This guest post from Jolyn is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. You can read more about Jolyn’s financial adventures at Budgets are the New Black.
My husband and I bought our first home in Las Vegas, Nevada, when he was stationed there with the Air Force. This was right after 9/11 when the economy was stagnant and the real-estate market uncertain. In the spirit of our new hometown, we took the gamble and plunged into home ownership, banking on the economy recovering before it was time for us to move again in a few years.
Fast-forward to 2004: The market was on fire! Houses were selling mere hours after being listed! Our house had appreciated by $120,000! It was also time for us to move again — and time for us to take the money and run, right? Wrong!
It seems hard to imagine now, but we really thought it would be a good idea to hold onto the house a little while longer. We were (literally) buying into the investment mentality that many have in the military who buy a house at every assignment with the intention of renting it out when it’s time to move, slowly accumulating wealth through appreciation. We weren’t really interested in keeping the house for the long haul, but we did count ourselves fortunate to have already gained so much equity.
Besides, we were moving overseas. What if we tried to sell the house and something fell through before we could close on it? My husband had an inflexible report date. We had small children, and I was pregnant. It wouldn’t be easy to deal with any problems selling a house while trying to settle into a new one in another country at the same time. We decided it would be easier to wait a couple of years, when we didn’t have so many things going on at the same time. Maybe the house would even be worth more by then.
Now fast-forward to today.
Are you laughing yet? Because we all know what happened! By the end of 2006, the real-estate market was going south. Las Vegas was — and still is — at the top of the list of cities hardest hit by the bust. Today, not only has our house lost all of the appreciation it gained in the short time we lived in it, it also wouldn’t sell for what we bought it for in 2001! Our ship came in, and we passed it by.
On Being Landlords
We’ve had five renters in the last six years. Las Vegas is a transient city! Most tenants have been fine. Some, well, they’ve been not so fine. At least one trashed the place. Three bailed out early, one in the middle of the night. Two had serious personal crises that required them to leave the area rather quickly. The latest was involved in a domestic dispute and actually felt bad about breaking her lease after only two months. She even did her best to clean the place up before turning in the key. In the past, we’ve had to clean the place up and replace the locks.
The house has stood empty this entire summer since that last tenant left. At one point some vandals broke in through a window and stole the washing machine. It looked like they tried to take the dryer, too, before they were interrupted. They haven’t been caught. Vandalism in Vegas is becoming a rampant business: so many empty, foreclosed homes, waiting for the banks to process them. It’s going to take a while for the market to bounce back — but the recovery will probably look more like a waddle.
The Cost
When we have tenants, the rent check does cover our ownership expenses, which are plentiful. In addition to the mortgage, we also pay:
- Two association fees
- One bi-annual assessment
- The sewer and trash
- The water bill (which, interestingly enough, runs way less in the desert than it has anywhere else we have lived)
It’s the weeks and months between tenants that cost us dearly: eighteen months total so far. The bills above are due even when the house is empty, and there are always fees involved to prepare the house for new renters: clean-up, extermination, painting, and so on. We also pay to keep the power on in our name when the house is vacant. It gets hot in Vegas! No one wants to rent a sauna.
We do have a property manager who takes an 8% cut from the rent check (when there’s a tenant). That’s an improvement over our first manager who took 10%, which is actually more typical. We changed managers because we were looking for a better business relationship, though, not because we thought we were paying too much. Land-lording long-distance is not for the faint of heart, and we started out at the bottom of a steep learning curve.
Woulda-Coulda-Shoulda
Now, I’d be lying if I told you that I wouldn’t like to bang my head on a brick wall now and then when I think of the financial gain that we let slip away. But it’s not all doom and gloom: I sincerely believe that these experiences happen to shape our character and our future choices, and that sometimes gains aren’t always monetary. What on earth do we not have? My family is strong and healthy, our income is secure, and our future is just as certain as the next person’s.
In fact, my husband just got a promotion (and a raise). And we just secured a new tenant. (Let’s hope he stays for his whole lease!) What on earth do we have to complain about? We may have missed our ship when it came in, but we’re still standing on the dock on our own two feet. And if worse comes to worse, we can always swim.
That’s not the case for everyone in Las Vegas, particularly for other members of the military. Many of them got caught buying houses during the hype and then receiving orders to move right after the market tanked. They turned around and found themselves upwards of $100,000 upside down in a house they had to leave, with no prospect of renting it out for enough to pay the bills. Fortunately, depending on when they purchased their home, there’s federal assistance for some of these owners. But often they’re required to short-sell, which still affects their credit, which will affect their housing options for the next place(s) they live.
Should We Just Walk Away?
