I'm feeling a bit discouraged here. July 4 will mark my fourth anniversary of being in business as a landlord and I'm still not seeing any financial benefits. Over the last four years, I've procured eleven single family homes. All are "C" class properties and built pre-1960 with a few in the late 1800s. These houses permitted me to get into the game because the purchase price was affordable. I renovated some of them, but some were purchased rent-ready.

Over the last year alone, I've had to replace two furnaces, four A/Cs (every A/C I have), and two sewer lines. I went through an eviction (I take full responsibility for the decision to allow tenancy), which cost $8k with renovations and I have a family three weeks behind on rent. I plan to initiate eviction proceedings tomorrow. I worry my next string of capital expenses will be roofs...

Gross rents for all properties $12,144/mo. After mortgage, taxes, and insurance, I'm left with $6200/mo. This has grown steadily over the last four years, but I use almost all of this for capital expenses and repairs/turn overs. I've also used this to purchase additional properties.

I had a goal of operating 21 single family homes to produce enough cash flow to allow me to leave my day job, but I'm getting a bit discouraged and wondering if I'd be better off exiting this business.

Will operating rentals ever lead to financial independence? If so, when?

Discouraged in Iowa,

JS

It doesn't sound like it.

Polish them vacant Pigs, one at a time,

Look at how many mortgage payments your tenants made for you plus if you have a w-2 job how much income was sheltered with your depreciation deduction.

I get your frustration but it isn't "quick and easy money" especially in the past few years (with what happened). I'm not sure how that affected you... but depending, that may be part of your frustration too?

Buying cheap is great but you need to understand WHY it's cheap. Just because your rentals are "mostly in class C" doesn't mean that you should lesson your criteria for tenants.

Keep money aside for the roofs, maitenance, etc. Some of the things that you purchased now are good but if you are gearing up for roof issues, get to know a good roofer and have them look at your roofs... A really good one will tell you how to keep it longer, which one(s) may need to be either repaired or replaced (and when). Have them go up and check them out... some can last longer with caulking (meaning they won't leak or you catch them before they do) and other roofers will say "oh yeah, you need a whole new roof but really you just need to put up some flashing or a light repair - that's thousands of dollars vs a few hundred).

Learn to screen and don't get nervous with a vacancy (eager to fill with a body)... be patient. Don't be greedy with the rent... make it worth the money (not saying you aren't) but just because someone else is charging $1,200 a month and getting it doesn't mean that they have good tenants... they may be suffering with who they have in there.

It's a great way to make money but sometimes it does take a little while to do so. Other times you feel like "oh wow this is great" and then BAM... something happens.

Shorts answer, yes you will get financial independence. It’s a tortoise, not the hare. As landlords, we invest in people. Do Home Inspections before you went to anyone, verify all applications. Basically do your due diligence on anyone you will be leasing to. Looking back it took about 10 years for me to hit the financial independence.

Your path is almost exactly what I experienced. I was acquiring a little over 2 a year until I hit my mark of 24. I poured every penny back into the business until about year 12 when I started putting kids through college with the income from the rentals. By year 18 kids were out, I bought a few more with cash. By year 24 all loans were paid off and by year 26 I retired from the day job at age 56. Now in year 30 I'm starting to slowly sell them to my son and cary the notes for him while we travel the globe.

So yes, it's worth it if you hang in there. My rentals have put 2 kids through college and allowed me to make more than I ever made in a day job as an executive for a large corporation.

One issue is that when you buy older properties,there is often a lot of deferred maintenance. We’ve all been there. You buy something affordable then learn why it was sold.

Real estate is a slow growth business when done right. Plus, you got into the game at the height of prices.

As you learn what you are doing, it will help.

Go to the Mr Landlord Convention

Go to the Mr Landlord Boot Camp

Learn good screening

Also, learn to pay yourself. That is a hard lesson for many smaller LLs to learn. Property managers charge 10-15% for management. Pay yourself that first.

Slow the expansion and get the repairs done and pay off the debt as fast as you can. Then, sock away until you have a strong repair savings.

Then buy new property for cash if you can, knowing you’ll need to overhaul them when you purchase.

