If you’ve read this blog for more than five seconds, you know I’m a big fan of real estate investing.
Because of my real estate investments, I have been able to retire early (though I was financially independent before I had my properties).
My 14 units provide the majority of the income that allows me to spend almost $100k annually without dipping into my assets.
And that doesn’t even count their appreciation.
So yes, I am a big fan of real estate investing.
But that doesn’t mean everything is sunshine, rainbows, and lollipops. In fact, there can be some pretty big bumps in the road that any real estate investor needs to be prepared for.
In particular, I have had a bad run (and by bad I mean expensive) the past few months and thought I’d share them with you.
High Real Estate Expenses
Here’s a run-down of the major real estate expenses I’ve faced over the past several months:
- New parking lot — The second property I purchased has two buildings, each with four units in them. In between them is a suitable-sized parking lot. The units are in Michigan, so we have not only regular wear and tear but the winter weather is brutal. The parking lot takes a beating and there were big ruts forming late last year. We knew we had to do something about it this spring, so we decided to patch a major part of it — to the tune of $10,345. Ugh.
- Terrible Tenant 1 — This person actually wasn’t that bad. He did create some problems and did minor damage to the unit (not to mention threw up in the hallway forcing a major clean-up) but in the end he went rather peacefully when my management company tossed him. All told he cost us $1,900 or so.
- Water heater — I knew I had an old water heater when I bought the place so it was only a matter of time before it gave up the ghost. It finally did and I was out $2,378. At least I got a few years out of it before it died.
- Terrible Tenant 2 — This person was a nightmare. She tore up the place and did not want to move despite not paying her rent. We had to start legal proceedings and finally got her out. Then we had to repair the place. All told the repairs and the legal fees set me back almost $5,000.
- Sump Pump — It just so happens Michigan had a ton of rain one day this spring and my sump pump at one of the properties failed. The damage caused by the water plus the cost of a new pump was nearly $900.
- Mice — Because it was such a cold winter in Michigan, all the mice decided they would rather live indoors. I don’t know if my management company nuked the place or what, but $600 later the mice were gone.
- Vacancies — Both the two tenants above as well as a couple others forced several months of vacancies for a handful of units. These are soft costs as I didn’t have to pay anything, but I also missed out on a few thousand dollars in rent.
- City inspection — Don’t you just love the government? I had two of my places inspected towards the end of last year and they came up with a whole host of repairs I needed to do to get them up to code. The most expensive: painting two entire buildings! I just painted those five years ago! And since when was fresh paint a requirement for safe housing? Between the two I was out $5,000.
- Fence — This one is pending and we won’t actually do it this year. The short story: the fence at one of my places is falling down. It was in bad shape when I bought the place so it’s not a surprise cost, but it’s a $6,000 cost hanging over my head.
Welcome to the world of real estate investing! 🙂
Thoughts on These Real Estate Expenses
Of course, all this goes with the territory of owning properties. I wanted to share them specifically because a lot of bloggers (including me) often talk about how great owning rental units are and never share the tough times. So I thought I’d share mine.
Here are a few other general thoughts on the costs:
- Yes, these are very high. Brutal even (cumulative). That said, I have had several years of relatively low expenses so averaged over those years, it’s not that bad.
- I had enough in rents to cover these expenses so I didn’t have to pay them out of pocket. This is an advantage of several properties — when one of them has extra costs, the rents from the others can pay for it.
- My property manager isn’t the greatest at providing a value product. My policy has always been to buy value — a good product at a good price. I question EVERY expense and she tells me she gets several bids, but I don’t believe it. She’s more of the passive type and I have to ask what I consider to be obvious cost-related questions. My last manager (who is now her boss) was GREAT, but he got promoted higher up. I did talk to him about the situation and he’s now working closely with her, so I think things will be better. It’s part of the cost for dealing with managers over 1,000 miles away — they know I have few options (if I was there, I would handle many of these issues myself with my own people).
- The property manager has had a bad run of finding tenants. When one stays for less than a year, I don’t have to pay a finder’s fee for the next one, but when one does $5k in damage I’m on the hook for it — even though the management company was the one who found the tenant. In addition we’ve had a run of tenants who have turned over recently which does cost me an extra fee. I need some good tenants who pay on time and want to live in my places for years. I talked to my manager’s boss about this as well and he’s working on a plan.
- Most of this just goes with the territory of owning real estate. Many of these expenses are to be expected and there are many more to come (roof, remodels, etc.) You have to expect them if you own real estate. Even so, they are never a welcome sight, especially when they hit all at once.
- These expenses illustrate why it’s a great idea to have extra income (in my case that’s a business) as well as remain flexible in your living expenses. Otherwise, an owner could be in deep do-do when big things like this hit.
- These expenses also illustrate why it’s a great idea to have margins of safety built in to a retirement plan. Otherwise, an owner could be in deep do-do when big things like this hit.
Overall, I do like real estate investing and plan to stick with it for some time. That said, costs like these need to be planned for and managed, just like you would with any business. There will be ups and downs through the years, so before anyone reading this thinks about investing, be sure you know what you are getting yourself into.
As long as you think and plan ahead for expenses like this, you should be fine when they happen (and they will).
Dave says
Thanks for sharing this objective information on being a landlord. My in-laws have owned a few rentals for many years. They have had the same issues that you shared along with bailing out drunken tenants from the county jail. Real estate can be very profitable if you have the temperament to deal with the crazy tenants and can manage the expenses.
FullTimeFinance says
Sorry to hear about the run of bad luck. I honestly don’t invest in real estate to avoid these things. They of course are financially manageable but I just don’t need the stress. Direct real estate management isn’t for everyone.