We’ve been asked on occasion, “Have you ever thought about just walking away?” And to be honest, no, we haven’t. It’s not just a matter of not wanting to ruin our credit. We made the decision to buy the home, and we took out a mortgage for it with every intention of paying it back. Washing our hands of it because it’s painful — which it is — simply wouldn’t be the right thing to do.
Now, if we couldn’t make the mortgage payment, that’d be another thing. Obviously, if something happened that caused my husband to lose his income or to take a severe cut in pay (I don’t want to think about how that would happen since he’s in the military), keeping a roof over our own heads and food on our table would take precedence over making a mortgage payment on a house we don’t live in.
We’re in It for the Long Haul
Or until the market recovers enough for us to sell. Or until we pay off enough of the mortgage snowball-style to meet the current market value. Whichever comes first. For now, at least, we’ll continue to make payments on a house that is currently worth less than what we owe on it. And we will bide our time.
Since our time in Vegas, we’ve moved twice and are now back in the States. And we bought the home we live in here in Ohio! At the time, we were expecting to stay here (at least) four years. Alas, the military has other plans, and now we’re trying to sell this home in anticipation of moving to California. Where we have no plans to buy a house! We’re looking forward to living on base, assuming a house is available, or renting “on the economy” if one is not. Additional home ownership is on hold for the foreseeable future.
We Won’t Be Buying a House Again Anytime Soon
Not only has my husband’s career path changed, now making it less likely that we will settle down anytime soon, but our perspectives on debt and credit have completely turned a corner as well. We discovered Dave Ramsey a little over a year ago, and since then we have eradicated all of our consumer debt (almost $20,000) and are striving to never use credit again.
Except, possibly, for a house. Someday. But only for what little amount we aren’t able to pay for with cash.
Homeownership is a lovely thing. Owning rental property can be a wonderful investment! Just please don’t go about it like we did, with our eyes wide shut. Understand what you are getting yourself into, the financial risks that are involved, and prepare accordingly — preferably, with cash. No great opportunity is worth the burden of a financial responsibility you aren’t prepared to have. You can take my word on that.
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Me, personally, I would have taken that $120K and ran!
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I have been following your renter woes here and there and it sounds like such hard work. I almost kept my flat back in London to rent when I moved to Canada (now in Egypt) but after stories like this I am glad I did not.
However you seem to be dealing with it well and once paid up you will have a property and that is comforting when you have family. I hope you get a renter soon
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Most unwilling landlords miss out on some assistance from uncle Sam. Tax deductions. Your rental is a business, and should be treated as such on your tax return. I don’t want to give tax advice on the internet, so if you’re not currently deducting your losses, hire a tax guy. It’ll pay his fee and then some.
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Thank you so much for sharing this story. Even NOW I hear people talking about how renting out is the road to automatic wealth. It’s good to see a reality check.
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I agree rentals are not something you should just jump into. You need to do a lot of research, areas, expenses, what tenant are you targeting your rental towards, etc. It’s not passive income or guaranteed income but I like it because it gives you a certain amount of control over your investment unlike investing in stocks.
I’ve been a property manager in Syracuse for over 2 years and there are people who do get positive cash flow almost every month, people who maintain their properties and screen their tenants and bought properties in the right areas.
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Good post… basically how the author ended up being a landlord is identical to my story. The biggest difference being that during my unexpected moved, I didn’t have much equity at all… so rather than wipe it all away by giving 7% to a realtor, I thought “Well I’ll just hold onto it for 5 years, rent it out… and then sell.” After 2008 happened… now I’m faced with the prospect of not being able to sell for 5 more years, maybe more depending on the market.
Good post.
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The added strain of the possibility of losing a security clearance is also a real one for the military (and those who work for the military). Friends who “walked away” found they lost their livelihood as well. A poor credit score is a poor security risk.
Hope you rent out soon! Enjoy your military career. It was worth every crazy year for us!
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I really admire you for sticking with the house and not just running away and letting the bank foreclose. People who do that damage their neighbourhoods and communities because they were too short sighted to know what they were getting into.
It’s probably a little painful to think about the money you didn’t gain, but you have a great outlook so I’m sure you’ll do well.
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You have my sympathy, we are landlords by choice, we have made some good ones and some bad ones (buying that last property in 2004 was a bad one). Investment rental properties can be a great investment, do you know of any other investments where someone else pays for the investment?
We have a lot of people who ask us for advice regarding rental properties, this is generally what we tell them. (1) don’t be a long distance land lord, it is too hard to take care of a property, manage tenants, etc. from afar. (2) question whether you can handle the carrying costs if your investment property is empty, because you will have times when it is empty. (3) in a bad market, like now, it is better to lower your rent and collect something rather than nothing. We have friends who would rather have their former home stand empty then rent at a loss, they don’t get the idea that each month it is empty is a bigger loss. (4) work with your tenants (if you can) during a rough spot. Mr. Sam is the landlord in our family and he does a great job in working with our tenants. Mr. Sam would rather work with the tenant than have to turn the property, incure the costs and time in turning it, advertisement, background checks, etc.
