Landlording & Rental Properties

10 Unforgettable Lessons From My Loser Rental Property

Expertise: Real Estate Investing Basics, Personal Development, Business Management, Personal Finance
49 Articles Written
loser-rental

In this article, I’m going to introduce you to my loser rental property. I sold this lower-priced single family house early last year after more than seven years of frustration.

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What you will read here is the opposite of most articles. This property didn’t make me a millionaire. It didn’t put a lot of cash in my pocket. It wasn’t fun.

So, why share it? Because we learn the most from our losers. It’s like we need pain before the tough lessons really sink in (at least I do!).

You can pay money to learn at a college. But you must pay with blood and tears at the school of hard knocks. Scars and wisdom are your only diplomas from this university.

So, I’m going to share the important details of this investment property from beginning to end, and then I will share my 10 biggest lessons learned. I hope the lessons will sink in so that you can improve your own real estate investing. Some of what I learned was what not to do. But other lessons were things I did well.

Feel free to ask questions and make comments in the comments section at the bottom of the article. I’d love to hear from you.

Now, let’s move on to the story of my loser rental property!

Background on My Real Estate Business

Before I tell you about the property, I want to give you some background about myself and my investment business.

During my first three years in real estate, my business partner and I primarily flipped properties. You can find out more about my beginnings in real estate with “My Sprint to the Top of the Real Estate Mountain or BP Podcast 84: Getting Started With Creative Financing.

The year we bought this property (2007) was my fifth year as a full-time real estate investor. This was the busiest year of my real estate career. In one year, my business partner and I had 48 closings on acquisitions!

While most of these purchases either made us a lot of current income or built a lot of long-term equity, we also acquired some duds — like the one you’ll read about here.

Growing your business fast is dangerous. It’s like pushing a car to a top speed that has never been tested at that speed before. Systems can overheat, parts can fall off, and wrecks can happen.

In our ambition to grow and to do more deals, we lost sight of our investment fundamentals in several cases. Luckily, we survived this fast growth episode, and it actually inspired our current real estate philosophy that big, fast-growing businesses are not the ticket to financial freedom.  

Related: Breakdown of a $30k Rental Purchase: From Offer to Closing [With Pics & Numbers!]

Our current small and simple investment business is run virtually out of our home offices. We don’t care if we do the most deals or if we are the biggest investors in town. The goal is not to be better than the next person. The goal is to have investments that support what matters in life!  

For example, next year my family and I will be living in Ecuador in South America for a year to learn Spanish, to explore, and to have an adventure as a family. Those are what matter to me. Real estate investments are what make that possible. 

But before I could get to the good stuff, I had to get burned. So, let’s move on to the loser property!

How I Found My Loser Rental Property

The year of this acquisition, I was pouring time and money into marketing to buy properties. I shared 7 of these ways to find incredible deals in my second time as a BP Podcast guest.

My marketing campaigns that year included:

  • Several direct mail campaigns
  • Newspaper ads (when they still worked!)
  • Signs on my car
  • Radio ads
  • Birddog networks for vacant houses
  • Referral campaigns
  • Short sale campaigns
  • Signs
  • MLS properties

I had so many leads coming in that my mornings were just spent making afternoon appointments to visit a property and make an offer. This is a good thing, by the way!

Over half of the deals I bought that year were from referrals. My loser property was also one of those.

Meet the Mill House

MeettheMillHouse

A friend of mine referred me to a landlord who owned a 2 bedroom, 1 bath, 1,000 square foot “mill hill” house near my target area. Mill hills are clusters of houses in my area of South Carolina that were built by textile mills in the early 1900s to house their employees. Some mill hills have been rejuvenated, but many others are still run down, lower end rental neighborhoods. My loser property’s neighborhood fit into the “run down” category.

I talked to this landlord on the phone, and the excitement had run out on his adventures in landlording. He lived too far from the house, and he wanted out.  

He owned the property free and clear, and I quickly learned that he would be open to seller financing. Although I was not excited about the neighborhood because it did not show signs of improvement anytime soon, I thought I could make up for that negative with positive financing terms.

So, this burned out landlord and I worked out the following deal for my company to purchase the house:

$30,000 = Purchase Price

  • $1,000 = Down Payment
  • $29,000 = Seller Financing Mortgage
    • 4% interest
    • $180 per month principal & interest payments
    • ~ 231 months to fully amortize

We also had $950 in closing costs and less than $1,000 in clean-up preparations before renting. The seller was willing to pay for the replacement of the old central heat and air system.

