Sharon Cohen was a young professional working at a job she enjoyed in the Washington area. She made a good wage and had a pretty good savings but she felt that wasn’t enough to achieve financial security.
She started looking for better returns on her savings. Like me, she was attracted to real estate for its security and strong potential returns and she decided she was going to find and purchase a rental property.
“Going into this, I really wanted to start gaining some real estate experience and build a portfolio of rental properties for cash flow and long-term financial security,” Cohen said in an email exchange. “Ultimately, I would have liked to have had enough units to replace my income and mange a real estate portfolio full time.”
She enlisted a local real estate agent and together they set out looking at properties in Virginia. Despite their best efforts, they had no luck finding a property that would make a good rental. The home prices were just too high.
Her agent recommended that she look to Prince George’s County, Md. There her savings would go much further.
Cohen sat down and ran the numbers on one of the condos in the building. The numbers looked good so she presented an offer for $50,000 and the seller accepted. She paid for a home inspection and the inspector reported no major issues. She closed on the property in December 2015 anticipating making only minor repairs to the home before she found her first tenant.
Here’s roughly how she estimated the rental income:
Gross rental income:
$1,275 a month
$350 condo fee
She anticipated making roughly $725 per month in profit. Notice that there was nothing in there for vacancy. On paper, this is a fantastic looking deal. In this scenario, her anticipated profit is roughly equal to what investors call net operating income or NOI. Seven hundred and twenty five dollars profit per month equals $8,700 per year in NOI. That income — if realized — would be approximately equivalent to nearly a 16 percent annual return on investment. Had she been able to use the leverage of a loan and calculated a modest annual asset appreciation, her cash-on-cash return could have skyrocketed — on paper, that is.
“A healthy margin would absorb any maintenance costs and the occasional vacancy,” she said.
She closed on the property eager to get started. Even with the positive home inspection, there were some problems inside the home. Before she could get a tenant in place, the water heater burst, flooding the apartment and the apartment below. Luckily, she had a home warranty that helped offset some of her costs. She also filed a claim under her homeowner’s insurance for the flooding. Insurance helped her a great deal with the repairs, but she’d lost valuable time.
Cohen decided to hire a property manager to handle the operation and oversight of the rental. After the water damage was repaired, the property manager found a tenant who moved into the unit in February 2016.
Cohen described three major problems: First, she didn’t have a great property. Second, she didn’t have a great tenant. Third, her property manager didn’t always handle tenant concerns effectively.
Right away she struggled with one of the major balancing acts every landlord with good intentions has to deal with. Her tenant called constantly with complaints and requests for repairs. Many of the problems, she said, were likely created by the tenant, or were just petty. Cohen said she wanted to be a good landlord but wondered if she was being taken advantage of and was unsure of how and if she should push back on some of the tenant’s demands.
Her property manager was not much help with this dilemma, she said. He was responsive but was not very good at managing the repairs. Cohen found herself dealing with the property far more than she had anticipated.
“Managing my property manager was bigger job than I had expected,” Cohen said. “I think it’s true when they say that no one will manager your property as diligently as you will.”
The problem was further amplified when mold was discovered on the dining room ceiling because of a leaking pipe. Now the tenant really had a legitimate complaint and Cohen found herself dealing with mold mitigation contractors.
The mold situation became the last straw. In May 2016, the tenant became very frustrated with how long the mold remediation was taking. She stopped paying rent and filed a court complaint. Cohen was frustrated, feeling powerless in getting the work completed. Luckily, the manager was able to settle the dispute with the tenant out of court.
All of this, however, was too much for the property manager.
“The tenant’s daughter called my property manager several times, and he reported that she was occasionally verbally abusive to him,” Cohen said. “On two separate occasions, that property manager called me, frustrated, and told me he couldn’t manage the property anymore because of the difficulty of dealing with this tenant. The first time, he later recanted; the second time was for real. He quit but he agreed to stay on until a new manager could take over.
The tenant continued paying rent and making complaints, Cohen said, until about September when she abruptly stopped paying. A new property manager was in place this time. Cohen said the new property manager seemed better at managing maintenance, but it took the property manager nearly a month to start the official eviction process after the tenant stopped paying rent. That delay is problematic in Prince George’s County where the eviction process can be lengthy.
Luckily for Cohen, the tenant ended up abandoning the property sometime in October 2016. Cohen was awarded a judgment of around $4,000 against the tenant for lost rent and damage to the property. However, she was advised to just let it go. She would likely spend far more time and money on the pursuit than she would get back.
The new manager found new tenants who moved in near the end of January 2017. While the tenants had a lower credit score than Cohen would have liked, the manager told Cohen that they were solid because at the time of the initial screening they didn’t have any evictions on their record. So she reluctantly approved.
The tenants paid their security deposit and rent for February and March and then payments stopped. Cohen went so far as offering them “cash-for-keys” — essentially offered them money to move out — but the tenants refused saying they loved the unit and wanted to stay.
By September, Cohen had issued the tenants three eviction notices for nonpayment.
Cohen has now moved to Europe for her job.
Right now, her goal is to get this tenant out of the property and sell it. The reality is her investment fell far short of her initial projections. The property did not produce for five months of 2016, which equals about a 42 percent vacancy rate. That is equivalent to a cost of about $6,400 if you use her income assumptions from the beginning.
The many repairs and major problems cost far more than she budgeted and firmly pushed her property well into the financial red. The stress and aggravation are costs that are real but impossible to quantify.
“I definitely wouldn’t buy this property again if I could go back,” Cohen said. “The stress and aggravation are simply not worth it. I am still monitoring the market for other real estate opportunities but I’ve turned my attention toward properties in Virginia which have a higher-income base. I think this means I would flip my goals a bit, so I’m less focused on near-term cash flow and more focused on equity growth through paying down the mortgage” and, optimistically, appreciation.
Justin Pierce is a real estate investor and real estate agent who regularly writes about his experiences buying, renovating and selling houses in the Washington area.