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AC- Don’t I wish we had!
Forest- Lots of people do manage the rental business successfully; thanks for the thoughts.
Nicole- Buying and renting out as you move is quite a common theme in military circles; no one talks about the struggles! That’s why I wanted to write about this.
Melissa- We do have a property manager we like in the local area, but it is still difficult to deal with issues at a distance, b/c ultimately we are responsible for making decisions as the homeowners… If we weren’t working at this long-distance, I am sure climbing the learning curve wouldn’t have felt so painful.
Janette- GOOD POINT! My husband’s Air Force career requires a clearance, so that is a real concern for us, and one I didn’t even think about mentioning. I hate to think of others who didn’t think about it until it was too late…
It is rented out now! And we are enjoying our crazy life! Thanks for the inspiring words!
Roo- So, so true. Too many people got loans they had no business getting; too many people are walking away b/c it’s the “easy” thing to do.
Looking around us, we know of many people who not only missed their ship- they’re frantically trying to bail water from a tugboat that’s sinking fast. That helps keep our perspective.
Sam- Yes, even experienced property investors make mistakes, don’t they! That’s something people need to keep in mind when they consider this business: there’s no crystal ball. I am very grateful that my husband’s income can float this rental as a monthly expense when it’s empty.
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OH wow…this story sounds just like mine. Bought in 2005 during grad school. Finished a year early. House lost value and we couldn’t sell. Had one AWFUL tenant and so we hired a property management company. Have a good tenant in now…we’re hoping they’ll stay longer than a year.
We are losing money every month, but not too much. We have an ARM mortgage but can’t refinance because of house value.
So we suck it up. Foreclosure is NOT an option. We agreed to pay for that house and we will.
We’re hoping in another 5 years we’ll get to a point where we can sell and break even.
Good luck!!! BTW, I wish we could find a company for only 8%. We pay 15%, but it’s a small city in the Midwest and he’s the only guy in town.
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Twiggers- 15%! Wow, that stinks. SO SORRY you are losing money even with tenants. I didn’t even get around to mentioning that we also have an ARM. The rate is SO LOW, though; and can only go up so much each year even if rates go sky high. Barring a catastrophe in our personal lives, we will have the balance well under control before a rise in interest rates gets uncomfortable.
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Jon- We totally get the tax deductions; unfortunately (depending on how you look at it) we already have so many deductions with three kids, etc., that any more is just a wash.
Mike- Your situation is now similar to the one we’re facing with our home in Ohio: losing anything we put into this house by paying a realtor. We’re choosing to do that, though, and cutting our losses. Now if only a buyer would come along…
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“In the past, we’ve had to clean the place up and replace the locks.”
You should be having the property cleaned and the locks replaced between EVERY tenant. As a life-long renter, the only thing more frustrating than showing up on move-in day and finding a filthy apartment is coming home from work to find things missing because a cheap landlord assumed a previous tenant had returned all the keys and didn’t bother to change the locks.
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Great story and bravo for the way you have handled a difficult situation.
We recently bought our first home at a great price, the market being down and all. We actually live overseas, South Africa, but our son was relocating to the States so we thought it would be a good time for us to buy and provide him a good place to stay while getting established. The payments are low so we can handle it even with no tenant and it has worked out well for him.
We expect our son to eventually find a place of his own and we will then become landlords in the real since of the word. Not looking forward to that but we bought within our means (not a dream house). We expect to at least cover costs and maybe make a buck or two in the process. We’ll see.
It sounds like your Nevada buy was wisely purchased within your income so the down swing hurt but didn’t drowned you. Smart move.
All the best and thanks for sharing.
Oh yes, we too benefited from Dave Ramsey’s books!
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Re: too many deductions already…
The tax advantages you receive for having children (child tax credit etc.) don’t affect your situation on a Schedule E for rental income. I hope you’re deducting depreciation and other rental expenses against the rental income. If not, figure out how to do it and file amended returns!
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Ennis- We totally bought well within our means at the time, so there’s that. It’s totally saving us now. And yes, Dave Ramsey rocks.
