Eleven Real Estate Lessons I Learned as an Accidental Landlord

This is the story of my first house, which my wife and I bought in our twenties. Things worked out in the end, but there are some lessons that we learned that I would like to share with our military audience. You might find great success in your real estate transactions (although the successful people that I know made real estate a priority in their lives, so don’t think that it comes without hard work and discipline), or you might find a lot of bad experiences.

This is a guest post from my friend, Forrest Baumhover. Forrest is a Navy retiree and Certified Financial Planner®.

Either way, this article isn’t to persuade or to dissuade you from buying vs. renting…that’s an individual decision that you’ll have to make with every PCS move. This story takes place over the course of 13 years, so we’ll break it up into the good, the bad, and the ugly…and then the not-so-bad.

Along the way, I’ll point out lessons that we learned.  One thing I learned is that owning real estate isn’t a matter of making a decision to buy, then making a decision to sell.  Having a house is more like a series of decisions, all of which determine where you end up.  However, each decision is made with the facts that you have at hand, and when you look back, you realize that with the benefit of hindsight, you’d have never made the same decision.  I’ll be sure to point those out along the way.

We bought our first home back in 2002, by using a VA loan.  Although we were married for 2 years, we had just moved in together after I got back from deployment the year prior.  We bought a cute little 3 bedroom, 2 bathroom, 2 story home right behind Old Dominion University in Norfolk, and we paid $160,000.  We were excited, yet nervous, because we had outbid several people for the house.  We were also looking at a much bigger house in Ghent, a nicer Norfolk neighborhood, but decided against it because it was $185,000.  Looking back, we probably could have taken the other house.

Lesson One:  Run the numbers.  Then put things into perspective.

We did run the numbers.  We knew that at the time, the extra $25,000 mortgage would have cost us about $150 per month at the prevailing interest rates (about 6-6.5%).  We decided we couldn’t afford it, but hindsight being 20/20, the market appreciation and rental potential would have more than overcome the $150 monthly difference.
Anyway, we loved our little house. The previous owners put a lot into it, so it was close to ‘move-in ready.’  However, it was close to 90 years old, so it came with a lot of charm (read: maintenance).

We had some solidly built stuff (like the solid walls, original wood flooring and original heating system), and stuff that we just had to deal with (like a ridiculously tiny kitchen with no room for expansion, and poor insulation).  However, it was our starter home, and we loved it.  We even moved to D.C. for a one-year internship, then moved back into the house.  Fast forward 5 years to 2007, and we were preparing to PCS overseas.  More like, Tania was preparing—I was on sea duty, and was away from home for the last six weeks of my tour.  My relief was late in coming, our ship was on an exercise, and my new command wanted me ASAP.  This meant that Tania had to do our household goods shipment and get the house ready for market, all while I was gone.  Oh, and she was pregnant with twins with a two-year old in tow.  Which brings us to our next lesson.

Lesson Two:  Recognize when real estate investing might be too much.

Being a landlord was definitely a lot for my wife to deal with.  We didn’t have much choice, but you should recognize that when dealing with a house, there are times when it requires attention, decision-making, and prioritization…all of which are difficult when you’re preparing for a PCS, especially overseas.
Since I wasn’t around, it was Tania working with the real estate agent.  We had a pretty good choice:

1. Sell for up to $275,000 and make a quick profit
2. Rent out for $1650 per month (which ended up being about $400-$500 profit)

Couldn’t lose, right?  As it turns out, these were both best case scenarios (this was October 2007, statistically the top of the market).  Next lesson:

Lesson Three:  If you’re going to decide to rent, learn as much as you can before you become a landlord—specifically, know the numbers and determine if your property will be feasible to rent.  If it won’t be, sell it.  If it’s not possible to sell, then figure out how much you need to budget to keep the property afloat.

There are a lot of resources out there now that weren’t around back then.  For example, Bigger Pockets is a community of real estate investors, both professional and amateur, whose primary focus is to share as much information as possible.  Had I had access to BP back then, I’d have known that the rental income was not nearly enough to make it profitable.  Selling it, we could have still netted a cool $75K gain after commissions.  But, we figured that we’d come back to it someday (never again with 3 kids, but we didn’t look at it that way at the time), so we rented it.  After all, we had already rented it out and returned to it, so why not?  For military personnel, the Military Landlords Facebook Group is a great place to go and ask real estate questions: how to rent a house while in the military, or how to sell it.  However, at that point, they weren’t around, so we had to make the decision on our own.  Before we go on with the next part of our real estate story, I want to emphasize a key point:

Lesson Four:  If you rent out the house you lived in, assume that you will never move back into it someday.  In all likelihood, you won’t.

