Is Buying a Rental Property Worth it?
Get Out of Debt Blog – Month 4
If you haven’t been following my quest to get out of a half million dollars in debt, I suggest you begin with My Journey to Payoff half a million in debt or check the Get out of Debt Blog master page.
Last month I talked a lot about getting my wife on board and suggested she read Dave Ramsey’s “Total Money Makeover”, but she has yet to and the spending continues. To make matters worse, our rental property is showing its money eating teeth. I currently have a vacancy and am in the process of evicting another tenant. Therefore, only 50% of the building is rented out and paying. I often ask myself if buying a rental property is worth it. Maybe I’ll write something later on my disastrous attempt at being a landlord, but in short…I’ve had 5 evictions, over $10,000 in lost rents, forced to invest $30,000 worth of building repairs, and have probably had 3 years worth of at least one unit being vacant during the 5 years of ownership.
The image I lead this post with is misleading in my state. Tenants aren’t forced out at the whim of the landlord, but rather they can dwell almost indefinitely. As soon as this particular tenant owed me $2,000 in back rent, I served him the 14 day Notice to Quit and now I wait a month for the Eviction hearing. Tenants knowing they are being evicted cease to pay anything, if they were even paying before. Once the hearing is complete and we come to terms, the tenant usually gets another 30 days to pack up and move out. If they don’t leave, we wait again for another hearing and come to some more terms. This is an endless cycle where eventually the landlord has to pay for movers and 12 months storage for the tenant’s belongings.
The landlord is eventually given a money judgment on the tenant that lasts 20 years. However, if you have lost contact with the tenant, you’re out of luck. That is, unless you want to hire attorneys and private investigators that normally cost just as much as the tenant owes you. In my opinion, money judgments are worthless and buying a rental property is not worth it.
What is the Income of a Rental Property?
Even if you have good luck with tenants and only need to put a modest amount of money into renovating the rental property, the value just isn’t there. Say you make $200 profit each month with a fully rented property after paying the mortgage, taxes, utilities, and other regular bills. Your profit over the course of a year is $2,400, but having one eviction will eat the whole year’s profit and more. If you have just one vacancy for a month, it will take roughly three months to recoup your losses. When I have a vacancy, it usually takes a month to clean and prep the unit for rental again, then another month of tenant screening and showings, then another month while the chosen tenant gives their current landlord 30 days notice. On average, there is a 3 month vacancy when a tenant moves out which requires 9 months to recoup the losses. Provided you don’t have any more vacancies. Again, buying a rental property is not worth it.
What about the equity you earn in the rental property?
I guess it depends on when you purchase the investment property. It is a good time to buy with the current real estate market, but I still wouldn’t even if I had the money. The value of my property has lost $65,000 in equity since I purchased the building. Combine that with my other losses and I’m out well over $100,000 attempting to better my position buying a rental property. It has done nothing but destroy me financially and mentally, even more so than my wife’s spending habits. I will reiterate, buying a rental property is not worth it.
Get out of Debt Goal Reminders
Goal 1: Achieve a Net Worth of $0 by paying down debt and increasing savings and investments.
Goal 2: Have $0, and I mean ZERO debt and liabilities.
Goal 3: Increase my net worth to $500,000. Basically, turn half a million in debt to half a million in assets…a daunting task to say the least.
Get out of Debt Status – Month 4
Financial Status for the end of Auguest:
| DEBT | EQUITY | Asset Value | |
| Property | $273,773 | $300,000 | $26,227 |
| Remarks: This is our home plus our rental property. I took the value of the properties from Zillow to determine equity and subtracted the remaining balances on the mortgages to figure the Asset Value. After speaking to a realtor this month, it turns out the investment property's market value is $20,000 less than zillow...figures adjusted from previous months to reflect this major depressing loss |
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| Equity-Line | $39,400 | $0 | -$39,400 |
| Remarks: Took this line on our primary residence to fund the down payment on an investment property. | |||
| Credit-Cards | $3,673 | $0 | -$3,673 |
| Remarks: Not much progress, but some.. |
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| School-Loans | $154,215 | $0 | -$154,215 |
| Remarks: Yup, it's a lot. Between the both of us there are 13 years of schooling with no parental help. We'll probably tackle these last as the interest rates are very nice. |
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| Vehicles | $32,200 | $27,400 | -$4,800 |
| Remarks: I took the trade in values for both vehicles from Kelley Blue Book to determine equity and subtracted the remaining balances on the loans to figure the Asset Value. |
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| 401Ks | $0 | $47,560 | $47,560 |
| IRAs | $0 | $7,312 | $7,312 |
| Investments | $0 | $7,000 | $7,000 |
| Remarks: This is a gamble on an IPO that still hasn't panned out. | |||
| Savings | $10,032 | $10,032 | |
| 529 | $1,933 | ||
| Remarks: I can't let my kids have the same burden as my wife and I with school loans. Our goal is to pay for at least half of their college education...which is not included as assets. | |||
| Totals | $503,261 | $399,304 | NetWorth: -$103,957 |
| Monthly Changes | $3,430 | $18,915 | NetGain: $15,485 |
| Remarks: This would have been an ok month with a $4,515 NetGain, but one of the properties value was overestimated. |
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My Get out of Debt Monthly Budget
I’ve tracked our income and expenses for the month of August.