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Jolyn, I have been where you are at. I went into landlording with a whole lot of cash and an equal amount of ignorance. I lost a huge amount of money and gained a crash course in human behavior. How I wish I had never bothered. I find it interesting, however, that so many people feel personally responsible for what was basically a loan free-for-all, with the banks directly responsible. The banks were making crazy loans to unqualified individuals. How did ‘they’ think it would end?? One doesn’t need a degree from MIT to figure it out. Many of us ‘regular Joes’ on the street saw it happening as it happened. The realtors and ‘loan officers’ had a field day, living high on the fatted pig, as property values escalated fueled by a seemingly never ending stream of ready easy EASY credit. Of course people bought into it! Who wouldn’t want a slice of the ‘american dream’?? Those that couldn’t afford and should NEVER have been given a mortgage couldn’t believe their luck as they settled into a $600K brand new home. Well, now we see the effects and I, for one, have resolved to pay off the one mortgage I now have and to never EVER go cap in hand to a ‘loan officer’ for a mortgage ever again. I already cut up my credit cards and sold the cars that were collateral. I drive cars with over 100K miles on the clock and I don’t use credit cards for anything. I paid off and closed every single credit account and personal loan. This is the effect that the ‘lending crisis’ and the billion dollar credit party had on me. Do I feel personally responsible for real estate that is overvalued and overextended? No I do not. I walked away from the real estate I owned (except for my primary residence) and before anyone decides to jump all over me, let me tell you that I lost a huge amount of money that I worked damn hard for. I got burned badly but learned a valuable lesson. I just could not continue to justify paying a hefty mortgage any longer ~ my tenants themselves were suffering from job loss and credit overextension. It was one heck of a bumpy ride. In the end, I had to save myself and my family before we ended up homeless on the streets. And yes, I filed BK. No regrets. I don’t give a hoot what my arbitrary ‘credit score’ is because I don’t need it and I WON’T need it. The banks can kiss the fattest part of my @#$%!!
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We bought a house in 2006 with the intention of “flipping.” Unfortunately, the house didn’t sell, and we entered in to the realm of landlords (as in your title reluctantly). We’ve had three tenants in that time, two who trashed the house. We’ve put literally thousands into the house to fix it up so it passes inspections. We have an interest only mortgage at 8% plus a second mortgage as a line of credit, that we cannot refinance. On top of that, we didn’t know that the house was in a flood zone and we pay federal flood insurance to the tune of $2,000 a year. Our current tenant is Section 8 (we got smart) and we get a check from the state like clockwork every month. The rent doesn’t even cover our two mortgages. We don’t think we will EVER be able to sell this house, so we’re trying to make the best of it with the hopes that if we can pay off the mortgage, perhaps the house will provide a stream of income in our retirement. Becoming a landlord is definitely not for the faint of heart. You really have to know what you’re doing, which we apparently did not.
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My son has recently thanked me for what I taught him about real estate.
1. Only buy what you can afford on one income. I know this is not politically correct. It is economically correct. It has saved me more than once. It gives you options in case of emergency.
If there is nothing that you can afford in that market, you rent.
2. Never carry 2 mortgages. Never buy the next house until the first house is sold.
3. Take the first offer you get. I have seen many people thinking they can hold out for a better offer that never comes. Sometimes you have to buy your freedom.
4. When moving to a new area, rent for awhile until you are acquainted with what you really want in a home there. Take your time.
5. If you want to become a landlord, do it in a planned and studied fashion, being well aware of the risks and rewards. You would not enter into any other business by accident.
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I applaud you for acknowledging that you committed to a mortgage when you bought the house and since you can maintain the costs of keeping the house, you are doing that. The country and the world would be in a better place if some who could have hung onto houses in this economy had done so.
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Karen-
That is all.
Gayle- Regarding #3, we have heard that from more than realtor friend over the years, even before we were homeowners. All of those are great tips that people should heed. We have always made decisions based on one income. With our lifestyle of moving around for my husband’s job, and three kids, nothing else even makes sense.
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Tom- I TOTALLY AGREE. I don’t think we are doing anything that a normal, decent person shouldn’t do. Unfortunately, the way our society views credit is all too often not normal and decent.
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Here are a couple of things to consider:
In the beginning of this post the intention of holding the house for some time and renting was stated. It’s important to understand that every market including real estate goes up and down and if you are buying and holding (which is a philosophy I agree wholeheartedly with), you have to be willing to weather the downturns.
18 months of vacancy in a 6 year period is a 25% vacancy rate. This is incredibly high for a residential property that has a property manager, even in Las Vegas. In contrast the average rental vacancy rate for LV has fluctuated between 10 and 16 percent over the past 2 years. Well managed properties should do better than that average. This says to me one of 3 things:
First, you may not have gotten a property manager right away.
Second, you may not have known what to expect from a property manager (as your email suggests) and they didn’t provide the service they should have.
Third, you may have held out for a too-high rent number instead of recouping some of your costs by renting lower until you could get a higher paying tenant in.
