Whew, we’ve been busy. Son turned 4. Lots of traveling. Kids started school. Managing two houses. Managing the rentals. Being 7 months pregnant.
We’ve been working on our old house to get a lot of the things moved to the new house, while keeping enough there to live. A slow move sounded great in concept, but dragging this out for 3 months now, with another 6-8 weeks to go probably, has been rough. We unload the car, put it in the new house dining room, and then I need to unpack all that and find it a home. Then we come with another dump of things right after I clear that out. It’s been exhausting. Meanwhile, I’ve been painting almost all of the new house, changing out light fixtures, changing out some electrical switches/outlets that were dated, etc. Mr. ODA has started working on the rebuild part of the bathroom renovation, so we happily have gotten all the electrical work that we wanted to do done (we need to hire an electrician to run a line for the dryer), and then got the shower framed. He’s also been working on the yard and landscaping, which is a big project because the original owner of the house put in a lot of landscaping, and then the people who owned the house for about a year before us didn’t maintain any of it.
We’re listing the house this week, and we’re hoping for a reasonable offer ASAP and a closing at the beginning of November. That closing will pay off our mortgage (~$265k) and our HELOC (~$82k).
RENTAL PROPERTIES
October brings a lot of rental bills. KY’s property taxes are due in October and November, and none of the houses we have here are escrowed, so I need to plan on about $6,500 outlay. Right now, we have a HELOC on our last primary residence, so I have that to fall back on. Typically, I project out 2 months of expenses, and I know how much I have “left over.” The “left over” usually is paid towards a mortgage or, currently, our HELOC balance; in the Fall, I plan to have that “left over” go towards the taxes. Luckily, our houses in Virginia that aren’t escrowed have the tax payments due half in December and half in June.
While our credit card balances are high (we’re carrying a large balance on one that’s 0% interest), we didn’t have a lot of expenses this past month. Mr. ODA’s work trip hotels and restaurants are on the credit cards that will get paid this week, and we’ve had higher gas expenses because of my driving to/from NY and then capitalizing on Kroger incentives so filled up one car. Other than that, we’ve only eaten at restaurants sporadically and have been focused on getting projects done, so haven’t gone out much.
This is the first month of the newly executed lease with a tenant who paid late every month. Their rent total increased for the convenience of paying twice a month (although the total owed now is still less than their rent and late fee they had been paying). They paid the first half on time, and they haven’t paid the second half, which if it’s not paid by the end of today will incur a late fee. Rent was $1450, so they were paying $1595 every month. Rent is now $750 twice a month. If they pay on time, it’s $1500 per month. If they pay half late, then it’s now $1575 per month.
I submitted the security deposit charges to the tenant that moved out. She asked a question about the charges on the list, but then didn’t acknowledge by the deadline. We need to have our property manager file the charges in court. Somehow it’s the 19th of the month, and we haven’t pursued that yet because we’ve been so busy.
Other than that, we didn’t have any service calls on any of the houses, and everyone else has paid their rent.
NET WORTH
We have a busy October planned. I hope we’ll finish the projects at the new house and be close to closing the chapter of our last house. Our investments have declined significantly (almost $91k!) from last month. Our cash is higher than usual because of the cycle timing for this update compared to the bill due dates. And finally, the credit cards are higher than usual, and they’re higher than last month, but that’s because we’re purposely carrying a balance on a 0% interest card. So while our overall net worth has decreased over $33k since last month, the stock market issues have been offset by paying down mortgages and increased property values.
We have one house that seems to always have a story. Well, we have two that are consistently late, but the one just says, “it’ll be late,” while this other one has a crazy story. While trying to gather my information on how we’ve worked with her so much, I thought I’d share some of these stories. Perhaps if you’re a tenant, you can see the landlord’s perspective on how this just doesn’t add up and there’s eventually an end to the rope. So just for fun, it’s story time.
This person has a history of fraud. She also had domestic abuse and restraining orders against her that caused us to lose one of the tenants at the beginning of 2020. There are the typical excuses like car maintenance issues, and then there are interesting ones.