Jim Wang says
One of the reasons I haven’t gotten into investing in real estate directly has to do with dealing with bad tenants. All the other stuff I’m OK with, I just don’t like dealing with other people’s problems… which become your problem if they stop paying, destroy stuff, and are otherwise being bad human beings. I think I’m happy taking lower returns and investing in crowdfunded RE. 🙂
Debbie says
Real estate investing just has never appealed to me. Have had friends and family give it a try for a few years and then bail out. But it was two of my friends that had rental houses > 15 years stories that sealed the deal for me. Taking a year to evict a drug dealer due to his knowing the system, another tenant that called for everything including having a lightbulb changed on the side table in the Living room and then tenant who did not keep their parrot caged. That tenant and parrot trashed the house to a tune of $16,000. One of these couples sold all their houses, duplexes and triplexes and went into the storage unit business. Less hassle.
Elaine Ngai says
Thank you for posting this. I own a mixed commercial building in Flushing, NY and do not like managing it. My husband will not let me hire a property manager because the building is not really making much, especially after all the expenses. We had a tenant abandon the building and we had to break into our own place. Now I have a nice apartment tenant who pays but never on time. I just have to keep in mind that maybe my children will get to enjoy the benefits of this property.
I appreciate hearing other landlord problems to know it’s not just me. I wish I had that much profit to play with but I don’t. In fact, I’m wondering if we’d be richer without this property. Too late now, we’re in too much to bail at this point.
Kylven Ross says
I can relate to the struggles you’ve had recently. Not wishing ill luck on you or anything, but I sort of take comfort knowing that even seasoned real estate investors experience some of the trials and tribulations that I did. I’m trying to see the positives of owning again after losing over half a million (includes opportunity cost) on my first property. I think your story has me taking a few steps back from another real estate pursuit. It’s probably for the best. My wife would most likely club me to death if I ever brought it up.
Laura Tokgozoglu says
We had a bad experience with “tenants from hell” about 20 years ago and sold the place and stayed out of the RE investing game until a few years ago. We started listening to Bigger Pockets and learned a lot. We decided that we were cautious investors and would concentrate on A neighborhoods with high quality tenants. We bought a couple of newer condos and have a good property management team. So far things are going very well. I like Condos even though we pay HOA ($100.00 per month each) I like that I dont have to worry as much about fixing big ticket items like the roof. We have had to make a few small repairs but so far so good. Our plan is to keep buying these condos, one per year for 10 years and then retire and live off of the income and not have to touch our retirement savings.
Coopersmith says
Yep. Bloggers make it sound like owning real estate is the best way to make passive income. Well there are issues that need to be resolved and sometimes it is work, not as passive as they make it sound and will cost you money. You do make some good income and appreciation of assets. But there are hassles of which I would prefer not to have to deal with. I don’t have the personality to own rental properties. You need to find what you are comfortable investing in and live with your choices.
MrFIREby2023 says
I’m glad you shared this with us and despite your cash flow and reasons for owning a physical property, there are caveats. This is the main reason aim invested in real estate crowdfunding. I have a mgmt. team and since my investment is shared across an investor base, so are all the expenses. I consider my investments a co-op.
funinthecorridor says
Wow! Thank you for sharing the ups as well as the downs. Where do you hold your earnings from real estate? Do you keep them in a special account to access when repairs are needed?
stock market advisor says
I’m glad you shared this with us and despite your cash flow and reasons for owning a physical property, there are caveats. This is the main reason aim invested in real estate crowdfunding. I have a mgmt. team and since my investment is shared across an investor base, so are all the expenses. I consider my investments a co-op.
James says
Thank you for sharing. Really I am surprised to see all of the negative comments on here about investing in real estate. Of course there are ups and downs as there are with anything but if done correctly rental properties can allow you to achieve your dreams quicker than anything else I know. I speak from experience. I am 36 and quit my job 3 years ago to live off of my rental real estate. I admit sometimes I get wrapped up in trivial issues or upset over costs, anyone overseeing their investments would. At the end of each year though when I count my profits I do extremely well. You have to just assume there will be some level of aggrevation and unexpected expenses then sit back and don’t let the “noise” keep you from achieving your dreams. Good luck to everyone I really enjoy reading about others who are likeminded.
Dennis says
I retired 18 months ago and my retirement income is from rentals, both single family and multifamily. It is important to build a replacement reserve to handle the expected costs for real estate for as we all know property requires maintenance. It helps to have multiple properties to smooth out the bumps that invariably occur. I do use leverage, otherwise would have far fewer properties and get better returns due to the prudent use of loans. I also like knowing I’m getting tax free equity gain every month form the tenants paying down the loans. Regarding REITS the income is taxed as regular income and has no depreciation so doesn’t have the large tax advantages of directly owning real estate. I use property management companies because I knew I didn’t want to deal with tenants and being DIY limits your scale and locations. Going into real estate is the best decision I made.
ThomH says
I have to agree with Dennis. We are nearly two years into early retirement and living entirely off the income from our rentals properties, which allows us to continue to grow our tradional retirement assets for future use. We’ve owned rentals for more than ten years, and accrue for typical capital expenses each month. We also run our properties through a property management company, so it’s fairly “black-box” with the occasional management of the actual property management team. This arrangement enables us to enjoy retirement and free up our time for travel. The tax advantages, steady rental income, and capital appreciation all combine for a difficult to beat option for early retirement income. The typical rental property horrors you mention, can all be easily controlled with good upfront planning…solid capital expense accruals, good insurance, and a strong property management team. Rental properties are certainly not for everyone, but if you want to retire early with a comfortable income stream, it’s hard to beat. Cheers!
Packer16 says
Given the additional effort you put in versus more passive real estate investing, what do you estimate is your rate of return on the properties? Is it higher than the 8 to 10% you estimated a few years ago? Thanks.
Packer
ESI says
I haven’t gone back to calculate it.