by Adam Dawson
The story behind our rental properties is very long. In truth, I never intended to really address it on this blog, or at least not for a while. I view this blog as a record of our journey to getting out of debt, not necessarily a comprehensive record of our entire financial lives. But since Emily outed me in her last post :-), I’ll open up a bit about our rental properties.
I do see why some readers would say we haven’t shared enough detail on the blog. I view us as still in an introductory stage here. We are two months into a 4 year debt journey. So, I agree with those who commented on the last post that we’ll continue to open up more over time. But we are considering the comment thread on the last post and thinking about how we can share the important, relevant details in our posts. Bear with us! We aren’t professional bloggers and we’ve had a lot of change in our lives recently. Thanks to everyone for chiming in on the conversation.
We now own 2 rental properties, as well as the guest house at our primary residence. The two standalone properties are in Indianapolis and are managed by a property manager Emily and I separately rented from and had a great experience with. The story of how I became a landlord is one that smacks of naivete, stupidity, and more than one large mistake. So here’s the deal. I’ll share the history behind our properties, and in return, I ask you to suspend judgment for decisions I made 7 years ago. Believe me, I’ve already served my sentence for my mistakes.
Rental House #1
It was summer 2006. I was 24 years old and living the dream in downtown Indianapolis. I had a good job and a cool apartment in a historic neighborhood in Indy. My high school best friend had just moved back to Indiana from a construction management gig in Florida and was temporarily crashing our couch. He brought home a DVD with some slickhaired guy in a hotel conference room talking about how to flip properties. His method had something to do with searching the ads in the newspaper and calling the sellers at 7 am before other buyers could get there. Nevertheless, people all over the country were getting rich in real estate and my buddy and I agreed to flip a property together.
Before long, we found a house for sale in the same neighborhood for $85k. It was a 5br, 3 ba house built in 1903, and had all the historic charm you’d expect. We found a contractor who bid out a complete rehab for $60k. And, we got a mortgage broker who was willing to lend us the whole amount, including closing costs, for NO MONEY DOWN, stated income, and a nice toothy smile. So in June 2006, we pulled the trigger and bought the property.
The rehab took 3-4 months. Of course the contractor underbid the job, so he cut a lot of corners at the end. Nonetheless, we were pretty happy with the finished product and put it back on the market for $220k. We had our celebratory vacations all planned out. But we failed to get any offers on the property in the first couple weeks on the market. A couple price drops later and we were in serious trouble. We had missed the rising tide and were on our way to becoming victims of the housing crash.
I moved into the house to save money. I had about 3 pieces of furniture to put in this massive home. When December rolled around and I ended up with a $400 heating bill, I had to start taking on roommates to make ends meet. By the time I moved out in 2008, we had every bedroom full with Indy’s coolest young artists and hipsters, a compost pile out back, and the occasional awesome party in the great room downstairs. It was the classic case of the unintentional landlord.
On a side note, in spite of all my mistakes and stupidity, I had one GREAT stroke of luck with this house. Emily was one of the roommates who moved in, and our relationship was born on that front porch swing and in that huge kitchen.
I continued renting the property until all the roommates moved out in late 2010, after we’d moved to Texas. It’s hard to rent a property in the winter in the Midwest, so it sat vacant for a while. We burned through our savings and missed a payment or two. So I called in the reserves and hired the property manager whom I’d rented from in Indy. He listed it and got renters in April. And since I turned over the keys, he’s kept it successfully rented and maintained for 3 years now, and we’ve saved about 6 months of expenses in a separate account that we don’t touch.
Today, this property rents for $1350 and our typical expenses are about $1000. Not the best cash flow, but again, I never intended to keep this property. Given the history, I’m pretty happy with my $350/month in cash flow. As a side note, my missed payments did have a negative effect on my credit score and caused us a 1-year delay in qualifying for a mortgage on our current residence. But we are well caught up on the payments now and hopefully don’t have any need for credit anytime soon. We should be above water now, but not by much. I’d like to keep this rented for a few more years before we consider getting rid of the property. 
So that’s the story of the first rental property! Since this ended up being so long, I’ll save the story of the other property for my next post.
Adam, thanks for opening up about your rental properties. I know you don’t feel comfortable giving the whole world a rundown of your entire financial situation, but it makes you guys so much more relatable, especially when you own up to past mistakes. We’ve all made them. You won’t see me passing judgment here. We knowingly set ourselves up for a rental property situation when we decided the house wasn’t good enough and the location was bad, so we had a new house built and this was 2010. Long into a bad real estate market. For some stupid reason, we thought we could sell it anyway and, well, that didn’t happen. We’re stuck with it for a long time now after the extreme wear and tear/damages that our first tenants caused. We slapped a band-aid on it to get it rented again, but it will take at least $15,000 to make it sellable again. I don’t regret our new house. I love our new house. I regret not waiting it out on the market for as long as it took to sell the old one.
Cathy, thanks for sharing your story too! I think there are many stories about the housing crisis lurking in the readership here. Maybe more people will share theirs.
Thanks for sharing this information – I believe it couldn’t be more relevant: there are a lot of stories similar to yours (and Cathy C.’s) : people buying up property to flip and then BAM housing market crash. I am sure you had your reasons for not disclosing this earlier, but I think a lot of people will be able to find inspiration in your and Emily’s journey.
Thanks scarr. I think I wanted to avoid the perception that we have some great financial situation that we don’t really have. If somebody has 3 rental properties as we do, it could come across like we are much better off than we are. I wanted the focus of the blog to be our personal debt. The rental properties are very relevant but could come across the wrong way.