Probably can still register for the Mr Landlord convention. If you cannot attend convention, attend the next bootcamp. Either one should leave you feeling more energized. Learn to count your wins, more than your losses. Those losses are

"I've also used this to purchase additional properties."

I need to hear this.

Hang in there and control what you can. As others have mentioned, deferred maintenance comes with the territory when buying older homes. From a management standpoint, you'll need a better assessment of that for future purchases. A better process and better screening will remedy headaches as far as tenants are concerned. How you manage is something you have direct control over.

Will operating rentals ever lead to financial independence?

Yes

If so, when?

Six on 12 pretax cash flow is pretty darn good

And you have your debt service included in that

What you have to plow back into the properties as maintenance and capital improvements as a management decision which is reflected in your increase in equity.

Sounds to me like if you can keep the drama and aggravation from tenants under control You are doing great.

Depreciation and other tax benefits should drive your net net up even higher

Keep them rented and keep the rent collected

Income real estate is a multi decade business

Six on 12 pretax cash flow is pretty darn good

And you have your debt service included in that

What you have to plow back into the properties as maintenance and capital improvements as a management decision which is reflected in your increase in equity.

Sounds to me like if you can keep the drama and aggravation from tenants under control You are doing great.

Depreciation and other tax benefits should drive your net net up even higher

Keep them rented and keep the rent collected

Income real estate is a multi decade business

I have some 60s ranches and have had to replace 2 sewer lines. It was very expensive so I feel your pain.

Short answer: yep.

Long answer: yeeeeeeeeeeeeeep!

*Grins

Let's take a trip down what my real estate career has looked like: the good, the bad, and the bizarre.

Years 1-5: I made almost no money. Maybe $50-$100 per month on 12 units. Beer money. I did almost all my own maintenance and cleaning. Very hard times. I wanted to give up.

Years 6-10: I started getting the hang of buying right and tenant screening. Also started getting educated by reading Mr.Landlord. Income increase to a couple thousand $ a month. Unit count increased to 20. Started getting around more investors like me, swapping stories and talking shop. Learned and lot and found some inspiration.

Years 11-15: Things started to really take off. We outsourced all maintenance, mowing, and cleaning. Income doubled. Unit count doubles. I had hit my stride and could feel it working. The bank account proved the feeling was correct.

Years 16-today: We've moved into 50% commercial units. Our net worth exploded over the COVID years as all our little cheapie houses doubled in value and we started 1031 exchanging some residential profits into even bigger commercial units. Rental income is now equal to my day job.

Future: The plan for now is to hold another 5-7 years, then maybe sell out half of our unit to get the entire portfolio free and clear. I'll be 52-55 years old and ready to hang up the day job. 2 of 3 kids will be through college and the other one halfway.

In addition to all the good advice already given:

Make sure you are buying right.

Learn to carefully evaluate the property you propose to buy & get the price down to where it will cover the cost of the problems.

Example: You now know what a new sewer line costs. Next time you're looking at a house for sale, have a lumber send a camera down the sewer line & take a look. Learn the signs of aging on a roof. If it has central heat/AC, find the stickers on them & learn how to decode the date of manufacturing.

As long as you keep learning & modifying your approach accordingly, you'll be fine. It doesn't sound like you have had to take personal money for the capital improvements, so that's better than some who are just starting out.

Also, did you CHOSE class C property, or did you buy them because they were the least expensive purchase price?

You may want to seriously think about the type of tenant you would like, which tells you the type of property you need. If you decide that you don't really have the type you want, sell & trade up.

There is a difference between being "bad" at what you do, or being a "failure", vs making a decision to modify your MO / go another direction. It's a matter of perspective.

Joseph,

You REALLY need to hear my presentation at Convention!

I talked with Barb at Jeffrey’s office today. Still seats available.

Thank you all for the words of wisdom, encouragement, and advice. From what I gathered, I need to give it at least another year and consider how I can improve my management skills. I think I will just hold on growing for now and focus on what I have in front of me. I appreciate the feedback on the c class holdings. I often wonder if things would be easier if I traded up.