Being a landlord or property manager is definitely a business requiring knowledge and certain skill sets. I recommend rental property as an investment, but generally I do not recommend that people manage it themselves unless its really what they want to do and they’re willing to learn the intricacies of it.
I’m very glad to hear you are not walking away from your obligation Jolyn, and I think you should have higher expectations of your property manager (or lower ones of your rent) so that your vacancy rate lowers considerably.
I hope you find this information useful.
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It’s like reading our story (we’re Navy) except we bought in Va Beach in 2006 where the market is still tanking as we speak. With work (and the desire to be debt free), we put ourselves in a position to cover rent when we don’t have renter’s, but it does hurt every single time it happens. Actually about 1/2 of the military I know have houses or condos somewhere that we are reluctant landlords of. It’s frustrating, but we have been lucky so far with renters, but a high turnover. We also tithe and try to keep the faith that all things happen for a reason. I believe our reason was a wake-up call that just because my husband has what we to believe a secure position, didn’t mean we couldn’t learn to manage our money a little bit better. There’s always room for improvement. We’ve improved our financial position over two years and hopefully the market will too! Our next house we buy will be 20% down or more with a 15 year mortgage. Another lesson we learned.
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Home ownership should be the exception, not the norm, epecially for military families who may need to relocate on short notice. You bought another house in Ohio? What were you thinking?
Me, I’d walk away. The Vegas market isn’t going to recover for years, possibly decades. Rent and build up your savings. You can’t build savings when you’re pissing away your income on an empty house that you won’t abandon due to some misplaced notion. Being a small private landlord is for suckers. You think you’re building your own little empire but it’s going to drain you dry. I only need look at my current landlord as an example. He died this summer and his estate is mostly worthless. I’m staying another year but moving on after that. His executors have no money for needed improvements.
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Kelley- Your attitude really mirrors ours to a T. And yes, so many military in this situation, which puts further strain on already stressful moves. We are rather put off by home ownership ourselves until we know for certain we’re done moving for quite some time…
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Thanks for sharing your story with us! I’m aware of the risks with being a landlord. However, we usually tend to rush into the deals with our eyes shut when it comes to investing in properties. I don’t know if it has something to do with all the financial literature that we read about the subject or why we think that it’s always a good deal to own lots of apartments and houses. Thanks for the reminder! I should hereby make some kind of checklist on the risks connected to investments in properties…
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Hey, that is a good idea for a post…
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That’s why I will never be a landlord if I ever have my own house, I hate how all these PF blogs tell you to rent, be involved in real estate, but its not for everyone. It sounds more like a headache than anything else. Thanks for your honesty.
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I think not selling when you could have is something that a lot of people would have done. Regretting that decision is just 20/20 hindsight.
I’m glad you finally clued in that buying a house for a short-term station (ie less than 5 years) is a very risky move.
Mike
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I can totally relate to your tenant woes as we had a lot of them in the first couple years of the property investment business I managed. You did well in finding a local manager. I wrote a three part series that might be helpful http://inthetrenches2009.blogspot.com/2010/08/residential-real-estate-investing-part.html
The fact that the property is now underway is a separate issue and might even be a bigger challenge in the long run. If you can get a break even or positive cash flow you may be able to wait out the impact for 5 or so years but crunching the numbers will help you make the best decision. Las Vegas would probably be an excellent area to begin real estate investment but a tough one for those who bought in when prices were at their peak.
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Thanks for writing this, Jolyn. We bought our condo in 2005 while I was in grad school, thinking that once I had a real salary we’d be able to sell, use our equity as a down-payment and could finally afford a single-family home. I didn’t end up with a “real salary” until March of 2009, almost three years after our local peak. Our condo is now worth an estimated $60K less than what we paid, right around our current mortgage balance (we paid down a lump sum of principle after my dad’s life insurance came in earlier this year). Half of the condos that have sold in our zip code in the past year have been foreclosures/short sales. My husband’s office is moving in April; we can’t rent our place because we financed through our state’s First-Time Homeowner’s program, which requires that the property be our primary residence – in order to rent, we’d have to refinance (which isn’t an option without any equity).
We will be putting our condo on the market in the spring and becoming reluctant renters an hour away until we can save up enough cash for our next down payment. We can cover both the mortgage and rent indefinitely in our budget and still save some, but we do hope our place will sell quickly and at least cover our mortgage balance – we’ve resigned ourselves to the fact that we’ll likely be paying closing costs out of pocket, but I feel like it would be an extra insult if we had to write another check to our mortgage company at the closing table. Like Kelley, we’re *only* getting at a 15-year mortgage with 20% down next time.