Thanks for sharing!
No one should judge you for a poor financial decision. We all make them. The housing crash hurt a lot of people. We put our house on the market in 2010 when the market was still somewhat decent here in PA. We foolishly bought another house in 2011 even though the first house wasn’t sold. Not even one offer. We didn’t want the responsibility of renting it and dealing with tenants, so we substantially reduced the price. We finally found a buyer in 2012, but we took a major loss on it. To make matters worse, the buyers needed money toward their closing costs. We took out a loan to cover their closing fees. I have no idea what we were thinking, other than we just wanted to get rid of it. All of our debt today is from that deal and it will take another 6-8 months for us to pay it all off. Like Cathy said, we regret not waiting it out on the market for as long as it took to sell the old house. Lesson learned!
Sharon, I wouldn’t regret your decision for a minute. You’ll have that debt paid off in no time and you can move on. That house is no longer your problem. We’ll be living with our bad decision for at least another 8 years! I wish we would’ve done exactly what you did.
Cathy, we never looked at the bright side of the situation. All of our money goes to that debt and it’s really depressing to pay for something we no longer have. It’s so easy to get lost in the debt pay off game that sometimes I think we lose perspective. Thanks for pointing out the positive. With any luck your rental property will become a profitable investment one day.
Adam, thanks sharing. Letting the world know about your (perceived or real) failings is never easy. That very well could have been me circa 2005-2006. If it hadn’t been for my Mom who warned me not to do it, I would have bought right before the crash. She worked in an industry where the first stirrings of the economy were felt early, and she had been correct in predicting every economic downturn that I can remember.
It sounds as if you’ve managed to make the best out of a bad situation, and are on the right track. Sometimes you never know what life is going to throw at you, and you just have to do your best to weather the storm.
Sara – total curiosity here….what’s your Mom do (or, what’s her industry)??
Thanks for sharing some more detail. Looking forward to more.
Thank you for sharing, and I echo some of the other comments.
What you were hiding made it confusing to readers, but ironically has made you more relate-able by sharing. (Though you were concerned about it being less relate-able). The real estate bust has created many a unintended landlord. 😉
Unfortunately, I don’t think the rentals will be completely isolated from your debt payoff journey. IT would be nice and easy if they were, but in the end are just another source of risk and expense that take away from your primary goals. I wish you luck and wisdom in getting them sold and moving on.
He hasn’t told us whether he plans to sell or hold this property, and we don’t know that selling it is his best option. At least with this property, he has an appropriate amount of money in reserve and a decent cash flow. That’s great! It will be interesting to see what he plans on doing with property #1 and I look forward to hearing the story on property #2!
Thanks for keeping it real! I totally get why you would need to take your time to unfold the whole financial picture, and why you wouldn’t necessarily feel it was relevant to spill it all here. 🙂 I like your style and getting to know you two and your decisions slowly.
Thank you for sharing. I think the reason people wanted this information is that by having a fuller picture of your overall finances we can give better advice.
And we all make mistakes. My big mistake when I was younger was I didn’t create an emergency fund. It wasn’t on my radar at first – I was narrowly focused on saving for retirement. If I had been able to put away money for an emergency fund there are several car repairs that wouldn’t have gone on the credit card… and stayed on the credit card for a few years :/ Which leads to problem number two – I carried credit card balances for several years and didn’t put in a disciplined plan to get rid of it until I was close to 30. My credit card debt is a thing of the past, but if I had paid it off sooner I could have had a down payment sooner and I may have bought a condo BEFORE the real estate boom…. If only if only, but oh well. It’s in the past and now I just have mortgage debt, and a nice emergency fund and a healthy 401(k). At least I was able to right ship!
And, I am certain that eventually you’ll be out from under your debt and able to begin saving for things rather than paying off things 🙂
Adam, thank you for sharing your story. You have a beautiful home.
My story is very similar to this one as well. Except it was just a condo (not a spacious home like yours) that I bought in 2005, at the height, to the tune of $235,000 (not counting $10k in repairs) with 20% money down not including closing costs. Of course, I am still hugely under water currently and still paying over $1,800 in mortgage and HOA fees each month. I can’t seem to let go and foreclose since I promised my parents that they will have a stable home to stay with me now that they are in retirement.
You handled the situation very well and I am glad that the “mistake” that was made is now even earning you passive income each month! $350 is a sizeable amount for passive income.
Being an accidental landlord? I think soooo many people can relate to you. We are renting out our first home, which is totally underwater, and taking a small loss every month. So be consoled that at least you’re making a little money!
Thanks for clearing that up! I agree with others that it does make you all more relate-able (not that you weren’t before, but it helps to give a little more insight into your decisions).
But how very cool that your “bad decision” helped you find each other. In the long run that could have been the best decision of your life!!!! 🙂 Keep up the good work and run this blog how ever you want to do it. I have enjoyed each of the bloggers and your different stories!!!
Just curious…did I miss it or did you mention if this is still co-owned with your buddy that you started the flip with?
We are still co owners. And amazingly still friends. I’d like to buy him out of it but I don’t have the required 25% equity to refinance and I’m not interested in pouring more cash in to get there.
I have become a landlord purely out of necessity due to the economic collapse in the housing market. It really sucks and I don’t blame you for not disclosing it sooner publicly.
Just out of curiosity, what preparations do you have in p,ace if you would happen to lose your job and the loan against your retirement account becomes due and payable immediately? I am assuming you took a loan rather than a disbursal with the applicable penalty and tax due. BTW,enjoy he blog.