March 2020
We started the pandemic off with a “furlough” letter. Knowing the history we have with this tenant, I didn’t take it at face value. I struggled to find a contact for the company that the letter was from, and then I eventually found a way to get in touch with a local office (as in… where she works and not the one in Florida where this letter seemed to come from). I asked for an employment verification for the tenant’s name and whether she was furloughed. The woman on the other end did a laugh/sigh thing and said, “She’s not furloughed. We’ve been over this several times. Her hours were reduced, but she is still employed and expected to show up to work.” I let her know that I received a letter from the company stating a furlough, which she said she was unaware of.
January 2021
Virginia has a Rent Relief Program for tenants that were affected by the virus and lost income. The program is for unpaid, past due rent. I pretended to be a tenant and went through the application process; it very clearly only let me input unpaid rent that’s past due (i.e., I couldn’t claim that I wouldn’t be able to pay a future rent owed). I even went through the trainings available on the system. I was very thorough. The tenant paid January rent, and then I received notification that the tenant applied for assistance. I can’t remember how I knew it was for this tenant (because in the future, I’ll get emails from the system that I can’t tie to any tenant), but I knew. I called the hotline and asked what month was being claimed as unpaid and was told January. I sent the tenant an email letting her know that she was not eligible and that I had done my due diligence acknowledging the information. I had actually also called because I didn’t appreciate that the documentation on file required my social security number to be on paperwork that the tenant had access to. For some reason, this didn’t bother any other landlords, but it’s not something I want this person having! When I told her she was ineligible for the assistance, she said it was because she expected February’s rent to be late, which she then paid without the assistance.
August 2021
She paid August’s rent on August 31. Why? She was in a car accident. When? On April 24, 2021. How is this related to August rent? I don’t know.
This doesn’t exactly explain why she doesn’t have income or what happened to her job. She said in passing that she would start a new job on August 30th, but we don’t know what happened to her last job or how long she had been unemployed.
It’s now October 6, and she hasn’t paid September or October rent yet. Why? Because she went to Costa Rica on September 1 (or 3rd?) and tested positive for COVID, so she had to quarantine. She shared several pieces of correspondence related to the car accident, which told us that she received over $5,000 in the insurance settlement. Questions that I have, which have not been asked and/or gone unanswered: 1) If you don’t have any money to pay rent until a car accident settlement check arrives, how are you affording to go on a trip? 2) If you received the settlement check in time to pay August rent on 8/31, why didn’t you pay rent with the rest of that check on 9/1? 3) Why didn’t you pay rent before you left town? 4) If you were unemployed for a while, and were starting a job on August 30, how and why did you leave the country (during a pandemic)? 5) Through communication with her girlfriend, we learned that she went to Costa Rica on 9/1, but she tested positive on 9/3. How did you get into the country and not get tested for 2 days? 6) I received an email on 9/6 stating she couldn’t get the payment to go through. What were you doing between 9/1 and 9/5 that I’m receiving this email on 9/6? 7) I responded to that email and gave other electronic options for payment. I received no answer or acknowledgement. Why couldn’t you respond to this email or attempt to pay rent again? 8) Assuming internet issues, I let it go for two days before sending a follow up email. No response to that email. Why? 9) At this point, I got stern. I very rarely get stern with people.
10) I received a response from someone stating they were her girlfriend and monitoring her email. If you’re monitoring her email, did you not find it urgent to address the lack of rent payment emails you’ve been seeing? 11) This person says she’s working with the family to get rent paid timely. I receive no rent nor do I receive an update. 12) Even though I had said I’d give until the 13th for an update, I ended up being responsible for my household while my husband traveled and didn’t get to the follow up until the 15th. I sent an email asking for an update. No response. 13) I don’t handle the text communication, so I waited until Mr. ODA was unoccupied with his work tasks, and asked him to text her on Friday. She responds! She says she’s been back for several days. Really? Why didn’t you get in touch with us? Why didn’t you let us know your status? 14) She says she can’t pay rent until Wednesday (the 22nd) because she had to pay for the extra costs for staying in Costa Rica for longer than anticipated. What if you had paid rent before you left? How would you have been able to pay for that hotel stay and getting out of the country? Why is it on me to float this financially? 15) Mr. ODA texted and asked about payment on the 22nd, we got no response, and I sent a notice of default. She suddenly was able to share that the person she was going to get the money from didn’t have it, and she couldn’t pay rent. Then she responded to my email and said she wanted a payment plan (Virginia requires me to offer a payment plan once every 12 month cycle). 16) I put together a payment plan to start payment on 10/1. She responded that she wouldn’t be paid until 10/8 because of the start date after she returned to the country. So she can’t pay anything towards TWO MONTHS worth of rent until it’s late for both months.
