’t make him a bad person.
And finally, regarding those who critisize him for buying the property “sight-unseen.” How many of you invest in low-fee index funds, as is frequently recommended by GRS? And have you thoroughly studied and investigated every company in that index? No? Then aren’t you buying companies “sight-unseen?” Is that any better than what the author did?
Let’s keep some perspective.
June 19th, 2009 at 5:38 am
I agree with Kevin. The landlord is already losing money. Many of the commenters think he should lose even more money by fixing the place up. If someone came in and fixed the place up, he would have to charge more rent and these tenants (who can barely afford the $300 a month they’re paying, or not paying) would be out on the street. If you take emotion out of it, the landlord is actually providing a service to the tenants by providing a cheap place to live. Not too many people would want to be landlords at all if they were required to pay to do it (actually this guy already regrets it). And where would that leave the renters?
June 19th, 2009 at 5:39 am
The current issue of the Atlantic has an article on the model that The Economist uses and how the changes at Newsweek compare:
http://www.theatlantic.com/doc/200907/news-magazines
June 19th, 2009 at 7:00 am
Having been in the same spot as the Pocatello residents until somewhat recently, I can’t say that I empathize with McGinn at all.
I lived in a 60+ year “Ocean Cottage”, a nice California term for crazy, small house near the beach. Our landlords lived 12 hours a way and we never got to speak to them or see them once in the almost 7 years that we lived there. The house was grungy looking from the outside but falling apart on the inside. My boyfriend had signed the lease before I ever got to see it (I was moving out from the east coast) but the rent was such a good deal and the property manager was so nice we felt that we weren’t in a position to pass it up.
I was a little less than thrilled the first time I saw it, but seeing as how I was 22 and unemployed at the time, I thought I couldn’t be too picky. It was in a cool location and a nice neighborhood. In fact the neighborhood was so nice that our neighbors didn’t really speak to us for a few years and it wasn’t until later that we realized that had shunned us because the state of the property was bringing down the value of their property. Not our fault of course.
Finally, one of the neighbors was able to get a hold of the owners and sent them an official complaint about the state of the property. About 3 years ago they did a major overhaul to the exterior: paint, re-shingled the roof, put grass in the front yard. It did look a lot nicer but the cheap workers they hired didn’t do the most thorough work and the paint started to peel within a year.
Of course there were no improvements made on the interior where the neighbors couldn’t see. They had no idea that out kitchen cabinets were falling apart due to termites (the bottoms were literally being held together with tape), that the bathroom had a constant growth of black mold due to there being no ventilation, the 20 year old carpet was threadbare and stained from wear, there were no screens on some of the windows, the horizontal blinds were broken on most windows to the point that you had to stand on the couch and twist them open by hand, I could go on and on. The really crappy part was that they raised our rent every year. By the time we moved out, we were paying $1300/month for a 500 square foot house, which was an almost 40% increase from the time we moved in. It was still cheap for the area at that time and wouldn’t have been worth the cost of trying to save up for another deposit and first/last rent.
Finally, at the end of last year we were able to save enough money to move back to the east coast. The best thing I could say about our landlords was that they gave us back most of our deposit. I always wished that they would someday visit us in Santa Cruz. I had envisioned walking up to them and handing them a rotting piece of wood that had once been a kitchen cabinet.
I tell you this story mostly so everyone is aware that when you jump into something like rental/tenant property ownership it means that you have an extra responsibility to make sure that your property is maintained. No, it’s really not a legal standard, it’s more out of respect for your fellow humans that reside there. I think the story would have been more intersteding if they had written it from the point of view of the people that get “stuck” living in these properties who have owners that are completely careless or completely clueless.
Sorry for the tirade!
June 19th, 2009 at 7:02 am
JKC’s Rules for Real Estate Investing:
1) Buy local. The best investments are within a 30 minute drive of your home.
2) Know the market. Related to the above. Know property values, rental values, demographics, and economic trends. This is easier to learn if you are buying local.
3) Manage it yourself. This will help your bottom line. (You won’t have to pay a property manager.) It will also teach you valuable skills like how to negotiate with your tenants, and how to decide which improvements are necessary, and which improvements are superfluous.
4) Know the law. Learn what your state and local laws have to say about what the landlord is required to provide as far as property condition, safety features etc. Also learn what your rights and remedies are if the tenant doesn’t pay.