2007 wasn’t the first time we rented our house out.  As I previously mentioned, we were in a 1-year internship in D.C. and we rented our house out at this time.  It wasn’t a bad experience…decent tenants, and rent paid on time.  Little did I know that is about as good as it gets, and things can get a LOT worse (as I’ll indicate below).  Although our oldest son was born during that time, the house was still large enough for us to move back into when we came back to Norfolk the following year.

However, by the time our twins arrived, we had long out-grown that home.  Most likely, unless you live a minimalist lifestyle and have concrete plans to do so as you go into your 30s or 40s, you will accumulate stuff (such as children, pets, and really cool stuff from all over the world).  Our 1300 square foot house seems ridiculously small today, and you will likely feel the same to you after 5 or 10 years.  On with the story.

Renting the house out went well…we had a decent property manager, and we were in a lease with a female college student (ehhh), whose parents had guaranteed rent payment (okay, better).  This worked well for about six months.  Then, rent payments started coming in late, and at the 9 month mark, they stopped coming at all.  By this point, I was deployed from Sigonella to Africa.  Additionally, since we tripled the number of children in our house, my wife turned over all things real estate to me, and I was dealing with this while on deployment.  When I pulled the string, I found out that the tenant had dropped out of college, trashed the house (about $2,000 in damage & clean-up fees—so much for female tenants being more trustworthy than their male counterparts), and skipped out with no intention of paying rent for the rest of the lease.  It gets worse, but let me point out a lesson:

Lesson Five:  Count on your tenants running out on you.  Make sure you have enough money set aside in your emergency fund to fix the house and get it back on the market.  And don’t count on the security deposit covering the cost.

You should be able to easily pay for any minor damages and cleanup fees to get a house back on the market.  As expensive as this might be, it pales in comparison with missing months of rent.  In this case, I had a total of $5,000+ in damages & lost rent (above and beyond the deposit).  We had enough money to get the house fixed and back on the market.

Then we ran into the next problem:  we were in the middle of the recession, and people just weren’t that interested.  Or so that’s what my property manager told me.  In hindsight, I should have known better, because the recession was the time when people stopped buying houses and started renting…but I was doing this all by email from Djibouti, and took her at face value.  However, I was just doing what I could to get a tenant in the property.

In a parallel action, I was also trying to see what I could do to get back the rest of the damages and lost rent.  I looked into the rent guarantee, which the PM told me the tenant’s parents had signed.  She told me that she turned over all the paperwork to a lawyer that the PM firm retains to go after collections.  When I talked to this lawyer, he told me something that completely rocked my world.  He told me, “Forrest, the PM told me that she never had a rent guarantee letter in the first place!”  WTF?  This meant that the tenant’s parents are completely off the hook, and didn’t have to pay a dime.  Untouchable.  Great.  All right…next lesson:

Lesson Six:  Trust but verify.  Especially in real estate.

This Reaganism means:  trust people because they usually have noble intentions, but get everything documented.  In hindsight, we should have gotten the parents to co-sign the lease, or asked for a copy of the rent guarantee letter.  This would have allowed us a more informed decision.  However, I wasn’t around for most of this, and we were in such a rush that we just didn’t do what we needed to do to protect our interests.

All right, this revelation introduced a couple of problems:

• I’ve got to go after the tenant for the damages, and see if I can collect any money from her
• I’ve got an untrustworthy property manager

Tenant first.  I filed a lawsuit, with the lawyer that I was referred to.  After a couple hundred dollars, I got a judgment filed with the Virginia Beach County District Court.  It is still in effect today, and collects 12% interest.  However, it’s pretty much useless, since I then found out that she married an Army fellow and moved overseas.  Since then, she’s moved to Fayetteville, North Carolina, and is living a nice, peaceful life, with little recollection of the damage she inflicted on our family.

I reckon the judgment is up to about $8,000 in accrued interest, and have thought long and hard about trying to start the collection process.  However, that would cost a LOT of money, and there’s no guarantee that I’d get anything out of it, since I assume that everything is in a joint account, which I can’t collect against.  The best I could wish for is for the sheriff’s department to show up at her house and collect a bunch of stuff, auction it, and use some of that to reimburse my expenses.  However, everything is probably jointly owned, so that’s probably unlikely as well.  Oh well.  Hopefully, she’ll read this post, know that I’m talking about her, and decide out of the goodness of her heart to start paying me back.  Good luck with that.