PAYMENT PLAN
I front-loaded the payments in the plan. First, I need to pay my mortgage, which I’ve now paid twice without offset from a tenant living in my house. Second, I’m not offering a payment plan for the next six months worth of rent, so come November 1st, she needs to pay rent in full. She can’t have evenly spaced payments while also paying full rent in future months. I put the due dates as every other Friday, starting 10/8, as she claimed she had no money until then.
I stated several times that the money is due on the date that we have agreed upon, and there is no five-day grace period like there is in the lease. Too many people think rent is due on the 5th because there’s a grace period. It’s due on the 1st, but there’s a grace period to allow for payment without penalty. October 1st was a Friday, and I still received rent on the 4th and 5th. Since this is overdue rent, I wasn’t going to play the follow up game that I’ve already had to play far too much in the last two months, so it was due that day, and that’s it.
During this process, she applied for assistance from the State for COVID relief. I also included the following: Any monies received from the State’s program will eliminate the last payments first. If and when I receive money from the State, I will let you know, and I will update the schedule accordingly. Do not assume any payments received; adhere to this schedule until told otherwise. If you can pay more than the amount throughout this timeframe, please do. Any and all payments received will work to eliminate the latest payments due first.
Since I didn’t find any requirements on the how the payment plan was to be set up, I didn’t extend it very long. The final payment is scheduled for 12/17, so that’s just 6 payments. As I mentioned, I front-loaded the payments, so the first two are $550. Then they taper to $350. The payments to be made also include the two months worth of late fees.
If she doesn’t adhere to the payment plan that she had to agree to, then I can seek possession from the court for default on the lease. Hopefully we’ll have some money here by the end of the week!
There’s really no point to this except to share in our experiences. The excuses are creative and entertaining. We’re lucky that we have the ability to float one house under the payments of all the other houses, but it doesn’t make it any less frustrating to be two months behind on income.
This one has been pretty easy, but we did have an interesting issue arise with the first tenant.
This is our largest house at 4 bedrooms and 1.5 bathrooms, and 1281 square feet. It’s a cape cod style house, so the upstairs has slanted ceilings, the half bath is not anything to write home about, and the HVAC struggles to work up there. The carpet on the stairs could really be replaced (but it hurts me to spend money on stairs because they’re soooo expensive compared to carpeting a room!). But the house has a huge fenced-in yard with a nice deck that’s a great selling point.
The kitchen was renovated at some point, so that’s held up well – and lets face it, who doesn’t choose baby pink knobs for their new kitchen cabinetry? But the plumbing and roof have been painful.
I’ve already told many of the stories about this house through other teaching posts, so bear with me if things sound familiar.
LOAN
The house is in Richmond, VA, and the purchase was very simple. We offered $109,000, and the seller countered with 112,500 and 2,000 in seller subsidy (i.e., closing costs), which we accepted. It was listed on June 22 at $119k, and we offered on June 25, so I’m actually surprised we got the contract agreed to so quickly.
Quick note here: after reviewing real estate contracts in NY, KY, and VA, Virginia wins. Sure there are several states that I haven’t ventured into, and this is an extremely small sample size. The paperwork is simple yet thorough, all while being in plain language. So if you’re needing a template to work off of, look up Virginia’s purchase agreement.
We settled on a 30 year conventional loan at 5.05%. We received a $200 lender credit since we closed on several properties in a short period of time. This is the house that we refinanced and received an appraisal of $168,000! We had already started with equity in the house because it appraised at $114,000 at closing.
