Taking on Tenants

Juan Fourneau

IN MY EARLY 30s, I was a typical blue-collar worker. The only way I invested was through my employer’s 401(k) plan. But I was a good saver, putting 25% of my income into the plan, which was the maximum allowed, plus I got a generous company match of 8%. Still, I was on the lookout for ways to increase my savings and my investment returns. That was early 2006.

I read a variety of books to further my personal finance knowledge. But it was the biography of my bodybuilding hero, Arnold Schwarzenegger, that ultimately convinced me to take the plunge and become a landlord. Though his big checks from Hollywood didn’t hurt, Schwarzenegger made his first fortune in real estate. It all began with a multifamily building in the Los Angeles area. He lived in one of the units, while renting out the other seven apartments.

I decided that could work for me as well. I was living in a three-bedroom house as a single guy. I didn’t need all the space. I had bought the house because my parents and coworkers all said buying a home was a great investment. Instead, it hampered my ability to save and invest more aggressively.

Each month’s $900 mortgage payment devoured almost half the after-tax income from the chemical plant where I worked. After making my car payment, and paying for utilities, groceries, cable and other bills, I was left with a few hundred dollars to spare each month. I began searching for a multifamily apartment building where I could essentially live for free, with the rental income covering all costs. I could then use that $900 to save and invest.

The first property I looked at was a triplex. I could certainly see myself living in the one of the two-bedroom units or even the efficiency. A negative was all the units were occupied, so my first job as a landlord would be to give one family notice that they had to move. In addition, I hadn’t expected the property taxes to be so high. My cash flow projections didn’t factor that in. I soon learned that Iowa has very high commercial property taxes and anything more than a duplex was considered commercial. I was outbid for the property by a seasoned investor who knew to move quickly with a fair bid, while I was trying to lowball the price.

The lessons kept coming. I looked at a fourplex in a small town near work. At one time, I had actually lived in one of the units, so I was familiar with the property, which was a bonus. Inside information in real estate is often available in way it never would be when investing in individual stocks.

My offer of $145,000 was accepted. At the time, two of the units were vacant and another tenant was moving out. I was concerned about having four empty units and encouraged the current owner to rent the units if, before the closing, she was contacted by potential tenants.

That was a mistake. The owner was selling because she was struggling to find good tenants who paid on time and took care of the units. When I closed, one of the two tenants was clearly going to be a problem. During the walkthrough, the unit was a mess, and the tenants already weren’t paying their rent.

I moved into one of the apartments and, within two months, had to evict the tenants next door. It was an expensive lesson, in part because I had to hire an attorney. After that, I learned the state’s legal process for evicting tenants, including what I could and couldn’t do. The other tenant didn’t work out in the long run, either. It was clear, after I moved in, that I would have been better off buying a completely vacant apartment building.

In the years since, that initial investment has delivered priceless lessons in cash flow, loan terms, property management and more. It set the stage for me to continue buying rental properties. But thereafter, I focused on single-family homes. I also began searching for a good property manager.

After the initial fourplex purchase, which I owned from 2008 to 2014, I purchased and still own eight single-family homes. I began to buy homes as opposed to apartments because they were readily available during the foreclosure crisis. I’ve also realized that, when it’s time to sell, you have more potential buyers with single-family homes, plus buyers planning to occupy a property themselves will often pay more than an investor.

I plan to use the cash flow from the properties to supplement my retirement income and perhaps fund part of my children’s college costs. I also hope to sell a house or two to reduce some of the mortgage debt I took on. Carrying a high debt load didn’t much bother me 10 years ago. But as I’ve grown older, and as I prepare for my two children to go to college within the next decade, I’d prefer to have the properties paid off.

Juan Fourneau’s goal is to retire at age 55. When he isn’t at his manufacturing job, he enjoys reading about personal finance and investing. Juan, who is married with two children, can still be seen in the ring on the independent professional wrestling circuit. He wrestles as a Mexican Luchador under the name Latin Thunder. Follow him on Twitter @LatinThunder1.

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