My consolation right now is that we will be getting a second bathroom, walk-in closet, and den out of the apartment deal for almost the same price as our mortgage + monthly condo fee, and will be way closer to all our friends.
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We have a similar situation, as far a being reluctant landlords.
We purchased a new house last year. We had been living in our current home for >12 years and decided now was the time to take advantage of all the short sales and foreclosures and buy our ‘dream home’. With the housing market the way it was we were able to get a $1m house for 50% off.
We are fortunate enough to have the income to be able to qualify for the new home while carrying the mortgage on the 1st home (we would however have to suspend all 401k/IRA/extra savings to accommodate this). So knowing we would need months to move all the sh*t (I mean Stuff) from out of the old home and do some minor repairs we jumped in.
Well we took our time doing the move, the new home was a few miles away so we would move when we had days off, extra time, etc. Very casually. After about 4 months we had moved out. We put in a few grand to repaint and do minor repairs, that was another month. The flooring needed to be replaced but my Realtor suggested we just put in a carpet allowance for the new homeowner to choose their own carpet.
We had listed it for about 4 months with no real bites, we did get one offer that was about 30k less than asking so we didn’t even bother. I started looking for a property manager because I wanted to rent, but didn’t want to deal with the headache (or have the time).
We found a good manager who takes 8%, but who also priced the rental about 10% more than what I was ‘guessing’ we could rent it for, so it was a net gain.
We rent for about $400 less than the payment (we had a 15yr loan with <10 years left) but it was better than paying the full amount.
It was rented within a month and we have 3 months down. So far so good.
It would be nice for the current tenant to stay longer than 1 year, but when they want to move out, we might try to sell it again. But I do have delusions of having the home paid off completely and having the majority of the rental payment as extra income.
At the height of the bubble the home was supposedly worth $350, we were trying to sell for $229, got an offer for $200, will wait and see.
I also have to admit that I have had fleeting dreams of buying another home and with a 30 year mortgage be able to rent it for more than the payment then add it with the same property manager, since it has been so easy, but then I come back to reality.
The other part of me wishes we would have just stayed in the original home, with the lower gas/electric bills, having it closer to being paid off (we are now starting over on a 30 year mortgage, well 29 now). We would have had about a year or year and a half extra monies put into 401k/IRA/Saving that we put on hold. Decisions, decisions.
Last but not least I admire the author that they didn’t bail on the house and walk away. I see so much of that happening and the owners have no remorse or shame for doing it. What happened to personal responsibility?
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Nice post, very enjoyable story to read. As I read your story I could see what was coming. I am a Dave Ramsey fan, I don’t always agree with everything he says, but some things are true. He often tells military people not to buy a house because of the chance of being moved to another base. He says unless you are going to be there for 5 or more years, just rent or use on base housing. Plus he says long distance landlording is not good. How can you keep an eye on your property when you live in another state or country!! Good for you for sticking with the property rather than just leaving it for the bank. Hopefully you will be able to sell it for a profit in the near future. I’m sorry you had to learn this lesson the hard way. But good for you for warning others about your experience (although some people will not heed the warning). Good Luck to you and your family in the future. Thank you for serving our country!!!!!!
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Jolyn: Yes, 15%. It’s awful. However, he did get the deadbeat tenant out early (without court) and got a new tenant in with only 1 month down time. Our ARM isn’t such a good rate…currently around 7.5%. Nothing we can do about it though. Suck it up like a lot of Americans out there.
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I am constantly amazed by the greed over the last decade (and still today in some cases). It blows my mind that lots of people didn’t sell to get massive amounts of equity when they needed to sell, because they thought they would hold on to earn even MORE. And it drives me crazy that so many military people buy real estate when they know they’ll likely only be somewhere for 2-3 years. That’s not the appropriate length of time to plan to hold onto an investment, and you’re not entitled to a profit after such a short time.
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It is so refreshing to read about someone who’s upside-down on their house, but not even considering walking away. That is a great attitude to have, and I bet your family will be very successful for it in the long run. We, too, owe more than our house is worth. I’d love to move closer to work, but I’m too nervous to become a landlord. Walking away is not an option.
Good luck with your move to California!
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Jolyn,
Just wanted to let you know how much I admire your decision to not walk away. Like you, I’m now about $100,000 underwater on my mortgage (in Florida). Unlike you, I’ve been tempted to walk away. But in the end, I’ve decided that as long as I can pay the mortgage, I will continue to do so.
People who walk away from their obligations carry that scar for the rest of their lives.
Walking away may make you feel good in the short run, but you pay a heavy price — the loss of a huge chunk of your integrity forever.
Keep fighting! Better days are coming for us all.