INSURANCE
Interestingly, we couldn’t insure the house through the company that we had gone with because they have a 5 rental limit. Our agent was able to quote us through another company though, so our process appeared seamless. However, the quote was much higher than we anticipated. We went through a friend to insure it, but shortly after closing (literally a week), we were able to find an even cheaper option – that was awkward.
THE NEIGHBORHOOD
Not a category that usually gets mentioned. I discussed the neighborhood of the one house we sold already, which was because I didn’t realize it was in a higher-than-average crime area that tenants honed in on. But this neighborhood is worth mentioning.
Rentals aren’t prevalent here. In fact, many of the homes are the original owners. While working on the house when we first purchased it, the neighbor across the street approached me. He as-politely-as-possible threatened me that this is a nice neighborhood, that everyone keeps up their property, and that they don’t want any trouble. I assured him we have good standards as landlords, and we haven’t had any neighbor complaints for any of the tenants we had in our houses.
The location also comes into play for our first tenant.
TENANT #1
This house is under a property manager for 10% monthly rent.
As with most of our tenant searches, no one fits perfectly into our requirements. We offset this by a higher security deposit or having another signatory on the lease. We had two prospective tenants – one was a mother/daughter combo (an adult daughter) and both had bankruptcies in the last year; the other was a man and his family that had an eviction 7 years prior. We chose the one with an eviction. His application actually said that he “will also respect the property to the utmost.” Boy did he.
He first requested that the carpet be replaced. It was actually a reasonable request because it wasn’t the best. Here’s the carpet on the second floor. Old, bottom of the line padding; a gorgeous blue; lots of wear spots.
We decided to refinish the wood floors on the first floor because 1) he wasn’t moving in for two weeks, and 2) it would save us in the long run to put that investment into the floors instead of carpeting every few years (and risking someone completely ruining it before its useful life was up). It was $1850 and the company was able to start immediately and get it done before the tenant moved in (granted, it was the day he moved in, but it did get done). And the refinish turned out great!
He asked us for a screen door, but we said that wasn’t a necessity. He asked if he could install one himself. We agreed, as long as it didn’t prohibit our access (e.g., he can’t lock it, give us a key). This later becomes an issue because he locks it after vacating and we need it rekeyed.
This tenant had a few late rent payments and struggled with paying rent on time, but overall he was a good tenant to have. He took care of the property and let us know when he ran into issues (it’s amazing how many people don’t tell us of a problem in a timely fashion).
Just as we did on House 5, we offered this tenant the opportunity to pay rent in two installments each month. His rent was $1150 from August through February. He took the opportunity and we executed an addendum to change the rent to $600 twice a month. Again, it’s an inconvenience to us to collect two rent payments, but it theoretically should save the tenant money if they’re constantly in a position that they owe late fees (if he usually pays $1150+115=1265, then 1200 is a better position).
And then the fun happened!
I was at WORK one day, answered my work phone, and someone on the other end asked to speak to the owner of [this house’s address]. I barely used my work phone for work calls, so to receive a personal call on my work phone was very surprising. I informed her that I was the owner. She then went on to ask me questions about the tenant occupying the residence. I couldn’t answer a single question – hah! I let her know that I really didn’t know who was living there or the status of the home because I have a property manager. She was very nice and understanding, and she called my property manager.
She was with the school system. Apparently, our tenant had moved into the City public school district, but kept his kids in the adjacent county school system. It was April. I thought it was ridiculous that the school system would investigate this with 6 weeks left of school, but technically, he was in the wrong. And get this – he blamed me for it! Our nice tenant turned on us and went crazy. He claimed that he could just walk away from the house …. honestly I don’t remember his reason for it, but somehow he thought he had a case.
Virginia has a wonderful statute that says if the house is vacant for 7 days, the owner takes possession without any court interference. There’s also a statute that says we can’t collect double rent, and we need to be doing our best to rent it out if given notice. We tried to keep communication lines open with the tenant, but he was silent. We had told him that we were willing to release him from his lease obligations if we found another tenant, which we did. He was responsible for May’s rent and late fees, and we would have a new tenant move in June 1. We also informed him that he would be responsible for the leasing fee associated with finding a new tenant, which was basically considered the ‘lease break fee’ and is fairly generous ($300 instead of a standard two-months rent that’s typically seen as the fee). It kept going south from there.