5) Make sure you are happy with the ROI going in. Always remember, appreciation is speculative. The most important number is the ratio of what the property costs (including ongoing expenses) versus what the monthly rent is. This is called the Capitalization Rate.
6) Be conservative. When figuring out Cap Rate, factor in possible vacancies and unforeseen expenses. Make sure you can still afford to carry the property if it goes empty for a couple months.
Real estate investing is a job. It can be a very part-time job if you own a small number of units, but it is still a job and will require some effort on your part. It can also be very lucrative if you do it right. If you are unwilling to give it the time it requires, you should not do it. Alternately, consider buying a REIT or a share in a local Limited Partnership where someone else is following the above rules (ie: doing all the work).
- JKC
June 19th, 2009 at 10:45 am
I agree with Kevin, the author is no greedy investor, as a landlord you provide housing to tenants at a market driven price.
Now I personally would never opt for the market segment he invested in, especially as a long distance investor. Too much can go wrong with this kind of property and the considering the risk of cost increases the ROI should have been much higher. And to be honest I would not want to be owner of property in such a state and could not find myself renting such a place out, but that doesn’t mean others shouldn’t or that I should reproach them for doing so.
As for buying sight unseen, have bought a few myself sight unseen, and quite successfully. BUT … always with the full knowledge of the area, the condition of the property (usually close to new), rental prospects, demographics, potential for capital appreciation and full life cycle ROI analysis. I’m an investor, not a speculator.
As for JKC rules, I couldn’t disagree more with rules 1 and 3! The best buys are where you can find the best combination of cash flow and capital appreciation and that is highly unlikely to be in your immediate area. Do your research and do it well.
Do not manage it yourself, if you source a quality property you are also very likely to be able to find a quality property manager and they are worth the cost as they take all the hassle away and you, as the investor, can concentrate on making the money by buying well. In most cases, the make the money in Real Estate investing when you buy, not when you sell. And a professional property manager will usually manage a problem situation much better as he sees them regularly, and he deals with the issue without emotion. This is business after all, not necessarily without heart, but it is business.
Just for info, I have invested in 10 properties in the state of Queensland in Australia, whilst living in the Philippines and now in Oman. Our properties are kept in excellent condition so they rent out well and to good tenants, they are managed by professional property managers and I use high quality accountants and lawyers for financial / legal support and advise. It’s not my job (yet), but I approach it as if I was running a business.
June 19th, 2009 at 11:58 am
A friend of mine described this happening to his church: they bought the house next door to their small church in the hopes of expanding their services and using it as office space and a guest house. But the church didn’t grow as they’d expected, and they found they didn’t really need the extra space, so they rented it out to people in the community.
It seemed like a good idea at the time, but after several years they realized that even with the best intentions they had become “slumlords” - they just didn’t have the skills to maintain the property or negotiate effectively with their tenants.
June 19th, 2009 at 1:12 pm
@ Erik (#33)
Thank you for your comment, and I appreciate your different point of view. Your interesting lifestyle as an expatriate certainly influences your investment decisions. I am glad that your investment program seems to be working for you.
In response to your comment regarding my rules number 1 and 3 (which obviously work together), I think the reason for your disagreement may be semantic. I think the “best” real estate investment is one that is profitable, low risk, and easy to manage.
Yes, It is possible to find higher returns far from home, but one sacrifices ease of management, and we agree that you will need to learn the new market – both factors increase risk. To me, it is not worth it.
Yes, management is “easier” if you pay someone else to do it, but doing so dramatically cuts down your bottom line. For most people starting out, I believe it is an important educational experience to manage your own property. You will build a valuable skill set and increase your local knowledge. If you choose to hire a manager later, that is fine, but if you do it for a few years yourself, you will know whether the manager is worth what you are paying them.
I am curious to know how many markets you compared before you decided to invest in Queensland. There are millions of real estate markets in the world, and often dozens of markets within a 30 minute drive of most people reading this blog. My hunch, (from skimming your website) is that you eventually want to settle in or near Queensland, and when you do, your investments will be local.
I am also curious to know what your NOI is after you have paid your property manager, accountant, lawyer and maintenance expenses to keep your properties in “excellent condition”. If it is high enough, I’ll be on the next flight to Queensland.
