Why do landlords/investors fail so often in the rental business

[Roger J]

Real Estate, like ANY business is NOT easy, boys and girls.  I'll give you simple.  RE is about as simple a business as you can get.  But easy.  NO.  If it was easy, then everybody would be doing it and making loads of money.  That doesn't happen.  As fdjake said, those that have said that, hang on to your wallet.  Bad karma is likely coming for you.

People fail in business, including RE, because they don't plan for success.  They don't run a it like a business.  They don't prepare for the worst.  Even "successful" businesses have went under because they did not plan on the worst.  And the worst will come.  That's why this business is still "easy" to you.  You haven't seen the worst yet.

How will you fair if half your rentals sit vacant for 3-6 months?  Several require major repairs?  Heck all go vacant?  It happens.  After you survive a major ordeal or two, then come back and say "it's easy."

As to this whole, "why don't you 'leverage' your money back?" posts, I really don't understand you guys.  The whole point in acquiring properties for investment is to pay them off in order to reap the cashflow that comes from free and clear property.  And everytime that someone has the ability to actually buy property cash, the first posts we see is "do a cashout refi."  Don't get it.

Raj

[rookieNYC]

Roger J,
  Using the term *easy* should have been backed up with what I do for a living and have been doing *my entire life*...I own a manufacturing company for over 18 years that employs over 25 people,I also work fulltime managing risk for a hedge fund (you want to talk blood in the streets brother)..So as I truly appreciate the slaps of reality I highly doubt that many have been through the *tough times* I have been through or witnessed..I hope no one here has but at the same time what hurts us makes us stronger..So if my worst case scenarios are vacancies,my properties burning to the ground,my boilers/furnaces going in the middle of the night,evicitons,drug dealers living in the house I'm mentally ready for it..I have lost it all and made it all back and I'm not even 40..I expect the worst because nothing worthwhile happens quickly,it takes time..I know what the bottom looks like and I'm never going back nor will I ever expose myself to be in the slightest jeopardy to make that return trip..And some clapboard pieces of crap homes won't be the thing to take me down..I can promise you that..

I never thought I would get such a negative backlash for being *happy* at my decision to buy rental properties..Amazing,one can do endless research,cover all angles,buy all cash at low prices,refurbish affordably,purchase in decent areas,have what I feel is excellent property managers and still be scolded with reality checks..I don't mean this to Roger J solely but not every person that comes to these forums is some young college kid scraping together a few bucks to live a pipe dream of being Donald Trump or that clueless baffoon Kyosaki..Some people obsessively think things out over and over and over again..If I fail at owning these rental properties and have to walk away I will do just that..But I spent a long time lurking/reading/researching every possible scenario in this real estate game..Do I know it all, HELL NO....But I'm willing to learn and business has been my life since before I could drive..It's all I do,all I love...

I buy homes that cost between 40-70k and *ALL* make %2-%3 a month in rent roll vs buy price..I try to keep the taxes as low as possible,buy in the most *decent* areas,thoroughly inspecting (professionally) each property with my contractor and then gutting if necessary any potential problems to make a place that tenant wants to live and eventually probably destroy all over again..I work with what I feel are very sharp minded property managers who take zero BS and know just how to put stuff to the curb..They are tough guys who know how to handle everything..From my point of view I don't know what I'm missing that puts me so much at risk in so many eyes here...I practically have no mortgages except for a few that are so small I would zero them out instantly if need be...I ask what am I missing?...Please let me know...

[allagash]

As to this whole, "why don't you 'leverage' your money back?" posts, I really don't understand you guys.  The whole point in acquiring properties for investment is to pay them off in order to reap the cashflow that comes from free and clear property.  And everytime that someone has the ability to actually buy property cash, the first posts we see is "do a cashout refi."  Don't get it.

So if your average acquisition cost per SFH is $60,000....and you want to acquire....say....10.....Tie up $600,00 in cash?

My response to rookienyc was given after noting previous posts of his and that he manages money and it's risk on a daily basis....some mortgaging is all I suggested....not to the hilt.

Leverage is just a tool for controlling more.

I do understand your questioning the refi....(it can cripple you pretty quick if not done right).