Id love to make it to the conference, but my 9-5 says I can’t. Hence why I’m chomping at the bit to be financially independent.

We have the same older housing stock. We "re-started" just before Covid hit. We now have 4 houses, 3 are/will be duplexes. And as you know here in NYS the LL is behind the eight ball much more than in Iowa.

We did all our major capital expenses up front. Fortunately DH is a master contractor so we got all the equipment at whole sale and DH put them in. Roofs, electric, plumbing and HVAC are all new as well as new replacement windows.

All of this was depreciated/written off against my salary at the time. DH is still on the child support treadmill (goes to age 21 here) and has 7 more months till the last of the three ages out and the ex is off the payroll permanently!

DH is 55 and has his own HVAC biz; he basically cherry picks his customers/jobs. On the days he's not doing that, he spends EVERY day (24/7 including holidays) rehabbing the 2nd to last rental. The biz is under my name and he is my subcontractor. That way I get to write off his "wages" which happens to be the exact same amount he is paying the ex in child support.

I am now semi retired (running said biz and doing the rentals) I retired from my 40+ a week job back last mid November. I am lucky in that I do receive a pension and I am 62 so I also receive SS widow's benefits until I turn 67 when I will start drawing off my own SS (should it still be in place).

I've been in the Rental Game of income property going on 45 years, started at the young age of 18 years old. I've seen three (3) complete Cycles where prices go up, then come crashing down. Therefore you've got to have multiple plans. Meaning, not just buy, restore and flip but also to hold and rent out to weather the storm.

MOST people don't understand the benefits of owning income property. Tax consequences, etc.

When I first started to buy homes, the depreciation period was only 15 years. Now it's 27.5 for rentals with people as tenants and 39 years for commercial rentals.

What does this mean? Well I became a real estate "Professional" so I could carry all of my real estate losses against my Salary/Job other Income Sources. What? I'd by run down property for a song and they after having that property in limited service, I'd vacate the tenants, 1 unit at a time, and fix up that property to shine and re-rent it for top dollar after the remodel. And write off all cost against my other job's income.

I find that class C SELLERS are often tired, fed up, and the properties are riddled with deferred maintenance issues.

I bought a 4 house package from such a seller. The "Plumbing" turned out to be just stuck thru the floor, dumping in the crawl spaces. Other similar issues.

I got them cheap, it's MY fault I did not do thorough inspections, so my entry expenses were higher than expected.

But once repaired they have been cash cows.

Your DREAM must be solid in your mind, in your gut, and bigger than these set backs.

If not you'll become a stooped over grumpy landlord.

BRAD

Thanks for getting back to us. Always good when we hear back. Since convention is a no-go, see about bootcamp. I believe that's in July, and just two action-packed days.

You sound like you are well on your way.

I only have 23 doors, one of which is my storage property. I just this last week had four empty places at the same time. Three of which were my fault.

Two of them were filthy tenants that I allowed to stay so I could keep doing other things while I waited. One is a special guy who turns out is a raging alcoholic that goes on benders and rehab every few months. The fourth one bought her own house. She's a kid of mine so I will let that slide.

When I had three empty I admit I was starting to worry. Then the fourth one popped open and all of a sudden I realized I am not going to go without a meal because of it.

Timing is bad because I am going to the convention, but it just allows me to realize the mistakes made and the progress that I will have in the future.

Not filing on the latest deadbeat until I get back. Not going to worry about it either. Heck, I just ten minutes ago got a call about a dead central air unit. I explained I was out of commission and contacted my HVAC guy. It is all set for tomorrow and hopefully it will be resolved before I get to the hotel.

Got one of the places rehabbed and rented. Added $25 per month to the rents and they have a dog so added the reg fee and the rents for the pup.

It comes and goes. You have to be ready for the bad stuff and learn how to avoid it the next time around.

If the headaches of turn over are driving you crazy - and they can.....what is your plan to limit these turn overs?

You are living prove that they are costing you thru the nose. You need to figure out your level of tolerance for pain and then build a plan to stay in that zone. Typically that means trading up in quality of your units.

fwiw-

My experience, # of units, timeframe, business evolution and complete journey mimics Sid's almost to a tee.