On top of the rent owed, he had several lease breaches – room painting (clarification: rooms are allowed to be painted as long as it’s a neutral color or painted back to a neutral color before vacating), wall patching and painting, house cleaning, mowing, re-keying, and utilities since he turned them off. By mid-June, he still owed us $874.76. We made an arrangement with him that he’d pay a certain amount each pay check, but he failed several times. We finally threatened to take him to court, which would affect his credit score and increase the balance owed since court fees would become his responsibility. Since he had been working to rebuild his credit since his bankruptcy, we thought this would light a fire under him.
We went to court.
Court also added a 6% interest charge on the outstanding balance, which now included the $58 court fee.
It took him over a year to pay the balance. By the time the court judgment arrived, his balance (after paying $50 here and there was $660. The court doesn’t put a timeframe or process on the judgement, but leaves it to the two parties to determine the payment schedule. He didn’t adhere to it well, but we did eventually get the whole balance paid. Mr. ODA also took this opportunity to have fun with calculating interest payments on a declining ‘principal’ balance that isn’t getting payments on a predictable schedule!
TENANTS #2 & #3
These tenants were/are much easier. The second tenant in the house had several large dogs, but we didn’t see any damage to the house. She eventually broke the lease to buy her own house in November 2020; we can’t fault someone for wanting to take advantage of low interest rates! She gave the appropriate amount of notice, but the lease was going to be broken as of 10/31, which isn’t a great time to have a rental come open. She ended up being very gracious with the situation, paid us one month of a lease break fee, and we kept her security deposit.
Right after she gave us notice, we had an old tenant reach out to us. They had moved back into town (I’ve mentioned them several times) and asked if we had a 4 bed/2 bath house available. Amazingly, we did. We showed them the house and they signed a lease within a few days.
Since turnover was fast, and I didn’t really know the status of the house, I didn’t get a chance to paint the house. All the rooms had been white except for the one room that I repainted after the first tenant had painted it lime green. The house really needs a whole paint job, and so I offered her an incentive. If she wanted to paint any of the rooms, she could knock $75 off the rent per room. So far she’s painted three rooms.
MAINTENANCE AND REPAIRS
The plumbing in this house has been horrendous. We had the tub snaked as soon as the first tenant moved in ($150). We then had issues with hot water, which required several adjustments to the water flow rates to coincide with the tankless hot water heater ($325). We had the upstairs toilet serviced ($120). Then a year later, we had to service the hot water tank again ($570). Tenants had complained that the upstairs sink drained slowly. We had attempted to snake it and fix it several times, but it never seemed to work. We finally just bit the bullet and replaced the plumbing – from the second floor to the crawl space. That work and the drywall patching cost us $1563.
Then there’s all the roof work. Shingles had flown off during a storm, so we had those replaced ($350). We also had a leak in the flat roof over the laundry room. We had a roof guy come out, and he said the roof hit its life expectancy. He replaced the pitched roof ($4135), and not the flat roof. So we’ve still had issues there that will need to be addressed.
SUMMARY
That sounds like a lot of money, but we’ve owned this house for 4 years now with our rent being double the mortgage (slightly better now too with the recent refi). When purchasing properties, any good investor is going to build maintenance and capital expenses into their numbers that determine if it’s a worthy investment. Rent cash flow wins out, and all the rest is just the cost of running our business – not to mention the $60k of appreciation we have on paper in just 4 years. It’s also worth noting that these things took up about 10 days worth of action from us over those 4 years, so most months, we just collect the rent with no other action required from us.
No property is going to be perfect, and this business relies on people, the tenants, to make the business profitable. No path will take a straight line, and being flexible to the ebbs and flows of rental property investing help make it fun too!
This was a mess. I learned my lesson to research each property individually and not to make any assumptions. I also learned my lesson to hold true to our standards and expectations for a renter. We owned this house for a year and a half, but we learned a lot about tenants and the selling process. Hey, every struggle is a learning opportunity for next time, right!?
