The Accidental Landlord Route to Purposeful Real Estate Investing

Our first rental property was a spec house I failed to sell and then lived in for a while. Then, when I moved to the East Coast, I became an accidental landlord. I made plenty of mistakes as a new landlord, and I’ll tell you about some of them here. I’ll also share details on the house’s worth and our cash flow on the property.

Single Family Home

How Did We Get Our First Property?

This spec house was intended to launch my successful and lucrative career as a developer. But instead … I made some poor decisions and ended up stuck with my spec house. The house killed my developer dreams, (at least for a while) but later fed our real estate empire dreams.

The house is a 3 bedroom, 2 bath, single family home on a slab foundation. It is approximately 1200 sq. ft. plus an attached two car garage.

Despite not selling as a spec home, the house has been super easy to rent. It is new-ish, in great shape, located in a nice-looking neighborhood, and within walking distance of the local university. This is actually not a college rental though! It is zoned for single family homes on our side of the street. And even though across the street is an apartment building filled with college students, we have always rented this house quickly.

Fortunately, I paid the house loan off early with assistance from family. Having zero debt on this house was huge. The house wouldn’t have made a profit as a rental house if we still had a mortgage on it.

As I mentioned earlier, the property is zoned R-2 which restricts the occupancy to two non-related individuals. It’s been impossible to maximize its earning potential by renting to only two students. With this property, we make more money renting it to a family.

The Beginner Mistakes We Made and How to Avoid Them!

Know How to Price Your Rental

In 2008 I moved to Virginia to be near my then-girlfriend (now wife) and the house became our first residual income property. We rented it out to some young guys attending the local university.  The first time we leased it we did not know the local rental market… or any market for that matter.  Our first big mistake was not taking the time to learn how to price the house. Not competitively pricing a rental is a general pitfall for accidental landlords that may not have the time, resources, or interest to make sure they are maximizing returns on their accidental investment.

The college students we leased it to were a family member and two of his friends.  We leased it way too cheap, and on top of that we were practicing long distance land lording.  A lot of amateur mistakes were made, but if you keep reading our blog you will be less likely to make the same rookie mistakes we did!

We charged $500 when only two of them lived there and $660 when another guy moved in a few months later. It seemed good at the time, but was still under the market value. The following year we raised the rent to $690.  Because we had the property underpriced we missed out on at least $1900 over the duration of their lease.

Routinely Check on Your House

The house has undergone one major repair/remodel after a set of tenants – an adult couple – kept more pets than we had agreed to in the home.  In fact, they had three dogs and a cat inside instead of the single dog they were supposed to keep outside!  There were some unforeseen circumstances and plenty of mistakes on our part that led to this.

Our first and biggest mistake was that we didn’t realize there was a problem until too late because we didn’t check on our investment. We were still long-distance landlords and rookies when things were going downhill. We failed to correctly identify and then manage this issue, and the pets trashed the carpet, urinated on a door jamb until it rotted, and the cat scratched nearly every window sill in the house sharpening its claws.  If you are a long-distance landlord who is not using a property manager, make sure you routinely check on your properties to make sure tenants are caring for them!

A couple of months before they moved out, Mr. College Rental visited them. We knew the situation had to be bad when they stood at the door to block his view of the inside of the house and did not invite him in. Even without going inside, he could barely stand horrible pet urine smell that hit him. Not good.

Luckily, I am a handyman and easily made all the repairs myself, with the only major expense being new flooring.  I had to remove the carpet, bleach the concrete floor multiple times to get rid of the pet odor and then install all new flooring in almost the entire house.  This incident made us loathe carpeting. Our kids still refer to this house as the one that smelled bad! And we vowed to never put carpet in a rental property again!

Today the property is all fixed up, smells great, and is rented to a pet free family.  The father teaches at the local university and has a great walking commute to work.

Detailed Numbers on Our First Rental Property 

We currently have a year lease for $850 a month. The house is now priced at market value—maybe slightly above market value.  It currently cash flows about $580/month after expenses.

 

Rent $850
Mortgage 0
Taxes (per month) $112.50
Insurance (per month) $53.50
Estimated Maintenance $100
Utilities/Mowing, etc. Paid 0
Monthly Cash Flow $584

 

Why Didn’t This Property Teach Us How Great Rentals Are?

Because it isn’t a great investment.

The house recently appraised at $126,000. At $850/month rent, that’s way under the “1% rule”. If we had an 80% LTV (Loan To Value) mortgage on this property, we would be losing money.

With the low rent for single family homes in our area, we didn’t realize the potential of rental properties until we bought a second rental—a college student rental house. For this reason, college rentals are our preferred niche even though they can be more work. See my blog post: The Pros and Cons of College Rentals.  But we already have this first house, plus it has sentimental value because I proposed to my wife there. So, we’re sticking with it for now and leveraging the equity to grow our rental portfolio.