And yes. Totally worth it.

Figure out the mistakes you've made in past. Write down the lessons you've learned from 'em. Figure out a plan to not repeat the mistakes, but to repeat the wins.

But yeh. Don't quit 3 feet before the gold!

Everyone has said all the good stuff. :)

Ultimately, it's not one house here or one house there. It's the group of houses working as a group. When the group is functioning as a whole, it can absorb the difficulties of an individual house that has a temporary problem. It wasn't until I hit five houses working together that I started to feel more comfortable. It wasn't until I had ten houses working together that the money started to be noticeable. And it wasn't until I hit 20 houses working together that it started to be more self-sustaining. I'm in a LCOL area, though-- your landmark points will be different from mine.

In my head, I try to keep a third of my rents for taxes/insurance, a third for maintenance/repair, and a third for me. Except even now, I'm still plowing my "personal third" back into the biz to help fuel aggressive growth.

When you buy cheap houses, they're cheap because fewer people are willing to put in the time, effort, and money to solve the accumulated temporary problems. But once you've solved a problem-- you're probably good to go for a while. So if you replace your HVAC, your HVAC should be worry-free... presuming that you keep up with your air filters. Then you start deciding what the best process is for keeping on top of that issue. If you replace a roof, your roof should be worry-free... unless you have a hailstorm or a wind storm. Then you start developing opinions about the cheapest roof, or a metal roof, etc. If you have a drippy faucet, you start developing opinions about whether to buy the house brand at the box store, or pay extra for the next tier up.

The most difficult recurring issue is going to be with people, because people have more variables than garbage disposers or sewer lines. As you run into trouble with people, and seeing how situations play out--- it affects the way that you handle similar situations in the future. Those lessons can definitely be the most expensive ones, and can also be the ones easiest to repeat, because we're human, too. But if you're going to repeat a lesson and give someone a chance in certain circumstances-- you do it with your eyes open, because you're trying to be generous, but with the understanding that no good deed goes unpunished. :) But in the meantime, screen for stability. Stability in other aspects of their life is a good indicator for stability in their relationship with you. If the rest of their life is drama-filled, it's not likely that they'll be able to keep their problems from affecting their business with you.

We bought our first renovation at Easter, 2010. We had our first tenant in November, 2010. And we lost our first tenant two weeks later, because she had outstanding warrants that didn't show up in screening. :P Fast-forward to today, and we're at 25 active sfh's towards our goal of 30. I hope to finish up my two active renovations by Christmas, and be at 27. (Yay!)

But roughly speaking-- look ahead to the point where you don't have that mortgage anymore. How long will it take you to get there? How much will that free up? That's the number you pay attention to; everything else will be solved by time, and time will pass. Your job is to use that passing time to grow when it makes sense to grow, and maintain what you have when it makes sense to maintain, so that when you finally get to that point in time--- you're in a better place than you would have been if you hadn't acted.

I checked back in On this thread

And Deanna TX really said it quite elequently

I’ll add my 2 cent s again

Try to keep the tenant drama out of your life and business relationship with them. Your tenants are not your friends, they are your customers

Rental RE is really a very simple business. Basically,…

You own something which you allow someone to use (occupy) in exchange for them paying you money.

We re not trying to cure cancer or perfect intergalactic travel.

As said above, the people challenges are the largest things.

And I use the word challenges,……not problems .

The people management skills are important. Develop them.

I try REAL HARD to not be a jerk when having to deal with jerks,…….and believe me,…..that’s real hard.

I think in general people are getting harder to deal with and getting generally crazier on all levels, about all things and at all education / socioeconomic levels.

That being said,…the next thing is keep enough of an operating cash reserve,…..that is REALLY dedicated to the property business, so that when you have to,….or want to spend Money,……you can.

Is it worth it?

As so many have very eloquently put it, yes and YES!

Many times though, I wondered the same thing. We were accidental landlords and as we have learned and grown our business acumen, our financial picture has improved.

At first, we were only looking at the rental income and expenses, but we have benefited from owning and managing rental real estate in many ways and you will too.