-Mike



 

[allagash]

If I had six hours to chop down a tree, I'd spend the first four hours sharpening the ax.
                                                -Abraham Lincoln

I think you're off to an excellent start.

As fdjake pointed point....probably really helps that you crunch numbers on a daily basis.

I especially like that you factored in and secured property management from the get go.  With the other stuff you've got going on, I can see why you chose that route.

-Mike

[Roger J]

Rookie,

Sorry if it seems that you're getting "backlash" from your post.  Most of these replies aren't actually aimed at you.  In fact, it seems that you're doing better than most "professional" investors, so I don't believe that you are 'missing' anything. 

That said, you already had a background in business and, specifically running a business and understanding the potential pitfalls of that.  Most newbies don't have that background and they are who we're really speaking.  One of the things that you'll have to learn as a "seasoned" investor (which you are now, btw) is that your comments will be taken to heart by many newbies that come here.  So I say again, for the average new investor, RE investing is NOT easy.  It's not easy money, and it's not easy work and it's not a get rich quick idea.  It's a business and must be run like a business in order to be successful.

So if your average acquisition cost per SFH is $60,000....and you want to acquire....say....10.....Tie up $600,00 in cash?

If that money is available to you, why not?  Your monthly cashflow is stellar, you have little risk and you're where you want to be.  $600K sitting in a bank earning 5-10% or 18% (rookienyc's number)?  I'll take the 18%.

In order to have that money available for future acquisitions all you have to do is get a line of credit against the properties.  Still no loan UNLESS you NEED it.

Raj

[propertymanager]

Bad karma is likely coming for you.

Forget the Karma!  All that cosmic karma mumbo jumbo is simply non-sense.  People succeed or fail because they pay too much for their properties and don't know how to handle tenants - not because they say the word "easy".  RookieNYC has covered those bases as well as they can be covered for a new landlord and better than many landlords with experience.  The numbers on his latest deal (the REAL WORLD NUMBERS) have him making $300 per month for a single family house even if he had 100% financing (which he doesn't).  I wish I had a bunch of properties with numbers like that.

I think RookieNYC is a very intelligent guy who has a lot of real world business experience.  He is already ahead of 99.9% of all new investors and I'm quite confident that by continuing to buy similar properties, he will be very successful.

In my opinion, there is too much of this psychological mumbo jumbo out there.  Look at all the ridiculous books and courses that are nothing but motivational nonsense.  Think and grow rich - BS!    Try sitting on your butt and thinking about being rich for an entire year and see how much money falls from the sky.  Another book says to write your goals on your mirror so you see them every morning.  In fact, write your goals on every wall in your house and wait for the money to start rolling in.  More B.S.    The more I do the less I make.  BIG B.S.    I read one book that said you should repeat "I am successful" over and over and the cosmic karma would bring business to you!  SUPER B.S.        

What matters in this business is whether you understand the basics; have a plan for success; follow that plan; buy right; WORK HARD, and deal with tenants properly.  It looks to me like RookieNYC has done all that and will be very successful.

Mike

[rookieNYC]

Mike (propertymanager),
 Thank you very much for being there and answering my messages about my upcoming deals always..I constantly look to you for reassurance which you always give..When I look for properties and crunch numbers I do so with you in mind..REAL WORLD numbers is impaled always in my mind..Your help can't be measured and you are an asset to this forum...One day I hope to return the favor because I feel I owe you...

Roger J,
  I appreciate your input also and I will say in hindsight my usage of the word *easy* was irresponsible and you made me see that..Newbies it's not easy..It's just in comparison to some things I have been through business wise it seems less risky is what I should have said..My mistake and it won't happen again..

Allagash (Mike),
   I understood what you meant by using leverage and didn't take it the wrong way and your advice is always appreciated..

Newbies this forum is a wealth of information..Only advice I can give as a newbie RE investor myself is never be afraid to ask questions..Never assume you know it all and be humble..Because some day you will get your teeth kicked in in business..And it will hurt but it will be a great learning process that you will recover from..Never overextend yourself and never bite off more than you can chew..

[fdjake]

The ONLY reason you're getting these responses is because of the "EASY" remark.  To someone with your background it probably is easy.  BUT.................it sort of bothers me a bit to hear someone with less than 1 year of landlording experience under his belt proclaiming how easy something is.  Wall St. isn't EASY.  