Mr. ODA showed me House 6 first (5 and 6 closed at the same time, and on my numbering list, this one came second… so try to overlook this awkward numbering!). I researched the area and the house’s history in detail, and I decided that it was worth pursuing. Very shortly after that, he approached me about House 5. The house was in better condition than House 6 and was literally only half a mile away. I assumed it was in the same neighborhood. I was wrong, and that’s where things went downhill fast.
LOAN
This house was so cheap that we needed an exception approved to get a loan. The purchase price was $60,000, which means a loan with 20% down is $48,000. The cutoff for even approving a loan with our regular lender is typically $50,000. Since we were below that threshold, we were ‘penalized’ by the rate.
I covered the closing snafu in the House 6 post, which also highlights the decision-making on the loan terms. Since this house was below that $50k threshold, our options were: 5.125% witha $200 credit or 5% with no credit. The higher interest rate would cost us an additional $1300 in interest, which isn’t offset by the $200 credit, so we chose the 5% rate. Hindsight: If we had known we would sell it just 18 months later, the credit would’ve been the better choice!
We purchased the house in July 2017. We immediately started aggressively paying towards the mortgage since it was the lowest balance and the highest interest rate.
We rented the house for $775, which far exceeded the 1% Rule.
WORK ON THE HOUSE
We did a lot of work in the yard. Here’s what the house looked like at some point before we owned it. It’s cute!
While it was under contract, the house sat vacant, so there were a lot of overgrown bushes, flowerbeds were filled with debris and no remnants of flowers having lived there, the lawn hadn’t been cut in a long time, and the tree in the front left had been removed at some point, leaving behind a mound of a stump and mulch that also collected debris. It’s a shame, and I kind of wish we had brought this little 2 bed/1 bath house back to life like it was in this picture. But I digress. Although this picture shows that the previous owner took care of the property, and that’s what attracted us to the purchase.
The floors were in immaculate shape, and the kitchen was quaint, but in decent shape. We purchased a new refrigerator before we could list for a tenant.
The bathroom needed a lot of help, but we didn’t want to overhaul it. The medicine cabinet wasn’t working anymore and the glass was cracked, so we wanted to replace it with just a mirror that covered the old medicine cabinet hole. Interestingly, we found a stash of 100s of razors behind it! (Apparently this is a thing from times gone by. You finish your blade and then you shove it behind the medicine cabinet for it to reside in the wall for all eternity.) We had several plumbing issues in the house. The drain pipe for the tub had multiple kinks in it, which caused the water to drain slowly and be more easily clogged. This would have been a major overhaul to get new plumbing installed in a way that was more direct.
The electric in the house was in need of work. We fixed quite a few electric-related-things while we owned it, but re-wiring the house was a major expense that would’ve come due in a few years.
TENANT ACQUISITION
The house was in great condition, had a big lot, was in a located close to the downtown area, and was on several bus routes (I even had a bus driver stop and ask me what the rent was on the house while I was working out front). It seemed like a great investment. We had several showings to qualified individuals….. who then went home, researched the house, and saw that it was in the highest crime area on Trulia’s crime map.
After sitting on the market for 5 weeks, we lowered our standards. There’s a reason you have standards as a landlord – it’s because if you select the right tenant, you’re saving yourself time, money, and headaches in the future. Here’s the email from our property manager. There are multiple red flags, and yet we gave her a chance.
The prospective tenant provided us with an employment verification letter showing that she had just started a new job, her most recent pay stub corroborating the employment verification letter, and wrote a decent introduction in her application. Between it being 5 weeks with no tenant and it now being mid-August (with it harder to rent in the Fall), we overlooked her credit score of FOUR HUNDRED AND FORTY EIGHT (448) and SEVEN (7) accounts sent to collections. I don’t recommend you do this. Oops.
EVICTION
This is the fun part to recount. It’s detailed, but I think it’s interesting.
RENT COLLECTION
She moved in August 2017. By December 2017, we already had enough issues that she wasn’t going to be trusted going forward. We’re very flexible landlords, and we’re happy to work with you on any issues as long as they’re communicated up front and timely (meaning, if we have to continuously reach out to you for rent, you’re not in a position to ask for favors).
