We had to evict some tenants recently in rental property number 10. The property is in a very small town, is older, and smaller than my other rentals, but was an awesome deal. I bought it for just over $99,000 in 2014 and rented it for $1,250 a month until the end of 2016. I only had to spend $4,000 to repair the house after I bought it, and I plan to sell this property for close to $200,000. However, the tenants did a great job of trashing the house, and also managed to get bed bugs twice!
How did I buy this property?
This was the 10th rental property I purchased. I bought it from the MLS in March of 2014. The home was listed for $99,917 and I made a full price offer the first day it came on the market. The home did mot need much work, except for minor cosmetic items. The home had 3 bedrooms and 2 baths plus a detached one car garage. The difference between this property and most of my other rentals was it is older and in a small town. I decided to buy this one because it was a great deal and there was a lot of demand from oil workers in the area. I figured it would be easy to rent since there were no houses for rent in the entire town. We ended up not getting any response from oil field workers when we put the home up for rent, but instead rented to a lady who had lived in the town for years.
Below you can see a video of the property when I bought it.
How and why did the renters trash this house?
I do not manage my properties, members of my real estate team do. The nice thing about my property being trashed, and us having to evict the tenants was I had no part in any of it except for signing a couple of documents. A few months ago Justin on my team who is managing the property told me the tenants were behind on rent. They fell further behind, but had been in contact with Justin and came up with a plan to get caught up. However the tenant kept falling further behind and we had to start the eviction process.
Here are the highlights from the almost eviction:
- Had low interest in the place (took longer to rent than others), but ultimately found an applicant who seemed well qualified. Had good credit score and references (including prior landlord).
- Lease started May 1, 2014.
- Tenant had us on auto-pay and went 2 years without missing a payment or having an issue. Tenant had even saved up enough money for a down payment on a house. Tenant pre-qualified through our lender and we started showing her houses.
- Shortly after, she missed a payment. After her 2nd missed payment, she started making payments again. Shortly thereafter, she missed her 3rd payment. Tenant continued saying her disability income was incorrectly stopped and that it was going to restart including back pay. But as soon as the 4th was late, we started eviction process on 11/11/16.
- The eviction process took about 2 months, so the tenant was out on Jan 10, 2017. It was not an eviction by force. The tenant left on their own.
- The tenant left trash and personal items at the house. The place was a mess and there was damage. Since this was considered “excess” damage, we were able to add it to her tab. With damages, rent, and attorney fees, the tenant is now on the hook for $13,520 (though this might change at the final upcoming court date). We will need to pursue collections on our own, but can garnish wages.
How did the tenants get bed bugs and what did we do?
The tenants ended up getting bed bugs twice in this house! The first time we paid to have the bed bugs killed even though we were 95 percent sure the tenants brought them in. The law is a little sketchy on who is responsible to take care of pests. If there is any chance the landlords or the house caused the pet problem, the landlord is responsible. When the tenants fell behind on rent they said they had bed bugs again. We talked to another bed bug company and they said small towns that get bed bugs often spread them very easily and they are really hard to get rid of.
We were planning to send the company back again when the tenants told us about the bed bugs, but when they got further behind on rent they never mentioned them again. Once they moved out of the house we sent the bed bug company over to inspect it. They found bed bugs in the basement and we hired them to eradicate the pests. To get rid of the bugs the company seals the house and heats it to 140 degrees for 8 to 10 hours. I did not send anyone to clean up the house, until the bed bugs were gone.
How did the tenants trash the house?
After seeing how dirty the house was, we were not surprised bed bugs were there. You can see a video of the house below.
The tenants broke doors, broke windows, destroyed the floors, put holes in the walls, and left trash everywhere. We had been doing inspections on the home a few times a year, and it was never close to as bad as they left it. I think there was some sort of distress in their lives the last couple months they were in the house!
We will have to put new carpet in, fix the walls, replace some windows, most likely replace the kitchen, and paint the home. I would estimate the total cost to fix it up will be around $15,000, but hopefully a little less. They did a lot of damage to the house and did not pay rent for a couple of months, but this was still a great deal for me.
What is this rental property worth now and how much money did I lose?
Even though we have to spend a lot of money fixing up the home, some of those repairs are improvements. Replacing the kitchen is not necessary if I were to rent it again, but I think I am going to sell this house. It is in a very small town, and I worry that this market is more volatile than the market my other rentals are in. Once fixed up, I think this home will sell for close to $200,000. The price increase is due in part to market appreciation and because I got a great deal on it when I purchased it. I think it was probably worth from $130,000 to $140,000 when I bought it.
When I project the returns on my rentals properties I also account for vacancies and maintenance. You can use my cash flow calculator to project returns on your own rentals here. I usually figure I will spend at least 5 percent of the rents on maintenance and at least 5 percent of the rents on vacancies. The older the house is, the more I project to spend on maintenance. On this house I figured I would spend $187 a month on vacancies and maintenance. Over two years that would be about $4,500. I made very little repairs and had no vacancies the entire time I rented this home until the very end. I accounted for many of the costs, but not quite all of them counting the eviction, lost rent and repairs. However, when I look at all my rentals I spend very little on maintenance or vacancies. This property shows that things can go very smooth for a long time, but one bad tenant can cost a lot of money. You have to account for maintenance and vacancies, and keep reserves in place for your rentals.
Even though the tenant trashed the house, I still came out way ahead because I got a great deal on the home, I made money every month, and as a bonus the market appreciated. This is the worst any tenant has treated one of my rentals. I have owned rentals since 2010 and have never completed a full eviction on one of my rentals. I rarely if ever have to make repairs on them either, but this will happen once in a while.
For more information on how I find my rentals, finance them, manage them, and much more check out: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. The book is available in paperback or as a eBook and is an Amazon best-seller.
Why am I selling this rental property?
I have a plan to buy 100 rentals by 2023, but I have not made much progress on that plan the last year and a half. I have not bought any new rentals, and I even sold two properties. I sold those properties because our market has gone up like crazy, and those were two of my least desirable rentals. One had no dining room and was very hard to rent, the other was a college rental that was also hard to rent. I had planned to take the money from those rentals and 1031 exchange it into new rentals in a different market. I never bought any rentals with that money, but instead reinvested it into my flipping business. I have 16 flips going at the moment and that business is doing great. While I have not been buying more properties, I am not just sitting here twiddling my thumbs either.
I am selling this rental because it is in a very small town with a limited market. I am also worried about the bed bug situation and the possibility of them coming back over and over. If I were to rent the home again, I may be able to get a little more rent for it, but it was a tough house to rent as well. If I sell the property, I will be able to take get back $120,000 after paying selling expenses and the loan off. I can use that money to flip more houses, or buy better performing rentals. In fact, I have a new rental property under contract!
What kind of rental property do I have under contract?
I have not bought a new rental since September of 2015 (a year and a half). The market has changed so much in Colorado that it is tough to cash flow with prices so high. However, I just got a new rental property under contract. It is a commercial property, and completely different from anything else I have ever bought. The property has retail space, shop space, and was a great deal. I will have more details once I buy the property, but the list price was $110,00 and I feel it will rent for $1,500 at a minimum without needing any repairs.
I hate that I am selling my rentals, because of the passive income they provide, but I need to do what makes sense for me. I still want to purchase 100 rentals, but I have had to change strategies due to our crazy market. Moving into commercial is one strategy, and I may still invest out-of-state as well. For now the flipping is going great and I have some big plans in 2017 that I hope to be able to reveal soon.