I'm sure your familiar with Jimmy Rogers, he started the Quantum Fund with George Soros in the late 70's and both are very rich men today.  He made a VERY interesting observation about new investors.....He said...

"Most smart people are very patient when it comes to their first investment.  They read, research, collect information, take to experts, and after they are reasonably confident in their knowledge they make their first investment and THEY MAKE MONEY!!!  All is right with the world.  Then they do the exact same thing again.  They research, collect info, ask for advice,  and THEY MAKE MONEY....AGAIN.  Now is when the problem starts, THEY THINK THEY KNOW SOMETHING!  This is the exact time when the GIANT HAND of REALITY comes out of the sky and cracks them in the side of the head!"  

I always thought that was one of the most insightful things I have ever read about investing in ANYTHING.  

Here's what I've learned in 20+ years in every phase of this business...

Renting homes to residential tenants is never going to BLOW YOU UP.
It's nothing like Wall St.  Your never going to come in one morning and find out your on the wrong side of a big bet.  What WILL happen OVER TIME is those small VELVET HAMMERS you now own will start tapping on your skull.  With less than a year under your belt you have a LOT to learn.  That, my friend, is a FACT.

Personally,  I think you'll be VERY successful in this business.  Your obviously very intelligent and know your way around investing.  Again, the ONLY reason your taking ANY heat at all from your post is the "EASY" that you slipped in there.  Take that out and no one would critical about anything in there.

[fdjake]

Propertymanager,

Here's what I KNOW.....

I NEVER say "Well I shouldn't have a problem with (fill in the blank) for a long time......               

I NEVER say  "this should only take about 5 minutes to fix"  GUARANTEED 3 HOUR JOB NOW.

I NEVER say  "I've done this a million times, IT'S EASY!"  Guaranteed most complicated project you've done in 6 months.

I NEVER say  " They seem like REALLY nice people"  Guaranteed nut jobs.

I NEVER say  "I'll just pay you now, then come back and finish the job tommorow"  Might as well say  "Hey, here's your money, ignore me for a month and come back in 10 minute increments to finish it."

I don't care what you call it.  I've been in the Construction Business for over 20 years.  You can say what you want, but there's a REASON you don't say this sh*t.   

It's called EXPERIENCE!!

[propertymanager]

I'd love to stay and chat, but I've got to go fix a broken window.  Should only take about 10 minutes!

Mike

[Dave NB Can]

I have 3 buildings with a total of 10 apartments.
I can tell you that ALL troubles stem from bad tenants.
It took me a few years to learn that it is better to leave an apartment empty for 6 months then to rent to the wrong person.

Here in New Brunswick, Canada, we have a rentalsman system.  Damage deposits are placed with this government agency.  When a tenant moves in, I have to go deposit the money.  When they move out, they have to claim the money back from the Rentalsman.  If there are damages or unpaid rent, I file a claim with the Rentalsman. If there is a dispute, the rentalsman arbitrates it.  If everything is okay, the rentalsman mails the tenant a cheque.

Now, this is where it gets interesting...
Because I visit this office frequently, I meet a lot of other landlords.  Most of the ones there filling out the "blue sheet" (application for sheriff eviction) are newbies that I've never seen before.
I never see them at REIO meetings
I never see them at the apartment owner's assoc. meetings
etc.

They don't invest time in understanding their investment.  They don't invest time in understanding the rules here.  You see, eviction is a long process.  It can take up to 2 months.  However, if someone does not pay their rent, I can issue a "notice to quit" and have them out in 10 days!!  The rentalsman does not like deadbeats.

These newbies would know these processes if they took the time to pick up the free,10 page booklet that the rentalsman puts out.  Amazing!

This of course creates opportunities.  The first building I bought I paid retail and learned the hard way that this is not the best way to invest.  The second and third buildings I bought from distressed landlords that I met at the rentalsman's office.  They were so downbeaten by their crappy tenants that they sold their buildings to me at great discounts.

