I would like to think I was smart when I was 27 years-old. I had already served four years in the military, earned a degree from a state university and had just entered the real estate world as an executive assistant earning a whopping $20,000 / annually. Okay, I didn’t blow the doors off with my starting salary, but I was excited to be learning the real estate game.
At that time, I was near the end of a failing relationship. I lived in an apartment and thought moving to a new house might change the way we both felt. What I should have done was either call a counselor or end the relationship, but instead I bought a house.
It was a 2 bedroom / 1 bath home in Spokane’s West Central neighborhood. This neighborhood was in a marginal area as evidenced by its lower income demographic, higher crime rate and low property values. It’s still like that today and will likely be that way for years to come.
Even though I had a decent credit score, my finances were in horrible shape. I had no savings and I spent more than I made each month by using credit cards. I paid the minimum balances, but I was getting deeper into the debt hole. It was simple math although I couldn’t seem to do it at the time.
Due to my prior military service, I qualified for a VA loan to buy a little house with nothing down. Like I said, I had zero saved, so 'nothing down' was the only way I could buy it. After some additional fees were rolled into the deal, the total loan cost was roughly $63,000. That seems like a steal today, but back then it was an absolutely huge number.
I moved in with the hope of a better life. Unfortunately, the reality of my relationship set in and my finances continued to worsen as I racked up additional credit card charges.
Later, I took out a second mortgage on the house to consolidate credit card bills, a car loan and some student loans. An additional mortgage of $32,000 was added to my stress level.
None of my decisions made anything better and by the end of the year the relationship was over. I was now alone in that house, with two mortgages, and completely underwater.
More Money but the Same Problems
A couple years later, I received a promotion to a residential property manager and suddenly was making decent money. However, my finances were still a mess. Just because my income had improved didn’t mean my spending habits had changed. I was still buying stuff I didn’t need and using credit cards to get it.
Due to the lending practices at the time, I was approved to buy a new home in a nicer, more affluent neighborhood. Hey, I deserved it right?
I decided to keep my first house and use it as a rental. I knew owning real estate was a smart way to grow wealth. I saw my clients doing it. Besides, I oversaw large apartment complexes so how hard could managing one single-family home be?
The first tenant I put in the apartment was a sketchy couple with poor credit history. I knew I should have said no, but I was desperate due to my financial position. I couldn’t afford to go two months with two mortgage payments. I was playing a dangerous game. I let the sketchy couple move in and told myself I would keep a close eye on them.
They were in the house for only six months.
Every month was a struggle to get them to pay rent until the sixth month when they stopped paying rent entirely. I had to get an attorney involved to evict them. I freaked out at the legal costs. I couldn’t afford a vacancy, let alone the legal fees to boot them out.
After they were gone, I was upset because of what they did to the house. The carpet was trashed and the walls need to be repainted. I had nothing in savings. I had to pay for the repairs with a credit card to get the house re-rented. I knew I would never recover a single cent from that couple.
The next renters were a couple roommates who were nice guys. They always paid the rent even if it was a few days late. However, my finances continued to be poor due to my own choices. I didn’t save, didn’t invest and spent whatever I made.
Once when the toilet broke, I didn’t have the money to fix it. The renters said they would repair it and take it out of the rent. I agreed because they needed a toilet, of course. However, this left me with a problem that I would have to make up additional monies for the mortgage.
The rent I charged was $500 / month with the tenant paying the utilities. The monthly escrow payment was roughly $550 / month. That’s without the second mortgage which was another $300 / month.
Why did I charge a rent lower than the monthly mortgage payment? Frankly, I didn’t believe I could rent it out for more and I was afraid to go a month without it occupied. I oversaw large apartment communities and had onsite managers who leased out the apartments. They were more confident in selling a unit than I was. I had negotiated against myself before a renter had ever shown up at the door step.
This grind of losing $50 / month continued for seven years. Every month, I complained about it but did nothing. A couple years in to their tenancy, one of the roommates moved out and got married. The other one remained and continued to pay rent albeit always late to which I never sent a late fee notice.