Our plan at the time was not to keep this property forever as a rental. Instead, we hoped to sell the house for $60,000 or more to our tenant, either with a new bank loan or with seller financing from us. Helping tenants become owners was a fun and profitable strategy we’d used extensively. 

We also preferred to work with private lenders instead of banks on our acquisitions (there are at least 6 reasons for this). In this case, the burned out landlord was a good candidate to do more private lending for us. If we paid him on time and kept him happy, there was a good chance he would do more deals with us as a lender in the future. There was more value in the relationship than just this deal.

Related: 7 Life-Changing Lessons I Wish I Knew as a Real Estate Newbie

So, for both of those reasons, we moved ahead with the purchase.

Phase 1: Preparing a Renter to Become an Owner

Within two months of our purchase, we found a renter for $395/month. We had tried to screen for someone who was interested in saving extra money to eventually own the home.

As I look back at the original application for this tenant, I can see all sorts of red flags that we would not accept today. Their credit was below 600. They had a large dog. Their reason for moving was “the landlord won’t fix things.” These were all BAD signs.  

But they had $600 for a security/pet deposit and steady jobs. They were also eager to work with a mortgage broker to improve their credit. So, we moved them in.

Here were the actual financials of our income property during this rental phase:

Millhouse_phase1_financials

Those numbers are not very impressive, are they? Fifty dollars per month net income is not nearly enough for the trouble. And today, I would not get near an 8.6% cap rate for a lower-end rental property. Also, the 19.93% cash on cash return is deceiving because I had such a small down payment.

Plus, the tiny monthly income and down payment do not even take into account capital expense reserves for things like the wooden siding, the roof, the gravel driveway, the septic tank, the old electrical wiring, and the huge oak tree looming over the house. The ratios would look much worse if proper reserves were included.   

Intellectually, I might have known those were issues at the time, but I was caught up in our own recent success of selling similar imperfect houses. I felt confident that we could sell the property for $60,000 as is, and I probably assumed we would not own it by the time those problems arose (uh oh).  

This was NOT a solid, conservative, “worst case” investment philosophy that wealthy investors like Warren Buffett would follow.

In many ways, we got caught up with the times. We didn’t take into account that the time period of our recent success — 2005/2006 — was a bubble. Loans were easy, and buyers were less picky.

Soon, of course, that would all drastically change.

Phase 2: My Renter Becomes an Owner

Our tenants were not perfect. They fell behind several times, but they always caught back up. They also took care of the house reasonably well.

In 2010 after about three years, we found ourselves in the middle of a real estate downturn where bank credit was EXTREMELY tight. Our tenants still wanted to purchase the property, but even with improved scores, they could not get a loan.

Plan A — cashing out with a bank loan — was off the table. So, we began looking at alternative plans.

About this time, the $787 billion Federal Stimulus package was in the news. We learned that a first-time homebuyer could earn a tax credit of up to $8,000.

So, we decided to sell the property to our tenants, use the tax credit for most of their down payment, and finance the balance. We gave them 5.3% interest and 30-year owner financing. We were willing to wait until they got their tax credit to pay us the down payment. This was VERY generous. They could not have bought a house this way anywhere else.

But the deal was also good for us. The finances of the property after this sale looked like this:

Millhouse_phase2_financials

On the surface, we were doing much better than the prior three years as a rental. The $3,900 per year from our buyer was better than the $2,748 net operating income from a rental. And we received $6,500 for a down payment, which recouped all of our small initial investment of $2,950 and put some excess cash in the bank.

The promissory note with our original landlord-seller allowed us to do this type of arrangement, commonly called a wrap around mortgage (or all inclusive trust deed in other states). And because there were no short-term balloons and he was receiving his payments, there were no problems on his end.

Everything seemed to be OK for about two years — until it wasn’t.

We were about to learn that being a lender can get just as ugly (or worse) than being a landlord.

Phase #3: Back in the Rental Game

I have a love-hate relationship with lower end rentals. On the one hand, there are many good people who need a clean, safe, affordable place to live. I love that I can help them rent or own a house using my entrepreneurial skills.

But on the other hand, drama is the name of the game with these customers. Their financial margins in life are very thin, and any little or big hiccup can turn their life upside down.

In my case, the buyers had a separation/divorce. One of them tried to remain in the house, but she could not afford it. After several months of non-payment and chasing our money, she moved out and deeded the house back to us.

It could have been worse. We didn’t have to foreclose, thanks to my proactive efforts to meet with the buyers. But here we were again with the house. Not only was it a mess from hard living by the buyers, but some of the deferred capital expense items were becoming more obvious.

