Why I am Leaving Real Estate Investing

Posted by admin on September 19, 2007 in Real Estate

Today continues our two part series on the pros and cons of real estate investing. Yesterday’s post dealt with the a pro real estate investor. Today is the con side from someone I will call Anti-Real Estate Guy. Both are friends of mine who have graciously agreed to blog on their positive and/or negative experiences in real estate. Without further delay, here’s a post from Anti-Real Estate Guy on who he is leaving real estate investing:

So often I hear people talking about buying properties with the intent of becoming landlords. It is great to see their excitement, optimistic plans and forecasts of fantastic passive income. As I sit here in the middle of renovating my own final rental property, getting it ready to sell, I can’t help but feel bad for most of them. They have yet to learn the biggest real estate lesson of all – being a landlord sucks.

And, as a small time landlord who once had 5 rental units with dreams of a nice passive income, I can tell you stories. Believe me, getting calls at midnight for toilets backing up, heating issues, floods and every other type of complaint you can (and can’t) imagine really wears thin after a while. So much for passive income. As a matter of fact, if your hope is for any kind of income you had better be in a popular area commanding top dollar rents.

The sad reality is that most people, when doing their cash flows and planning how they are going to build their real estate empire seem to forget the realities of owning property. For example, in a multi unit property who’s responsibility is shoveling the driveway in the winter, planting flowers in the spring, mowing the lawn, cleaning the eaves, repairing decks, keeping the pavement in good condition, painting the common areas, cleaning those same common areas? Who do the neighbours call to complain to? Quick answer – you.

And what about when tenants leave? No matter what kind of lease you sign, when the tenants move out you will most likely need to fill holes from paintings, shelves and hangers, repaint and clean the entire place. There’s nothing passive about any of this – its time consuming and costly. And when tenants leave, and the good ones usually will (the bad ones seem to stay forever), you’ll need to advertise, show the place, do credit checks and sign new leases. Expect at least a month of vacancy each time. Of course you can pay a property manager to do this for you but the cost seldom justifies it.

Hiring a property manger is certainly an alternative to all of this work but it reduces your profitability. My old property manager charged a small monthly fee per unit and anytime that they rented out the unit they charged a fee of one months rent, regardless of whether or not the tenant stayed or paid rent. In addition property managers have established relationships with plumbers, painters, electricians, handymen, etc and although that sounds like a good thing what it really means is that they are not shopping around for the best deals.

Let’s do the math: on a $1500 dollar apartment making an 8% ROI there is little profit if you hire a property manager. Really the rule of thumb I liked to use is 1% of the purchase value of the property being charged in rent each month (on a $300,000 property, you charge $3000/month in rent). At that rate, assuming you put down 25%, you should have enough cash flow, if you are lucky.

$300,000 – 25% down = $225000

Mortgage of around $ 1350 (give or take, depends on the market, interest rates etc.).

Rent of around $3000 (most likely need at least two units to get this)

Monthly gross profit of $1650

Monthly expenses like taxes, insurance, utilities, landscaping, etc – $ 750.00

Property Management Expenses: $ 120.00 per month per unit = $240

This eventually leaves you with a profit of approximately $400 – $500 per month. All it takes is one unit being empty for a couple of months added to the rental fee charged by the property manager and a fresh coat of paint and there is nothing left. This assumes that you can get 1% of the purchase value as rent so my numbers are actually best case scenario.

Just in case you haven’t been kicked around enough, there are the ‘professional tenants’. These guys know the system better than you ever will, they’ll pay the rent for a short time and then suddenly a check bounces. You find out a week or so later when your notice the reversal on bank statement, then it takes a couple of days to contact them, they apologize profusely and offer to give you another check. Being the kind hearted landlord that you are you agree. Then that check bounces, you arrange to get cash, they don’t show up at your scheduled time. You finally decide to evict, download the paperwork, fill it out and serve it to them. By now it is past the end of the month and they owe a second month. You go to the tribunal with them, talk to an arbitrator, a deal is struck giving them a couple of weeks to get caught up and then guess what… they miss that obligation as well. Back to the tribunal, get a date set and serve notice. Before the tribunal date they vacate (if you are lucky) and they don’t show up at the tribunal. The tribunal issues an
order in your favour but since the tenants have moved out and not left forwarding information you can’t collect. And there is not much in going to small claims court – if they had any money they would have paid you in the first place.

By the time you clean, repair, paint and find a new tenant it’s been 4 months since you’ve had any income from that unit. Hopefully the damage deposit you got when they signed the lease covered some of the costs. Depending on your margin this could wipe out your entire budgeted annual profit. Still want to be a landlord?

Obviously rental properties can be a good investment, otherwise there wouldn’t be so many units around. But as a small investor you really need to look at whether the potential hassle is worth the investment. Maybe there are better ways to invest your time and money.

2 Comments on Why I am Leaving Real Estate Investing

By telly on September 20, 2007 at 11:45 am

I’ve been witness to the “professional tenant” as well. When my sister confronted her tenant after his rent was over a month late he told her to serve him XXX papers (he knew them by name though I can’t remember what they’re called).

My husband and I are currently thinking of leaving the RE business as well. It’s definitely not all it’s cracked up to be.

One thing I would add though, in your calculations regarding cash flow, you are considering the entire mortgage payment as an expense although it really should only be the interest on the mortgage. The prinicipal (plus likely appreciation) should be retreived upon the sale of the property.

Great post detailing “the other side”!

By Landlord (poster) on September 20, 2007 at 5:46 pm

Hi Telly, you’re correct that I included the entire mortgage payment as an expense. For the purposes of cash flow it is. I was really focusing my post on those people who look to create a small monthly passive income to supplement their current income. That mortgage payment still needs to be paid regardless of the appreciation of the value of the property.