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Jaime- Real estate investment is not for the faint of heart! But I do think we’re an extreme example of how difficult it can be. Then again, people need to prepare for the extreme…
Mike- “Clued in” is probably a very nice way of putting it.
Carol- We do break even when we have tenants, so there’s that. Vegas is pretty risky as an investment with so many short sales, foreclosures, and many, many out-of-town investors snatching up the good deals. If you can play with the big dogs, you may do okay. But for small fish like us it’s pretty daunting.
Courtney- I’ve never heard of a mortgage that wouldn’t let you someday decide not to live in the property? I mean, how would they know? And why would they care so long as the mortgage payments are made?
Ed- I’m glad you’re having a positive experience, despite the negative cash flow. Buy real estate or put cash in savings… Aw, that is the crux of the matter, isn’t it? Will the property one day gain enough appreciation to make up for or even out-grow the potential earnings in stocks/funds/mutual funds? Only time will tell…
MDD- You’re right, of course. Although we didn’t feel greedy at the time; we just felt really LUCKY. But I don’t think most military buy thinking it’s an investment: they just want to be homeowners. Also, many arrive and are told one thing about the length of their tour, only to have another thing actually happen. It’s a learning process.
Kristen- I appreciate your kind words. I had a response while I was reading your comment, but Chris right below you said most of it.
And Chris- Hang tight, dude. This, too, shall pass.
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I’m curious about the amount of people here who say they have had rental properties that have been trashed… multiple times. How common is this really? It seems like a disproportionate number of people who post here have had this experience.
Is it that if you’ve had a place trashed you’re more likely to post and have an opinion on this subject, or are these places being rented to lower income/marginal tenants?
My grandmother had multiple rental houses for many years (here in Australia), and she had some minor damage at times, some cleaning, but nothing ever trashed fully.
I’d love to understand a bit more about the types of rentals, the tenants and the damage actually done. Would probably give a better picture to others too. “Trashed” is a pretty strong, scary word to proposective landlords!
Needless to say, I do agree that you need to prepared for the fact that you may need to do some work on a place after a tenant moves out. Good advice.
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Marcella- Yes, it is entirely probable that people who have had negative experiences are more likely to be drawn to comment, since our experience has not been great. I can tell you personally as a renter of many, many homes myself, all across America, that whenever we move out the owner is SOOO THANKFUL for the condition we have left the property in: clean, with no needed repairs. In other words, we are decent, responsible renters. Not entirely common, I’m afraid.
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@32, though it is admirable to stay with a mortgage though you are $100K underwater on the home, though I usually agree that it is personal responsbility, it would have been nice to see some of those banks who got a bail out from their speculative investments to have passed on the gift to victims of this housing crisis such as yourself.
I personally would have blamed the lending institution, economy, whatever, my money is better put elsewhere; I don’t think integrity has a lot to do with that decision. However, if you STAY in the house while it is getting foreclosed and enjoy rent-free living, that is a serious integrity check.
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My disasters beat yours. Moved to Las Vegas in 2004 with life savings in cash, having sold the prior house in Silicon Valley for a decent gain.
1. Paid $220K all cash for new home. Worth $140K today.
2. Paid $184K AND $204k respectively, again all cash, for 2 rental townhouses. Rented at $825/mo and $1080/mo respectively. Worth $60K each today (although one sold for $34K cash at foreclosure auction on courthouse steps). About 1/3 of development is abandoned/foreclosed. Bad tenants, move outs, bounced checks, non payments, etc. I manage my own units. I will not live long enough to see them worth what I paid, even in 20 years I feel. The HOA is bankrupt, because few people pay dues, so water, trash and sewer may be cut off.
3. My neighborhood is full of foreclosures, 3 within sight of my front door. Next door house people paid $185K originally in 2003. Remortgaged for $300K. Currently worth $165K. Strategic default, they walked away a month ago, to let the bank pick up. They removed all the window coverings, blinds, ceiling fans, and landscaping. Yes, they dig up and transplant landscaping here, taking it to the new house they just bought cheap. They call it ‘buy & bail’. Buy a new one cheap, even if it means putting it in someone else’s name, then bail on the first one. And max out your debt before you do this. Then rinse and repeat, if you can find a way to do it (another straw buyer name to use to make the next purchase).
4. Neighbor house $180K original purchase, remortgaged for $450K, and abandoned. Resold by bank for $165K, losing $300K. The people who did this had done the same thing about 10 years before, buy, finance up, and bail. Then laid low renting for many years, and repeated in the 2003 run up.