I try to avoid bad tenants.  One way I do this is by paying $200 a year to the Apt owners association in my area.  This gives me access to the "tenant database"  it's like a credit report for renters.  It's full of good and bad info.  One of the things that I  tell everyone who applies to rent is that I'll be checking their name in the database.  This scares away about 40% of applicants!  The second thing I let them know is that when they move out, I'll be making an entry into the database with their payment history and behaviour info.  This way if they're a good tenant, they should find it easier to rent in the future.  This encourages good behaviour.

I find that a lot of newbies never join the association!

I love these failed landlords... more opportunity for the rest of us.

Dave

[Architecturefan]

Dave in New Brunswick, very interesting to hear how things are handled north of the border.....sometimes I wish we had Rentalsmen here in the states (I particularly like that 10 day timeframe for non-payers).

Not much to add to what has been discussed other than that people will start to take on the "Smell Of Experience" as they mature as Landlords.  Deadbeat tenants will know after one or two sentences out of your mouth on a phone interview, or tour your property sheepishly if they manage to bluff an appointment.
Most Real Estate Agents with no customers other than re-hashed versions of people you have already turned away will start to pass you over for listing solicitations.....you start to become a rope of garlic to vampire like tenants and agents.

And laugh when that tenant who was just released for seving a five year rap for grand theft auto goes to the Real Estate Agent who calls you to inform you they have the ideal tenant.....He is an "automobile acqusitions specialist" who has been at his last address for five years......

[rchapman]

I just want to start off by saying thank you for all of the info that I get from this forum. ITs good to Hear others in my place talking about the day to day situations and answering questions that we have all had at one time or another.

To jump in on this string, I would have to say that a good protion of them fail for the fact that they are so gung-ho to get in the game that they dont read the directions and buy the first place that fits in thier budget. I read books, forums, internet, talked to as many people as I could for probably 6 months before I even got started siriously looking into property. My Wife has been very good about that too, as Every SAturday, we would jump in the car and head out to look at 40-50 properties that I had located during the week. I must have gone thru hundreds of properties before I narrowed it down to the few. Then came the hours of number crunching that seems to consume my life.

I guess to make a long story short, I honestly feel that people just do not do enough homework. You cant go into this without all of the knowlegde available, and I still dont understand how its done without money. I look at it in this fashion, All of the money I have invested is lost, unless I do everything in my power to try and protect it. The only way to truly do this, is to live the business. This is not a hobby. You cant just tuck it under the bed when it gets boring.

[Salverston]

From my experience the main reason new landlords fail is they take shortcuts.  I have to echo DaveNB in that most new landlords don't do the preparation to get ready.  Of sure, they may or may not spend untold hours learning about finding and buying property.  But very few do the basic work they need to do to prepare to be a landlord.
 
The Top Ten Sins of a New Landlord:

1)  Buy your property at too high a price, and underestimate costs and time for repairs.

2)  Get too high of a mortgage on the property so it doesn't cash flow.

3)  Underbudget for costs such as routine vacancies and maintenance.

4) Don't know your local laws.  Save a couple hundred dollars and don't see a local RE Atty to give you a run down of laws, rights and responsibilities and get your lease and assorted paperwork reviewed by the Atty.  Use cheap or free forms you get at on the Internet instead of using forms written for your area.

5)  Don't carefully screen prospective tenants, including checking your local eviction reporting service and calling at least 2-3 previous landlords.

6)  Don't do a thorough walk through with a tenant when they arrive AND when they leave.

7)  Agree to take less than the full security deposit BEFORE you give the tenant the keys.

8)  Don't have a system in place for taking take of tenant issues - late payments - maintenance - noise and other complaints.

9)  Don't follow your system.

10)  Apply your rules differently between tenants - be less strict with tenants you like and stricter with those you don't.

I will have to disagree with Dave NB when he says "All troubles stem from bad tenants."  While tenants cause a lot of them, landlords also cause their own problems by not buying right, and not doing the things they need to do so they can get good tenants.

[kenvest]

the best way to make money on rentals is to bank on the appreciation of the property and not so much on the rental income it can produce. 

about the only rentals i'll mess with are the ones in fast appreciating/transitional areas that we feel will be torn down or rehabbed comletely in 3 to 5 years.  it would be nice to cash flow these for a few years but if you don't, that's not the real reaosn you purchased the property in the first place...