No Longer Landlords

The first sign of fall - orange leaves on a tree in the West EndA little over two years ago, Kyle and I thought it would be a good idea to become investment property owners. My career was in real estate and we wanted to talk knowledgeably to clients about being landlords, in addition to diversifying our investment portfolio. Our property search began and we identified a tiny condo in West Hartford that appeared to be a cash flow positive investment and took the plunge.

Today, as of 11:30am, we are no longer investment property owners and I can say that we are both very happy about that. Ironically we never had any issues with our tenants; they always paid their rent on time and were respectful of the property. Every month we netted about a $100 in profit – nothing huge but enough to cover unexpected expenses beyond the mortgage, condo fees, taxes, and insurance.

Looking back, we learned some things through this process…

First, finding good tenants is a lot of work. We only went through the process twice, but in each case it required at least two weeks of concentrated effort. We would post the ad on CraigsList and then try to answer as many questions as possible via phone or email. Kyle or I would meet potential tenants at the condo to show them around, answering any remaining questions. The paperwork aspect was less burdensome, but still required time and effort. It would have been possible to fill the unit much more quickly had we lowered our asking rent, but we were very focused on finding good tenants and making sure our investment was cash flow positive.

Because the unit was a condo, once we decided to sell we had to choose whether or not to sell it as an investment property with a tenant in place or as a vacant unit. We were confident that a vacant unit would be more attractive to the buying public. However, we had a good tenant in place who was interested in extending her lease, so we decided to try to sell to investors first. There was some interest in the property over the four months we were advertising, though informal discussions with potential bidders made it clear that investors valued the unit far lower than we believed an owner-occupant would. We listed the vacant unit for sale and quickly saw the asking price, which was so outrageous to investors, was very attractive to traditional buyers. Agents showed the unit early and often, and it went under contract in about a month.

Part of the due diligence process we used during our initial search was modeling the expected financial return of the property. Kyle put together a spreadsheet to take into account all of the expenses that investment properties require. It was interesting to see how the model rated different opportunities. Nearly all of listings we considered were cash flow negative at the asking prices – many dramatically so. It was difficult for us to understand how buyers were expecting to make money on their investments. Having gone through the landlording process with a property that was cash flow positive, it seems to us that the buyers must have been counting on continued price appreciation. There were no hidden revenue sources or profits.

Property ownership is one of the oldest businesses in the world. It is a specialization unto itself and should not be thought of as “easy money.” After a dipping our toes into that world, we have a good understanding of how it all works, and have concluded that it’s not for us right now. We have other priorities, and don’t want to feel responsible for maintaining additional properties.

That said, we wouldn’t rule it out as a future business activity. There are definite advantages to being a property owner and a landlord. We would have to be involved at a larger scale than one rental unit, and we would be much more opportunistic about our entry point so that there was a better chance for price appreciation in addition to the regular cash flow. At this stage in the market, the two main opportunities we see are for contractors to buy, repair, and operate distressed properties, and as a place to park excess cash (buy with no mortgage) that will generate a better return than money markets, CDs, or government bonds.