Our first several years, we left so many benefits of owning real estate and a business on the table due to our ignorance. I would suggest you invest in educating yourself on how the tax code has many benefits for owners of rental real estate and businesses. We are clients of Sandy Botkin, John Hyre, and Anderson Business Advisors.

Now that we have educated ourselves on the tax code, we are legally able to take many former personal expenses and with the proper documentation, we can deduct them as legitimate business expenses.

Once I retired, I now qualify as a full-time real estate professional and that unlocks many additional tax benefits.

In our area, renting regular single-family homes to families 1 year at a time is extremely difficult to make a profit with due to the taxes, insurance, and the steep purchase price, so we have begun looking at properties in a creative way.

We purchased a farm house on 26 acres which we converted into a duplex. (Thank you WMH for getting my creativity flowing!) We sold 11 of the 26 acres with owner financing (we would not do that again) and we installed an 8-space RV park. There is a 2,400 square foot pole barn with water, electric and two small sheds on the property and we may end up installing an auto lift and renting it out to an automotive shop. (Thank you, S i d for the idea!)

We bought a disgusting doublewide mobile home on 1 acre with a failed septic system. We completely re-did the doublewide, installed a new septic for two homes and brought in a new singlewide mobile home on that same acre.

Our Self-directed Roth IRA purchased 5 acres with a singlewide mobile home, we added a 5 space RV park and we rent out the 3-acre pasture for horse grazing. There is a 4-stall barn that I would love to do something with, but we have not yet. We highly recommend Mike Todd with IRA Innovations if you are looking for a custodian. The SD Roth has been a game changer for us, and might be something you would like to look into.

Our best performer started out as a royal pain in the neck. We purchased a beautiful, used 38-foot RV for about $7,500 and have rented it out every month for the last 7 years starting at $650 and now we are at $800. Living in an RV is different than a home in terms of the amount of electricity available and our Guests have had quite a steep learning curve and paid for several melted breakers until they realized I knew what I was talking about. We have had the same Guest for the past 3 years and it is no longer a headache to manage.

We may foray into the medium lease term space targeting medical professionals when a duplex becomes available.

Eventually, your capital expenses will even out and you will be able to plan and budget for them, your rents will increase, you will be a pro at doing semi-annual home inspections and holding Residents accountable for any damage to the homes, you will put to use the excellent tax advice you’ve been receiving, you may even 1031 your way into small and medium sized commercial properties.

We made sooooo many mistakes in our first years, but for us, real estate is a long game and over 25+ years, your early and even mid game mistakes will not really matter that much in the long run as long as you stay in the game.

A others have said, If we can do it, so can you! We are rooting for you!

Renne

I can appreciate and understand your frustration if you are only reinvesting the money's that you make back into the business.

Inflation is a great tool if you own real estate already. The value of what you currently own is up probably 40% or more in a cash flowing heart land location. At the same time, the spending value of the money you owe is also down more than 40%. That is a wonderful combination.

Perhaps of targeting a specific number of units, you should set a goal of certain amount of cash flow. It is difficult to forecast the capital expenses, but I have found they typically run about 8% over the course of an investment.

Joseph Congrats You have 11 properties the first few years are the hardest and least profitable. It will get better!

You need other local landlord friends to brainstorm and problem solve with.

Perhaps change your focus from getting more roofs to INCEASING your net cash flow on those 11. Which residents are least cooperative? Give them notice of nonrenewal or hire a property manager just for that property while you manage the simpler ones. Which properties is the rent too low, study your comparable rates in the area and adjust. Could you do a 1031-sale out of one that has appreciated into another newer one that is more profitable and simpler to manage in a nicer neighborhood? I used 1031IPX company custodians once a year for the past three years.

Examine and prioritize what UPGRADES could you make to increase rent? Eg. Turn any into a duplex, add a bathroom, rent by the room and put keypad locks on bedrooms, finish a bedroom or attic? If you have to replace a roof could you add another story on top of the house (would foundation support that) to get more finished sq footage? Add another outside entrance - convert a window into a door? Submeter water and electric to pass utility costs to residents. Build a shed or garage and charge rent for that?