This was not a happy reunion!

On top of everything with the house, the neighborhood seemed to be getting worse. The teenage kids of a neighbor two houses down were definitely doing something illegal. And the junk from their house often spilled out onto the street. Maybe it was the dark cloud following me around every time I visited this property, but it was depressing!

But my business partner and I are fighters. We decide to attack the problem, and we prepared to spend some money and fix up the house to see if we could start over, find a renter, and turn them into a homeowner.

We spent about $8,500 doing repairs, such as:

  • Scraping, prepping, and painting the wood siding
  • Cutting some dangerous, dead limbs from the oak tree
  • Fixing moisture issues in the crawl space
  • Replacing the carpeting
  • Painting the interior
  • Replacing the hot water heater

Before the work was finished, we had some of our existing tenants at an apartment tell us they wanted to move into the house and to eventually buy it. They had paid us on time for several years, but they had a few issues to fix on their credit. So we rented it to this couple immediately after finishing our remodel!

Here were the new financials during the phase 3 rental:

Millhouse_phase3_financials

This happy new period lasted for about a year and a half. Then, like our first customers, life happened for our tenants. And our rental property went back into loser status again!

Related: How to Exit a Real Estate Deal Gone Bad

Phase #4: Sell and Get Out!

A domestic split once again led to our renters’ demise. We had to file an eviction because of non-payment, and we took the house back. I NEVER watch reality TV shows. Maybe it’s because I get enough drama in real life as a landlord!

After we took the property back this time, we were not enthusiastic about trying to rent again. The year was 2014, and the overall real estate market had recovered from the downturn. We decided to liquidate, cut our losses of money and time, and move on.

Once again, the house needed painting, cleaning, and repairs. The repairs included addressing electrical issues, rotten wood, and the driveway that had washed out. This cost us another approximately $5,000 out-of-pocket.

Then we hired our real estate agent to stage and sell the house.

We priced the house at $40,000. It looked as good as we could afford to make it.

Millhouse for sale - 1 Millhouse for sale - 2 Millhouse for sale - 3 Millhouse for sale - 4

And then we waited.

Nothing.

We dropped the price. And we waited again.

Still nothing!

We waited some more, and then dropped the price below $30,000.

We finally got some interest from potential buyers, and we decided to take an investor cash offer at $22,000!

It was time to lick our wounds, learn from our expensive seminar, and move on with life.

The 10 Lessons Learned From Our Loser Rental Property

In the end, this rental house odyssey took over $16,000 from our bank account!  

We had basically broken even operating the property as a rental and an owner financing contract. And our final loan balance to the seller was about the same as our sales price to our final buyer. But the repairs, capital improvements, and closing costs we spent each time the property turned over amounted to our total negative cash flow.

What can we do on a loser property but learn from it? We call it a VERY expensive seminar. And you’re getting it for free!

Here are the 10 most important lessons I’ve taken from the experience. The first seven lessons are negative. The final three are positive. And I’ve thrown in a bonus lesson for fun.

Negative Lessons

  1. Old rental properties and their deferred capital expenses WILL cost you — now or later.
  2. The negative cost of bad neighborhoods is hard to quantify. Buy at your own peril.
  3. Qualify, qualify, qualify before putting tenants into a house!
  4. The margins on low rent properties are difficult to justify when also calculating return on time.
  5. Two bedroom houses are more difficult to sell (in my market).
  6. Gravel driveways on a slope are a bad idea!
  7. Carrying a note for your buyer requires large cash reserves for worst case scenarios.

Positive Lessons

  1. Buying with seller financing and flexible terms give you multiple exit strategies.
  2. Treating your private lenders well, even if deals are bad, earns credibility and trust.
  3. Saving cash for a rainy day helps you during… a rainy day!

Bonus Lesson

  1. We can survive, learn, and get better from negative situations. You can, too!

I’m happy to say that this isn’t the only deal we’ve done in our real estate career. Many deals both before and after turned out much better. And we’re beginning to reap the fruits today from our good deals in the past.

But despite all of this, you still never forget your losers!

[Editor’s Note: We are republishing this article to help out our newer members.]

What did you learn from my loser rental property? What could I have done differently (other than not do it)? Have you had a bad deal similar to mine?

I’d love to hear from you in the comments section below!