I finally discovered Dave Ramsey’s Financial Peace and worked diligently to get my finances in order. I pulled myself out of the abyss and paid off that debt consolidation mortgage. It took a couple years of frugal living, but the rental house was no longer underwater.
I built a small savings account and did the right things. That was until I bought a new Ford Mustang, on credit, and put myself in a financial bind again. I quit following Dave Ramsey’s advice and was spending like a drunken sailor once more. I deserved it, I figured. I'm successful because I make a good salary.
The rental house continued to cost me an irritating $50/month. It chapped my hide that this investment, my only investment, had turned out to be such a dog. I always thought I should dump the stupid thing, but I never got around to it.
In the spring of 2006, I was given an opportunity with the new company I worked for. It would require relocating for one year. In preparing for that relocation, it gave me the motivation to get rid of the little rental house.
The renter had now been there for seven years and had indicated several times he would be interested in buying the house.
When he inquired how much, I told him, “I just want out of it,” and told him the remaining loan balance. He agreed to pay that amount and all closing costs. In the end, he bought the house for $60,482.
I lost money on the property but was happy to be free of it. The irritation that I felt when writing the monthly mortgage payment was finally gone.
Waking Up To the Lost Opportunity
That happiness lasted until a few years later when I finally woke up to how money and finances really worked. I had now plugged the hole in my financial boat. I’d sold the financed Mustang and bought a used car and was no longer taking on unnecessary debt. I met a friend in the commercial real estate game who taught me how to buy and manage my own real estate. Together, we started acquiring properties and talking frequently about money.
That’s when I reflected back to the little rental house and how lucky I was to get out from under it. It didn’t take long to realize I wasn’t fortunate. I was fool.
When I had changed my perspective about that rental house was when I understood the opportunity I had lost.
Don’t make it personal.
I carried that little rental home through a lot of tough times and resented the property. I had made it personal, like an albatross around my neck.
Investment real estate shouldn’t be personal. Some properties are winners and some are losers. It happens.
By making it personal, I became short-sighted. I whined and moaned about it. I’m embarrassed to think what people thought about me when I talked about that house.
When you make it personal, you lose the ability to look at a problem objectively. If you let your emotions overrun your decisions, you’ve already lost.
Look at your problem through the right lens.
I kept repeating to myself the loser’s mantra that I was losing $50 / month.
It’s embarrassing to admit, but my attitude sucked then.
Unfortunately, my crummy attitude prevented me from seeing the better picture which was that I wasn’t losing anything at all. Since the tenant’s rent was covering the majority of the escrow payment, I was actually buying a house for $50 / month. How great is that? I wouldn’t want to make a habit of it, but if one of my current properties has the scenario occur now, I will realize it for what it is and keep a positive attitude.
If I would have told myself every month that I was buying a house for $50, could I have weathered the storm better? Hell, yeah, I could have.
Look for everything you can do.
This is the one that is really embarrassing.
What could I have done?
Simple. I could have raised the rent.
Why didn’t I?
It was a combination of being a nice guy, being lazy and being afraid. I liked the renter and I wanted to be liked by him. I was also afraid of him moving out and sticking me with a vacancy.
Looking back, if I would have raised the rent by just $10 / month each year, then I would have raised the monthly rent by $60 in that seventh year (that’s $720 for a year which was more than a month’s rent!).
I raised rents every year at my client’s properties but never once did it on my own rental home. That is humiliating to admit.
A rental home is a business. It’s nice to be liked, but you and I are in this game to make a profit and grow wealth. I should have raised the rent. If my tenant complained, I could have laid out my expenses as justification. If he didn’t like it, he could either move out or we could figure out another solution such as a smaller increase with a new signed lease.
As my friend, Kevin says, “The answer is always ‘no’ unless you ask.”
My inaction on the little rental house created unneeded stress and a lost opportunity when neither had to have occurred. A change in perspective won’t fix everything, but it surely would have helped in this situation.
What about you?
Is there an investment that would have been more successful if you would have changed your perspective?