| Income | This Month | Over/Under | |
| Salaries and rental income | $18,179 | $16,554 | -$1,625 |
| Remarks: Our income has dropped significantly due to apartment vacancies and a pending eviction of a tenant. |
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| Other | |||
| Total: $16,554 | |||
| Deductions | |||
| Taxes | $3,841 | $3,841 | - |
| 401K | $1,240 | $1,240 | - |
| Remarks: We could put this toward debt, but I need to match company contributions and the investment market is just so under valued at the moment. I hope I'm making the right choice. | |||
| Life-Ins | $48 | $48 | - |
| Health-Ins | $465 | $465 | - |
| Dental-Ins | $30 | $30 | - |
| 529 | $100 | $100 | - |
| Total: $5,724 |
Remaining Income: $10,830 | ||
| Long Term Debt | |||
| Mortgages | $2,737 | $2,800 | +$63 |
| Equity-Line | $200 (min) | $200 | - |
| Vehicles | $821 | $821 | - |
| School-Loans | $1,286 | $1,286 | - |
| Total: $5,107 | Remaining Income: $5,723 | ||
| Expenses | |||
| Insurance | $415 | $112 | -$303 |
| Day Care | $450 | $510 | +$60 |
| Remarks: Our day care situation has changed this month and will again next month, I should have an updated budget for this by the end of September. | |||
| Gas | $500 | $363 | -$137 |
| Food + | $1,100 | $1,769 | +$669 |
| Remarks: The + means anything you would buy at a retailer, such as a shovel, toilet paper, lawn bags, clothing, etc. My wife does this sort of shopping and I go crazy figuring out why these necessities are so expensive. Could I ask everyone to comment and let me know how much you spend on groceries et all and your family size. I need some average bearing. |
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| Electricity | $450 | $234 | -$216 |
| Oil | $800 | $0 | -$800 |
| Remarks: We ended up on a payment plan last year and when the price of Oil dropped significantly, we had a balance of a grand or so. Still haven’t needed to pay anything additional for oil yet. | |||
| Water&Sewer | $255 | $0 | -$255 |
| Remarks: We paid the quarterly charge last month so this should even out over the year. |
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| Trash | $20 | $20 | - |
| Internet/Tele | $80 | $85 | +$5 |
| Cells | $90 | $91 | +$1 |
| Cable | $130 | $144 | +$14 |
| COH | $400 | $370 | -$30 |
| Remarks: COH is Cash on Hand that is spent every month on lunches at work, fast food on the go, tolls, quick marts, small apartment fixes, and the like. |
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| Credit Card | $275 (min) | All of our extra income goes toward this. Therefore, the paydown is tracked above in the Debt status table |
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| Newspaper | $10 | $10 | - |
| Gifts | $100 | $0 | +$100 |
| Dinning Out | $200 | $148 | -$52 |
| Entertainment | $200 | $0 | -$200 |
| Remarks: Entertainment is for movies, day trips, games, and other luxuries. Obviously, these aren’t needed, but for now we’ll keep it at a modest amount. |
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| Incidentals | |||
| $152 Window Repair $621 A weekend getaway for my wife and I $378 Clothes and shoes $63 Kid Toys $92 Hired an Electrician $106 Random things like copays |
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| Remarks: I could probably budget for everything here, but broken down and saved for monthly according to frequency. These are different every month however. I think I need some sort of budgetting software to help me. |
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| Total: $5,268 | Remaining Income: $455 | ||
Aside from the rental property issues, my wife has yet to come around and agree that we need to really focus on paying down debt. She wants to do a bunch of refinancing and buy a bigger home, but I’m persistent in keeping this idea at bay until we have a hold of this debt. She also wants to work part time to spend more time with the kids, but our income to expenses just doesn’t allow her to do that. She sees our financial picture much different than I and these two arguments are a constant thorn in our relationship. I can’t get her to read Dave Ramsey’s book “The Total Money Makeover” no matter how much I try. She feels like I think she’s clueless about money and is insulted that I keep pressuring her to read it. I fear even if she reads it now, her mindset will be skewed and negative in that she will not benefit from anything Dave explains.
My Get out of Debt Progress for September 1st
My Get out of Debt Conclusion for the end of August
I need to get rid of this rental property to be able to budget better through fixed income and expenses. However, the current market conditions will have me taking a loss that I cannot pay for. I need to wait out this downward real estate trend and bank on both properties during the upturn. A colleague of mind thought I should try the Zipbuyer service whose banner is to the left. Anyone tried this service? It has yet to be included as an opportunity for review here, but I’ve asked they add it soon.
