From Struggling Small-Time Landlord to Sophisticated Investor – Part 2 of 3

Welcome to part two of this three-part series exploring why and how I went from being a small-time landlord to investing in apartment buildings and the lessons I’ve learned along the way. If you haven’t checked out part 1 where I discus my motivations to invest in real estate and how I got started, you can check it out here

What challenges have I encountered as a small-time landlord?

Lots. I’ve dealt with almost every conceivable issue a landlord can have – bad tenants, non-payment of rent, property damage, as well as noise, parking, and garbage issues . Simply put, being a landlord isn’t easy and the commitment doesn’t stop at just writing cheques. The best way to describe the challenge is mixing the ownership and maintenance responsibilities of homeownership with the HR issues an employer faces – all of that but amplified.

I can tell you from firsthand experience that the small amount of monthly profit is not worth the risk and reward. Maybe the numbers look great in a spreadsheet, but when the rubber hits the road you quickly find out its not worth the personal sacrifice. For example, when your Saturday night is spent bent over cleaning rotten onions out of a dishwasher and scraping what you believe to be pizza sauce off the wall (yes this actually happened – and these are PG friendly examples) because you can’t find a cleaner at the last minute you begin to doubt your decision to be a small-time landlord.

Are bad tenants and property damage the norm?

Definitely not! However, if you’re in the game long enough you’ll eventually have a bad tenant who will wreck your property and stick you with the job of cleaning up after them. I’ve had good tenants and it feels great, things go like clockwork and you’re making money. Then boom! A bad tenant comes along and suddenly there is a major strain on you financially, emotionally, and physically.  Sadly, I know this firsthand. My relationships suffered and it was a very hard time. In one situation, I had to deal with a tenant who not only wasn’t paying rent but was also actively destroying my property and decreasing its value in the process. Suddenly, I had a hole burning in my pocket every month and I was forced to reinvest a significant amount of money just to get the property back up to a livable standard.

What are the risks associated with being a small-time landlord?

Small-time landlords carry a huge amount of risk and end up in constant cycles of feast or famine. For example, when a house is rented to one tenant, the landlord is fully exposed to that one tenant. Either the rent is 100% collected or its not collected at all. Either the house is 100% occupied or its 100% vacant. This is the exact opposite with apartment buildings where the risk of both rent collection and vacancy are spread across dozens or even hundreds of individual units and tenants.

In any event, when I had a non-paying tenant it was very stressful despite having a reserve fund for such an occasion. Mortgage, property tax, and insurance obligations don’t stop just because rent stopped coming in.

If being a small-time landlord is so tough why do so many people do it?

I ask myself this question a lot and I think it comes down to:

#1 Knowledge – most people don’t know that you can invest in private direct real estate without the burden of becoming a landlord.

#2 Access – most people don’t know where or how to access private direct real estate investments.

Lessons Learned

  • As a small-time landlord, too much risk is tied up in the performance of only a handful of units.
  • Being a small-time landlord is hard work and you’re ultimately making a lifestyle decision because the buck stops at you.

Stay tuned for part three of this series where I explore why and how I became a sophisticated apartment investor but did it in a way where I have no responsibilities such as tenants to deal with, no debts, and less legal liability.

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