The Darwinian Doctor This is the story of how I ended up selling my first rental property for a loss of $3000 after two years of ownership.
“You never forget your first rental property,” they say. Or at least I think that’s the saying.
In my case, my first rental property was a single family home in Birmingham, Alabama.
The purchase
I purchased it sight unseen in mid 2019 for $92,000. It was a modest three bedroom house that represented the beginning of my rental empire.
I bought the 1000 square feet home already renovated by a turnkey operator that took a rough looking property and made it look clean and shiny for the purchase.
We got a mortgage on the property so only had to bring 20% of the purchase price to the table. Including all the prepaid costs like insurance and taxes, our total out of pocket to purchase the house was $23,888.
Read more: Rental house #1: Purchased!
The honeymoon ends
My initial optimism took a beating almost immediately, however, as we struggled to lease the property. After three months with no tenant found, I switched property managers out of frustration. Ironically, a few days prior to making the switch, the original property management company found a tenant for the property.
The tenant’s monthly rate was $810, less than the $830/month that we’d expected. At this lower rent rate, though, our projected return was pretty low.
At the six month mark, I calculated the return on our investment. When I took into account things like repairs, our return came to -2.3%.
Not to be deterred, I forged on and hoped for the best. Unfortunately, our problems didn’t stop there.
Read more: Rental property #1: My real return after 6 months
A bad situation gets worse
Just six months later, the Covid pandemic struck and our tenant promptly stopped paying rent. Luckily by this point we had income from our other rental properties, so we decided to just sit on the property and see what developed.
Unfortunately, what developed was approximately 9 months of no rent payments combined with an eviction moratorium.
We got some better news in January of 2021, when the original tenant disappeared under the cover of night. Although we lost out on thousands of dollars of back rent, I never had an expectation that the tenant would have been able to pay that all back. So I was glad to see that she left the property in fairly good condition.
Our property manager took about a month to clean up the property and then rented out the property for $875 a month. This was a nice increase from the previous rate of $810.
Betrayal
Despite the higher lease rate, we noted inconsistent and lower payments from our property manager. When we’d call or email inquiring, there was always an excuse. One month, he said he’d calculated the costs from the unit turnover incorrectly and we owed him more money from the tenant turn. Another month, he claimed that there was a repair that he’d forgotten to inform us about.
We began to suspect that we were being misled.
The sale and the septic tank
Finally, after months of inconsistent rent payments and suspicions, we decided to sell this black sheep of a property. We found a real estate broker and put it on the market.
The property got fairly quick offers and was quickly under contract for around $108,000, a side effect of appreciation and a hot housing market. But after torrential rains in an unusually wet Alabama winter, the buyer inspection showed that the property’s septic tank had issues.
The header lines were flooded, and we were quoted $3500 to fix them. We asked the buyer to share in the cost of the repair, but they refused.
When the septic repair company went to replace the header lines, they found that the situation was worse than feared. The water level had risen to a point where an extra tank and sump pump had to be added to the system. The full cost of the repair was $6500.
By this point, we were so sick of the property that we were happy to just forge on ahead to the closing to be rid of the property.
The verdict
In the end, after paying for the septic tank and 6% broker fees, we walked away with $20,977. This represents selling for a loss of about $3000, not to mention the opportunity cost of that original $23,888 that had been stuck in the house for over two years.
Conclusion
If not for a faulty septic tank, we might have still walked away from our black sheep property with a profit. Our experience actually shows that real estate investing can be pretty forgiving over time.
Two and half years of appreciation almost made up for a $6500 septic tank repair bill!
You could also say that we should have just switched property managers. We considered this, but just couldn’t muster the energy. Since most of our portfolio is clustered in Indianapolis with a great property management team, it didn’t seem worth the effort.
And just like that, our portfolio shrinks just a bit. We’re going to funnel the $20,977 to our ever-hungry renovation project in Palm Springs. I’ll have a nice update on that renovation next week.
Have a great day!
–TDD
Have you ever sold an investment at a loss? Share the story below to console me!
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5 comments
Thanks for sharing. We bought a duplex and two triplexes (8 units total) outside of Cleveland November 2020 for all cash. Class C buildings and Class C tenants. They were immediately money pits and, while we should have been netting 3K/month in rent, every dime of rent money went back into them in deferred maintenance and repairs. Plus had to kick out and re-tenant three units. Sold them this fall– one for a small profit, one at a 10K loss, one at a 30K loss because some foundation issues were discovered on inspection. Ouch. Set us back a year, I’m trying to look on the bright side and appreciate the carry forward loss I’ll have on my taxes. Not doing small multi family again! Thanks for sharing.
You’re welcome! I think it’s important to admit that it’s unrealistic to expect every single real estate deal to be a success. Sometimes it’s better to pack it up and move onto greener pastures. As long as the overall financial journey is in the right direction, it’ll work out in the end.
Oh man, what a bummer! It makes you test your faith in humanity. Glad you’re simplifying life. With your income, having that rental car so it doesn’t seem like it moves the needle much.
I have had tenant issues myself. And I’m going to be spending about $15,000 to paint my house and remediate some mold issue. Bummer. But it needs to be done so the mole does not spread. Thankfully, there has been strong appreciation in the house and rent has been on time for the past two years.
Thanks for the condolences. I can’t fault the tenant too much, as Covid has done a number on the nation and a lot of people’s’ finances. But it wasn’t amazing to be on the receiving end of the pandemic as a landlord, that’s for sure. If your rental house has appreciated, I’m sure the $15k will be a good investment.
It’s done fine. Bought it in 2014. Always bummed when having to spend money on upkeep. But it is what it is.
Hopefully, my kids will thank me when they’re older and have a place to stay!