I also need to get my wife on board through any means necessary. One commenter last month said that he or she sees this ending in nothing but divorce. Is that a good option? I’ve run the numbers as a single and it certainly looks like I would be much better off. Most people say divorce only hurts your finances, but in my case I don’t think so. However, I’m not sure there is reason enough to leave my wife just yet, there is still hope.
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1.Got a third party involved Marriage counselor or paster {preferably debt adverse and go even if she won't attend)
2.Stop mentioning Dave Ramsey to wife ( I am a big fan of radio show)
3.Lead by example. When I started my wife was not fully on board,Knowing "I could not out save A spender". My 2nd job income only went toward debt that was dead(closed) and could not come back with out my signature.
4. Fail first ,our budget was broken by me first and we developed a plan for this.
5. sold my leased car an now drive a debt free car.
If you do this for 6 months and you fell like you are still "pushing a rope".
Well... This is something you need to know about your wife moving forward.
We have been debt free including the house for 18 months and don't fight about money near as much and when we do only on one day a month(budget planning)
I will continue reading this blog.
Hang in there.
Wow, you have a tough row to hoe.
obviously pointing out your mistakes does not help your problem, so i will only offer an outsiders opinion on what I would do to correct your situation.
Getting your wife on board is the most important thing you can do b/c you will have to change a lot of things. If you will not take a loss on your primary residence, sell it. buy something smaller, or better yet, rent something until you are at zero. keep the investment, lower the rents, and only rent to people with spotless backgrounds. that always works better for us.
sell both cars private party. buy two cars in the 5-8K range.
stop contributing to your childrens 529's, you cannot afford to do that until you have no debt. You are paying interest on your credit cards, yet trying to make interest on their 529 plans? making more in the market than your credit card interest rate? i doubt it. same goes for 401K, stop until the high interest debt is gone. you must be militant about paying it down.
no unnecessary expenses until things are better. you are one emergency away from serious default. you have lots of assets, but how many can you touch if needed?
no eating out, no lunches out, cancel the cable and the newspaper, get rid of the CC debt. then reevalutate.
BTW, our household spends $400/mo on groceries. two people, organic food, eat almost every meal at home (dinner out maybe 2x a month)
you have to want it bad enough, soon enough.
Thank you for your comments, support, and advice. I wish I could do most of the things suggested.
@gdynpm
1. I’m thinking about it
2. I’ve given up on that effort
3. Getting a second job is a thought, but I already work 55 hours a week and don’t see my kids enough
4. As you can see, we’ve broken the budget every month, albeit my wife’s doing…or Murphy’s law.
5. I work an hour away, and need something reliable
I envy your current position, but until the real estate market bounces back…we’ll be in a pinch. If real estate values kept a steady pace upward over the last 5 years, I’ll bet we would have $100,000 more in equity and I would have sold the investment property a while back saving us tens of thousands.
@anon
Sound advice…getting my wife on board. I show her this budget every month and she dismisses it as overreacting. I’m at a loss on how to get her on board. She feels I lecture her too much.
We could probably sell the cars and downgrade, but that will be a hard sell to the wife as well.
The interest on our credit cards has been floating around in 0% deals for a while and I intend to get this paid off this month. After that, would you still suggest ceasing contributions to 401k and 529’s. We’re only doing $50 per month per kid.
“no unnecessary expenses” now that is what I keep trying to get my wife to agree on, but in her eyes they are necessary.
$400 a month on groceries??? Does that include all the other household items…ie cleaning supplies, toiletries, etc. If we could get it under a $1,000, I’d be amazed. At least I talked my wife into clipping coupons…haha, that seems like nothing in the grand scheme of things.
i was the anon from yesterday.
Yes, $400 on groceries. we buy good, clean food. the girl can cook, so we dont go out too too often. i always pack my lunch.
realistically if you and your wife do not come to some kind of understanding/compromise/agreement on what direction you are heading, the rest of my advice is pretty much useless.
i see it as the boulder is rolling downhill, you must stop it first, then start pushing it back up. the more drastic measures you take ,the quicker it will happen. if you are burning money, the $50 a month for the 529's could help. if you are just going to spend it, then might as well put it away for the kids, even though it is only $600 a year.
you and the wife must align your goals to some extent. otherwise their will be animosity or passive aggression between you two.
i wish you the best.
I've been watching you for months and commenetd in the past.
This is painful to watch.
I said it before and will say it again, the Ramsey method works, if you do it.
You both are not even close.
You will dig out of this if you follow the plan, you will win.
$621 for a weekend getaway...you have got to be kidding me.
$378 clothes...yet more insanity.
$999 on two line items that absolutely should not have happened. Do you really want this?
Behavior, Behavior, Behavior wins this game.
I think it depends a lot on the area where your rental property is. Sure, this is just like a business with long term investments and long term returns. I know that apartment investing work best near university areas or even industrial areas. If you think you are overwhelmed by the task of always searching for new tenants you should probably find a real estate agent to help you with that.