We had allowed PayPal to be used to pay rent, but every month there was an issue. She either sent it in a way that incurred fees (after being told that she would be responsible for such fees) or it was sent in a manner that caused PayPal to hold the funds and not immediately release them. After December’s rent was late, the late fee wasn’t paid in full, and there were fees taken out by PayPal, we cut her off from electronic payments. Our property manager informed her that going forward, all rent had to be received by her office (either by mail or drop off) before the 5th.
Speaking of flexibilities – we noticed that she needed to send us rent based on each pay check, versus having all the rent money at the beginning of the month. She was paying us a late fee every month. Her rent was $775, and her late fee was $77.50. That meant every month, we were collecting $852.50, which really wasn’t necessary. We offered a change to her lease terms – rent was due on the 1st and 15th. As compensation on our part, rent would be increased to $800, split into two $400 payments. However, if rent was late, the late fee was now 10% of the late payment ($40) or up to $80 if she was late on both installments. She agreed to this, as it saved her money each month and set her up for success by being able to set up a system with each of her paychecks. We didn’t like that our relationship with the tenant had come to us hounding her over money, so we thought this was the best path forward for both sides of the party. Here’s the addendum to her lease.
And yet this didn’t change anything!! The addendum was signed at the end of January 2018. She paid February’s 1st $400 late. Then she didn’t pay February’s 2nd $400, and we had to reach out to her several times before even getting a response… after she also didn’t pay March’s 1st $400.
Our property manager filed unlawful detainer (eviction) with the court, and that got the tenant’s attention. She then had to pay the balance due, as well as the court filing fee, before March 30th (court appearance date) to dismiss the court action. She showed up to court with the cash to pay and then everyone just went home. You can’t evict someone who has paid in full, even if the process of collecting rent was unnecessarily burdensome.
And then came April. There was another story about a medical emergency and a new job on the books. We had agreed to a new one-time schedule for April’s rent payment, and she missed those deadlines and was incommunicado. We sent her another default notice on April 25. Note that this medical emergency was for her “husband.” This is the first that she had implicated herself that someone may be living in the house other than her and her son. She paid her balance owed on May 4th.
On May 8, she was given another eviction warning notice for lack of May rent (the 1st $400) and gave no response to requests for information on when to expect rent. After continued lack of payment after that notice, she was served with another eviction notice. On May 17, she was given 30-days notice to vacate the premises by June 17, 2018 at 5:00 pm. But then she paid in full and on time. We then changed her lease terms to state she was on a month-to-month basis and she would be granted 30 days notice when we (or she) decided to terminate the lease agreement. It was signed on July 16.
Guess what? She didn’t pay September’s rent. At this time, we also addressed her husband.
She was married when she applied, but we didn’t know. Justnow as I was looking back through our files to write this post, I saw that her pay stub she used for employment verification said that she was filing her taxes as married. I hadn’t seen that before. In all our visits to the house, there were always other people there. There was one man that seemed to be around 90% of the time. We overlooked it, but our lease did stipulate that anyone who stayed for more than 2 weeks was required to pass a background check and be on the lease. I strongly suspect that this individual was not going to pass a background check, which is why it was never disclosed to us that she was married and another adult was living there. Our property manager informed her that only she and her son were on the lease, and that if anyone else was living there, they had to be on the lease. She asked if we were referring to her mother-in-law visiting, our property manager said that it appeared to be her husband was living there, and then she ignored us.
We gave her our 30 days notice on October 5 to vacate, meaning she had to be out by November 5. Our property manager reached out to her on October 26 to see if she would be out earlier and set a time for key pick up. The tenant nonchalantly stated she wouldn’t be able to make it out by the 5th and she’ll be out by the 9th. Umm, excuse me, ma’am, but that’s not how this works. We held strong to the 5th and she lost it. Our property manager said that her lease is over on the 5th, and if she was not gone by then, the court fees would be her responsibility for us to get the court and local police department involved for her removal. She got angry and claimed that we didn’t handle the rental well at all, that we couldn’t charge her any court fees, and that she should charge us for not being able to use her tub because it was clogged (guess what on this one? The plumber removed things like a dental floss pick from the drain, immediately making it her fault (and at her cost) for said clog). She then said: “Lets just hope your (sic) as speedy with my deposit as you all were with terminating the lease.” I laughed out loud on this one just now. We should have terminated her lease an entire year before this discussion happened, but we kept working with her! Hysterical! Gosh, and to think this wasn’t our worst eviction process (more to come :)).