All the best,
JKC
June 19th, 2009 at 1:27 pm
AD comment #25: “Not one of the landlords maintains their property as s/he should. At the very least, the lawns should be mowed and weeds controlled, the siding should have mold removed, and municipal regulations (no parking on the grass,etc) should be obeyed.”
The landlords may not be responsible nor at fault for any of that.
The lease will often require the tenant to mow the lawn. At least around here for single family homes lawn maintenance is generally not included in rent. Obeying municipal regulations is absolutely the responsibility of the tenant. The landlord doesn’t valet park their tenants cars and is not responsible for enforcing parking laws. Removing mold is however probably the landlords responsibility, but that could also be the tenants job. Lawn upkeep and mold removal is generally not a matter of following the law so theres usually no real obligation to do it at all. Some cities have laws that require such things but if they do then the city has to enforce it and you can always complain to them. Or if there is a HOA then they can monitor and enforce the rules too.
Jim
June 19th, 2009 at 3:37 pm
It kinda boggles my mind how the guy can effectively be donating $1000 / year to charity in this venture (he’s down $2500 after 2.5 years) providing a place to live for these folks, yet so many will immediately decry him as being a heartless, greedy villain. So he ultimately plans to make some money here? Are we all greedy and heartless for expecting to get paid for working at our 9-5 jobs?
June 19th, 2009 at 9:44 pm
The upkeep of the house will really depend on existing laws and the rent agreement. Anyway, the author said he bought the property without seeing it first because it makes an interesting story for a book. Let this be a lesson to all of us. With all our advances in technology, still, nothing beats a first hand ocular visit.
June 20th, 2009 at 4:10 am
Success as a landlord is achievable. Pick a decent area to buy, preferably one with lots of owner occupied homes. Have a strong lease including ability to evict for lack of maintenance of the property, police involvement, APPEARANCE of drug trafficing, and domestic vilolence. Run a credit check and get policer report. The first time there’s a problem send written notice via certified mail, second time evict. Offer a nice, clean facility and rigorously screen tenants. Tattoos mean a potential tenant does not spend money wisely. Look in their car, an older car in immaculate conditon inside spells a good tenant. A car full of fast food wrappers, cans, trash, means scum who will treat your place badly. Never take a pet. Never take a dog because when the dog bites someone you are responsible FINANCIALLY and can lose everything you have earned. Tenants who work are the best as they are gone all day and at night they are too tired to cause trouble and on weekends they are busy shopping, doing laundry. Welfare people are resentful of a landlord who has worked to buy a place to rent, and welfare types hang around all day and night, wearing out the facility, over using the utilities, and setting a bad example for the working tenants. Get the maximum security deposit allowed in your town, add a cleaning fee which is refundable if the place is in the same immaculate conditon when you get it back, which it rarely is. Do not rent to anyone who does not have the security in full, in cash. Get first month’s rent in cash also. INSPECT UNIT FREQUENTLY AND WITHOUT PREVIOUS NOTICE THAT YOU WILL SHOW UP. Being a landlord is a business and you can make money if you don’t behave like a jerk. Rent is due on the first. Late after the 5th. Daily late free from 6th on is automatic. On the 10th day rent is late, a properly written lease allows you to file in court for possession WITHOUT FURTHER NOTICE. Follow these rules and you’ll have a decent experience as an owqner.
June 20th, 2009 at 6:09 am
#39 I am the designated “enforcer” in our little rental enterprise, and I agree with most of what you said.
However, some of the items you suggest, like the unannounced inspections or cleaning fees from the security deposit, are illegal in many areas, even if you add them to the lease.
In general, we need to be aware of landlord/tenant laws for the city and state before we decide to purchase a rental property. For example, in the City of Milwaukee, any purchased rental property is immediately inspected and must be brought to code. You would be amazed at how many people buy properties and are surprised by that detail.
June 20th, 2009 at 10:06 am
I own several rental properties and use a property management company. I STILL drive past my properties at least every other week, check on their status after bad weather, and inspect them and supervise the turn around of each unit when the tenant moves out. I do this to be informed and to make sure they stay at a certain level. Am I getting rich? NO. But I have property that is well maintained with majority of the tenants staying past their lease date. I couldn’t imagine living 3000 miles away and then visiting once in 3 years. As with any investment one has to be diligent. If I were the owner of that property I would take vacation and then personally oversee the maintance and upgrades to the unit. Buying 200 worth of carpet and leaving it won’t cut it. An investment in the property now before something major happens is worth it.