Property manager.  I knew that I was dealing with a shady person (nice enough young lady, but she really screwed me on this).  However, I knew I just had to work with her to get the house back on the market.  It took a couple months to clean the house and get it marketable (why, I did not have any idea at the time).  Then a month came by.  No tenants.  Two months.  Three.  Four.  At the end of four months, she decided to turn my account over to another, newer property manager.  Within one week, he had qualified tenants and a lease signed!  WTF again!

Before I continue this story about my house, I’ll let you know what I did to repay this nice real estate agent for how she screwed me.  I knew I couldn’t sue her or the real estate company.  However, I would make sure that her  company knew what she was doing to get leases signed.  So, I wrote a very professional letter (I even left the curse words out) to the president of the company, the board, and everyone in her supervisory chain of command letting them know what she did, how I knew it, and how that impacted me.  I made very clear that I was going to take no legal action (very important), and that I trusted the integrity of the company itself (also very important), and that I trusted them to do the right thing (most important).  After about a month, she was no longer with the company.  Next lesson:

Lesson Seven:  You can make a difference!

Cheesiness aside, if someone conducts shady business, don’t you almost feel like you have an obligation to do what you can to stop it?  It doesn’t matter if you’re a business partner, or part of a company.  Even if you’re just a customer who got underserved because of a severe lack of judgment (or in this case a serious breach of ethics), you have every right (and some people would say a moral obligation) to let that person’s company know what’s going on, or to let other customers know what’s going on, or to do what you can to stop it.

I won’t make any judgment on what you SHOULD do, but in this case, I really did not want other customers to get burned by this person the way I did.  Once she was let go, I didn’t track her down and send threatening letters or anything…I just wanted to make sure that the company knew she wasn’t living up to standards that it pledged to its customers.  They made the decision that they felt supported their values.

All right.  Now I’ve got a decent property manager, rent-paying tenants, everything’s good, right?  Well, for now.  At this point, we’re in 2009-2010 time frame, and this was good enough.  I had just gone through a deployment (the excess pay, entitlements, and tax exclusion effectively kept us afloat during the whole no-tenant, screwed up house fiasco), so I was willing to just let the house pay for itself.

At some point, probably around 2011, though, I’d had enough.  I just wanted to be done with the house, and the stresses.  So I listed it with a real estate agent, for a price I thought I could get.  Crickets.  Took it down and listed it again.  Crickets.  Finally, in 2015, I listed it with an awesome agent out of the Norfolk area, Christian Iturbe, who listed it, sold it, got my asking price (minus a small concession since the house’s roof needed to be replaced) and also hooked me up with a military rebate on the commission.  Awesome!  A couple of lessons to wrap this up.

Lesson Eight:  You probably think your house is worth more than it actually is.  But sometimes, the real estate market might reward you for doing so.

However, you get the right to keep it as long as you want.  At some point, the market might reward you by offering you more (inflated market, anyone?).  I’m not saying my house was overvalued…it probably was a bargain for houses in the area.  For me, I was happy to take the money and move on with my life.  With my Section 121 tax exemption, which includes a 10-year extension for military personnel stationed more than 50 miles away (read this article for more details), most of my profit was tax-free, although I had a decent tax bill for the depreciation we took over 8 years.

Lesson Nine:  Any time you sell real estate, even if you don’t think you made any money, be mindful of the tax consequences.

This is one that a lot of people overlook, because they’re just looking to move on with their lives.  If you’re selling a rental, you need to calculate the depreciation you could’ve taken (even if you didn’t actually take it), and be prepared to pay the taxes on it.  Most people work with a CPA or enrolled agent.  I highly suggest doing this, even if you are a tax professional.  I did this, and I AM a tax professional.  Even if you’re selling a home that you’ve never rented out, you should be mindful of the tax considerations.

Lesson Ten:  Don’t be afraid to hire a pro.  In fact, it might be cheaper than doing it yourself.

Every time you do something that a pro could do, you run the risk that it goes wrong.  You can mitigate this risk by investing a lot of time and money, but you’d better be prepared to accept the risk and the consequences.  And there’s a LOT of risk when it comes to managing real estate.  Especially rental property.  Especially more than 50 miles away.  Or across the country.  Or overseas.  Or on deployment.  Or (fill in the blank here).  I’ll wrap this up by saying that I’m glad I did it, but I’m even more glad that I’m done with it.

Lesson Eleven:  Know yourself before you get too far into real estate investing.

I did the Bigger Pockets thing.  I tried to find rental properties, or to find people to work with.  None of that stuff panned out, and possibly for the better.  I know that I’m doing things that I’m more comfortable with, and my stress level is a lot lower.  At the end of the day, that’s what really matters.  So, find out what matters to you, and be prepared to say, “I’m not a real estate investor.  No matter how much I want to be one.”  I did, and I’m SO much happier.  So is my wife.