SELLING
A friend-of-a-friend was attempting to purchase a house in the same neighborhood as this house, and they ran into multiple issues causing them to walk away from other deals. Mr. ODA approached him with an opportunity to sell this house, which had similar specs to the one that they were pursuing. The buyer spoke to his wife and father about the deal and agreed to move forward. Of course, this deal was not easy.
The contract was ratified on October 31, 2018. We didn’t close until January 8, 2019. Our typical close time on our purchases is 4 weeks. We’ve done faster, and we may have done a bit longer if the time of month lined up better for our finances, but over 2 months was horrendous. Since our tenant was moving out on 11/5, and the closing was expected to be no later than November 30th, we didn’t pursue finding a tenant.
The appraisal was late being ordered, which was somehow allowable. Then it came in at the beginning of December at $65,000; our contract was for $68,000. We split the difference ($1000 from the buyer, $1000 from the seller, $1000 from the agent who was dual representing).
On December 18, our Realtor finally pushed back on the buyer’s side of the transaction to get things done. But it was Christmas time now. With so many offices closing for the end of the year, we weren’t able to get a closing date until the first week of January. The buyers were signing paperwork from Pennsylvania, which caused more delays because of having to send the paperwork back and forth for everyone’s signatures.
We sold in January 2019 for $67,000, after having purchased it for $60k just 18 months earlier. While this seems like a great deal, it’s not an automatic $7k in our pockets. You need to account for our closing costs from the purchase and sale (about $6,500), loss of rent for two months while trying to close the sale and the 6 weeks of no tenant when we purchased it, utility costs associated with vacant times, and costs to fix things around the house during our ownership. However, during that time, we had a tenant paying our mortgage (covering the loan interest and paying down the principal), and we were collecting more rent than projected because of her continued late payments.
1031 EXCHANGE
We made the decision not to pursue a 1031 exchange on this house. A 1031 continues to defer the depreciation to the next property, and it allows capital gains to be deferred. Based on current tax law, it can be done infinite times. However, there are extra lawyers and fees that come into play, so it becomes worth it when you have big dollars at stake, and that you have another property to purchase quite quickly after selling the first one.
The appreciation on the house was minimal given that it had only been 18 months since purchase, we had two sets of closing costs to add to the cost basis, and we hadn’t earmarked a place for that money to go upon selling. Plus, the cost of an intermediary would continue to eat into the “profit” versus tax paid, so we just went ahead and planned to pay capital gains taxes on it. Unfortunately, since we had depreciated the structure and the fridge over the prior 18 months, that paper money had to be brought back into the fold when calculating our taxes the following April. That’s several thousands of hidden money that is easy to forget about.
Depreciation is a great tax break when you own the property. The IRS assumes the value of your asset is being reduced by wear and tear and father time. This is true. It’s why if a landlord neglects the property and isn’t active with maintenance, renovations, and other replacements, the property will turn into a trash-heap in time. However, when you sell the property, you show the IRS that it in fact did not do that. If someone is willing to buy my property for more than I bought it for, then it obviously didn’t depreciate to a lesser value. I have to pay the IRS back for the depreciation assumptions that I was allowed to make over the time I owned it, plus pay the tax on the actual profits. Bummer, but logical.
In summary, we bought a cheap house and got a poor tenant. We had a TON of headaches with that tenant. We had to do a few house/yard projects over the ownership life of the property, but nothing worrisome and not already built into our numbers. Somehow, we made it work that eventually the tenant always paid up and then some (late fees). We made mistakes, we learned lessons. We figured out a set of streets to avoid for future purchases, learned how to sell an investment, and learned how to file taxes on an investment property sale. The story is fun to look back on. I’m glad we experienced what we did. But I don’t want to do it again.
One Dollar Allowance 