5. I met a guy who makes $8/hour on W-2, but much more undeclared money as tips (strip club bouncer). He bought an $800K house, financing $700K. Immediately after closing, he got it appraised higher, borrowed another $100K, taking back his entire cost and having nothing at risk. House worth $300K today. He hasn’t made a payment in 18 months and still lives there. Banks so overwhelmed, they can’t process the foreclosures and often you can stay for years without paying. Eventually when they throw them out, they’ll rent, and in 7 years their credit will be back to neutral.
6. Met a guy who paid $170K for a rental condo, defaulted, and bank sold on courthouse steps for $12K, writing the rest off.
7. Friend lives in Bay Area, high pay job, many assets stocks, bonds, $1M home. No financial trouble. Bought condo as rental in Vegas in 2005, paying $220K with 10% down and 80/20 loans for the balance. Value today $60K. $825/mo NEG cash flow when rented. Now, tenant bailed. He decided to strategically default. He can afford to pay, could afford to find a new tenant etc. But he says there is no reason to, it makes no business sense. So until the bank gets around to taking it, selling, and writing off the loss, he lets his kid (living here) live there. He knows it could be 18 mos before he has to move, and he can live there free. Then, when the bank finally takes it, their agent will come by and say the kid needs to move, they have title, and will evict him. But they always make another offer: cash for keys. So the kid will get $1000 to $1500 cash, in exchange for saving the bank the hassle of the eviction, after staying 18 mos for free. Easy money, maybe put a deposit on a rental.
These are everyday stories in Vegas. Nothing special. By paying all cash for my rentals and home, I’ve lost a huge amount of my life’s savings and inheritance. I thought it was conservative to buy real estate for cash. I never dreamed real estate could drop 75% or much more in a few cases (vacant land). All my life’s savings was for naught. With what I see happening here, none of this will come back. And I have no mortgages to walk from. If I did, I would.
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Live and let learn.
I still think if you buy in a prime location in SF, NYC, wherever, owning property is an incredible investment and proposition.
I’m buying ALL I can right now, just not in places where you can build endlessly!
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Mak –
Your situation is so terrible! I’m so sorry. I’m sure it’s even worse that you have to watch so many people game the system while you lose so much money. It seems so twisted that someone who could actually afford to pay cash for a home suffers the most.
I don’t think we should conflate those who foreclose or do a short sale within the confines of the law with those Mak describes who live rent free for months on end or who pull equity only to foreclose a few years later. I am rather bothered by those who make those who foreclose when they lost 50% or more of their purchase price out to be immoral or lacking in integrity. Chris @39 is a particularly harsh version of this. The law allows them to do this, as does the contract they signed. Now if they trash the house or live in the house until evicted, that is another story. But I’ve defended people who walk away on this blog before and was attacked for it.
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@Twiggers … I used to love your blog, then it disappeared! Are you still blogging?
@Jolyn … I, too, am a reluctant landlord and feel your pain. My last tenant left the keys on the counter and bailed the week before my wedding! I do have a tenant now that has been working out well…just hope that he stays put and renews this month.
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Did personal responsability leave with the last generation? I work 40 hours a week at my job, and my wife and I own 19 retal units, 9 unit, 8 unit, and a 2 unit apartment buildings. I work on average 20 hours per week on them, and more when there is a vacancy, and usually 7 days a week. I am doing it for a better future for my children and for our retirement. There is a very simple and easy answer to owning and thriving with rental properties….It’s called hard work and commitment. For those who do not have it, stick with a 401-K. It is unfortunate that some people have a terrible outcome with rental property, but nobody forced them into it. It was a financial decision they made which might have been done with a little more research and understanding of just what it takes to make it work.
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I have thought about becoming a “reluctant landlord” too. We also bought in 2001 and have happily lived in it for almost ten years. But DH was laid off in 12-2008 and returned to work in 5-2010 about forty miles away. Right now the commute is long and life-sucking. We own our house outright and we have found a cheap rental in the new community, but I am both reluctant to leave the other house empty, we can’t seem to sell it, and really would rather not rent it out either. Anyway this whole situation so far has caused us zero finacial stress, but it has been a huge stressor regardless.
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Hi everyone,
I have previously posted about a possible solution to tenant issues.
I have a house I rent out and I rent it to the Department of Housing. They pay me market rent with no agents fees, all of the tenants are people on public housing. Part of the contract is that they pay for tenant damage. So if the tenant trashes the house I don’t pay anything except normal wear and tear.
A few years ago I had a tenant who punched a hole in the wall, they paid to have that fixed and they changed the locks and gave me a new set of house keys.
Another tenant decided to make part of the back fence into a gate so they could bring their boat in and out, they didn’t ask permission and we had some really strong winds that blew the fence down. The housing company paid to have the fence repaired and returned to it’s original structure.
I am happy with my decision to rent to public housing tenants…..
Sassy.
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