June 20th, 2009 at 12:27 pm
#39- Tattoos mean the person doesn’t spend money wisely? Wow. Thats like saying an applicant who is over 55 must automatically be on Social Security and therefore a bad tenant risk. I know many many people who have tattoos who are very successful and probably have way more money than you do, Way to stereotype. And what does an older car have to do with it? Thats just silly.
June 20th, 2009 at 3:17 pm
“Welfare people?” Sheesh! One day one of your hardworking tenants may well drop a dime on you and what sounds like your potentially illegal lease conditions, 39. (Just because you put something in a lease *doesn’t* mean it’s enforceable or even legal. State and city laws vary dramatically.)
June 20th, 2009 at 6:16 pm
This article sounds like my own rental real estate nightmare although I would never have been so stupid as to buy an out of state investment property to begin with.
Rule #1: Never buy a rental property more than a 30 minute drive from your residence unless you’re prepared to spend significant bucks on a property management company to monitor it for you. Then, be prepared to ride the property management company’s back to get the service you thought you were paying for to start with.
Rule #2: Never treat a real estate investment as a ‘passive’ investment. There’s no such thing when it comes to rental real estate. Prepare to roll up your sleeves and get dirty on every level.
June 20th, 2009 at 6:33 pm
@43 ~ If you do not own or have never owned a rental property then you have no basis to set anyone straight on how they legally run their investment. #39 raises some excellent points especially in regard to the sort of lowlifes that WILL cost you your investment property. It’s a sport to them. Walk a mile in the shoes first. It’s no joke to watch everything you’ve worked for circle the drain because a bunch of lowlifes would rather deal drugs and sex than get a legitimate job. Those types drive out the best stable tenants. Once that begins to happen, the odds of replacing good vacating tenants with equally good tenants quickly diminish.
June 20th, 2009 at 8:38 pm
@35 (JKC)
Hi John,
You’re probably right in that the disagreement is largely semantic, however I do believe that choosing the right investment is most important and if that means it out of state, so be it. Your comment about gaining experience as a property manager is a good one, certainly when you start out, but people have to bear in mind that with this approach it will be very difficult to build up a portfolio.
We chose to invest in Australia because that’s where we intend to live in the longer term and so we felt we need to have some real estate in the country or risk being priced out of the market in due course. Our original expectation was to settle in Western Australia as that is where the majority of work opportunities in Oil & Gas are. I spent 4-6 months reading about Australia’s economy, housing markets, demography etc. before deciding to invest in Queensland because it has a very strong, very diversified economy with continued population growth due to overseas and interstate immigration and there is a huge economic upside due to the commodities. Back in 2004 we went to Queensland to check out potential investments and have a holiday, that first investment property we bought then has grown into portfolio of 10. We’ve come back every year to QLD and since then we have decided that we’d much rather live on the east coast in QLD than in Western Australia. Just means I’ll need to find anotehr job, or start something for myself… Interestingly enough, when I’m in QLD, I don’t want to spend time looking at our existing properties as that’s what I pay our proprrty managers for (8%-9% of rental income), but unfortunately I have to so that I can keep our trip to Australia tax deductible
As for income, the properties I have bought are all aimed at capital growth and in initial years will be what is called negatively geared, i.e. you make a cashflow loss in the first few years, but that is offset by increases in value. In Australia all expenses relating to investment properties incl. mortgage interest are tax deductible and you have extensive depreciation allowances. If you have a (paper or real) loss you can carry it forward as a tax credit for future years and offset future income. As rents rise over time, the properties eventually start generating positive cashflow and you will have accumulated a sizeable equity gain. That increase in equity can be used as a deposit for the next purchase. Downside to this strategy is that you can only support so many properties before the negative cashflow east up your spare monthly cash and so after a while you need to balance the portfolio with more cashflow positive properties. Our portfolio is not eating up all the spare cash just yet, but I want to prevent that from happening and will now move into more cashflow positive properties. The trick will be to find good cashflow and good capital appreciation, but I know they exist and I will find them (even if it is lots of work).
Erik
PS Hoped you liked the site, I only been at it a few months and being the first site I ever built it’s been a steep learning curve. If you have any suggestions I would be gratefull to hear them!