Chad Carson is an entrepreneur, writer, and teacher who used real estate investing to reach financial independence before the age of 37. He wrote an Amazon bestselling book
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    Marcia Dabrowski Investor from Naperville, Illinois
    Replied over 3 years ago
    Hi Chad, Thanks for sharing a real life story! We’ve also learned a lot from a “bargain” investment. Last year our evicted tenant “gifted” us with trashing the house by scraping metal items including most of the duct work, floor grates, light fixtures, electric wires, plus 2 whole windows and their metal frames. She also helped herself to the AC unit, washer/dryer and stove…. I learned a new simple phrase this year from another investor… “Challenging people live in challenging areas”.
    Chad carson
    Replied over 3 years ago
    Wow, that I tough. I am amazed what some people think they can do. But I think you are right – you can avoid that to an extent by avoiding the locations. Thanks for sharing,
    Federico L. Investor from Orlando, Florida
    Replied over 3 years ago
    Great post Chad I enjoyed, glad to hear you moved on, thanks for the lessons
    Alden Simpson Wholesaler from Greenville, South Carolina
    Replied over 3 years ago
    Great story such a hard lesson learned.
    Kerri Thewlis from San Rafael, California
    Replied over 3 years ago
    I’m a new investor and have invested in the $30,000 market for 3 properties. Two of the properties have been going well. The third one was just evicted and totally trashed the place. I’m wondering what the wisest thing to do is? We were just about to buy a new property in a few months after saving, but now we might have to put thousands into a trashed house. Wondering if it would be better just to sell the house as is and start again, or hold on to the property and fix it up. We have a rental manager who is offering for handymen to go in and fix, still waiting to hear the estimated cost to clean up and fix the place. Bummer to start real estate investing on this foot, but as you said, good lessons to learn early on. Even thinking this cheaper market may not be for me, maybe save more and get a house in a bit nicer area where I can not only rent the house out but also hopefully have the house increase in value (unlike my present properties).
    Austin Hughes Rental Property Investor from Lubbock, TX
    Replied over 3 years ago
    It’s interesting…this describes a house I have very similarly. 😀
    Ed Perez from Cleveland, Ohio
    Replied over 3 years ago
    Chad, great article! Most articles I’ve read are just your “bragging” stories, showing other readers how smart they are than the rest because they accumulated multiple properties at the right price, cash flowing right, and how they made millions… So they claim. But your article was enlighting to read because you showed the ugly side of owning rental properties. Your story has more credibility than the ones I read, I think.
    Katherine Umstetter Investor from Greenville, South Carolina
    Replied over 3 years ago
    Chad, I enjoyed reading this article and am also in upstate SC. I am curious about the $40,000 price point when you guys tried to sell this house the last time. Who was the target buyer? I ask because in my limited experience, it seems difficult to find a bank to give a mortgage under $50,000 (so factoring in a necessary down payment, the price of the house often needs to be closer to $60,000 to be traditionally financed). I see mill houses languishing in this price range in Greenville and always wonder if they are too expensive for cash buyers yet not expensive enough for traditional buyers. Maybe it’s easier for owner occupants to get mortgages at lower amounts- I don’t know. Thoughts?
    Yanis P. from Steger, IL
    Replied over 3 years ago
    @CHAD CARSON Thank you for a great story:) I see that after repairs your : Property Tax go’s DOWN ( how did you do that?:) insurance go’s UP ( why?) maintenance go’s up ( underestimated?)
    Yanis P. from Steger, IL
    Replied over 3 years ago
    @CHAD CARSON Thank you for a great story:) I see that after repairs your : Property Tax go’s DOWN ( how did you do that?:) insurance go’s UP ( why?) maintenance go’s up ( underestimated?)
    Josh Stack Investor from Cramerton, NC
    Replied about 2 years ago
    Hey Chad, I’m glad I stumbled upon this post from you, it’s a super one giving a good real life example of what being a landlord is like. I notice you paid for property management in your calcs but was that just pro forma and you were actually managing yourself? Or did you still have all these headaches after having a property manager doing the front end tenant stuff for you? Do you think there is a sustainable strategy in building out a large portfolio (30+) units of quality mill houses if the investor has a property manager doing all the grunt work and they take a back seat portfolio management roll? For anyone else who stumbles across this article, I’ve started an Ultimate Mill House thread on the forums. If you have success stories in this asset class, please share your experience…. https://www.biggerpockets.com/forums/311/topics/584289-the-mill-house-thread-profiting-and-succeeding-w-mill-houses
    Johnny Nguyen Investor from Portland, OR
    Replied about 1 month ago
    what was the lot size of the property? could this be used at sec. 8 housing to subsidize renters?