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Taking on Tenants

Juan Fourneau  |  March 29, 2021

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.

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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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Harold Tynes
Harold Tynes
8 days ago

Excellent article. I’ve discussed real estate investments with my sons. The tax issues are real and need to be part of the planning. Also observed some catastrophic maintenance issues that made the property unlivable for a period of time and cut cash flow. Appreciate more articles regarding real estate investing.

Tom Murin
Tom Murin
13 days ago

Excellent article. I was a landlord for about a dozen years. I had no real problems with my 2 family house. I lived in the top half. If the heat went out – it was mine too – so it wasn’t twice as hard. If you have good tenants it’s smooth sailing.

I had a single-family house as well. I co-owned it with my brother. We had to evict a tenant which was a slow and expensive process. You need to factor these types of things into the equation.

I did well with the properties. Uncle Sam took a nice chunk – you don’t realize the extent of your “silent partner” until you sell. I should have tried to do a 1031 exchange in hindsight.

Not everyone is cut out to be a landlord. That’s a good thing for those of us who are or were willing to take it on.

Juan Fourneau
Juan Fourneau
13 days ago
Reply to  Tom Murin

Thank you for the comment Tom. I’ve sold 2 of my rental homes over the years and I was also a bit surprised by the taxes. I was only factoring in long term capital gains taxes. It still was profitable though and a good investment.

parkslope
parkslope
12 days ago
Reply to  Juan Fourneau

I was also not aware that the IRS taxes recaptured depreciation at 25%. When we sold we had sizeable capital gains plus 20 years of recaptured depreciation, so a 1031 was a no brainer.
On the other has hand, there are several favorable tax breaks for rental property including the recent 20% pass through deduction.

Peter Blanchette
Peter Blanchette
15 days ago

You are not a typical blue-collar worker. About a third of workers in the private sector do not have a retirement plan. You had a retirement plan and received a company match to boot.

Juan Fourneau
Juan Fourneau
15 days ago

And I was very grateful for the benefits Peter!! Thank you for the comment. In my home town we are fortunate to still have a good manufacturing base where most folks have a 401 K with a match. But unfortunately you are correct, that’s not the case for everyone.

parkslope
parkslope
15 days ago

Thanks for sharing! I suspect that the difficulties you have encountered as a landlord will confirm the views of many readers that owning rental property is not worth the hassle. However, the vast majority of those who rent are responsible and deserve to have conscientious landlords, like you.

Although it was not our intention, my wife and I became landlords in 1999 when we fell in love with a three-story apartment that was being sold as part of a 4-family Brooklyn brownstone. While we had a few problematic tenants in our first few years, we didn’t have to resort to evictions and property damage was minimal. We were also fortunate to be located 20 minutes from downtown Manhattan by subway and never had a vacancy during the 20 years that we lived there.

It also wasn’t our intention to continue to be landlords when we retired and sold our brownstone in fall 2019. However, we changed our minds when our CPA informed us that we could defer more than $300,000 in capital gains and recaptured depreciation taxes if we purchased new rental property via a 1031 exchange. At our ages, we wanted to reduce our risk so we made all-cash purchases of four single-family houses near our new retirement home. It also helps that I am good with my hands and mostly enjoy managing our properties. Once again, we have been fortunate to be in an area that is booming and have had no problem finding good tenants.

I wish to the best in your continued adventures in real estate and hope you are as successful as we have been and that you are able to achieve your early retirement goal.

Juan Fourneau
Juan Fourneau
15 days ago
Reply to  parkslope

Thank you for the comment!! Thankfully my most challenging years with tenants were my early years. I now have a professional property manager and they have earned every penny of their fees. For the most part I have also found most of my tenants, 80% or more, to be good folks who treated my properties well.

Scrooge_McDuck88
Scrooge_McDuck88
15 days ago

Juan-

You’ve outlined most of the reasons that I’d never become a landlord.

Juan Fourneau
Juan Fourneau
15 days ago

Thanks for the comment!! My early challenges helped nudge me to hiring a property manager who gave me my time back and showed me why they were pros.They were much better at the job than I ever was. But being a landlord is not for everyone, I agree.

R Quinn
R Quinn
15 days ago

Let me just say, you are and we’re not a “typical blue-collar worker” 👍

Juan Fourneau
Juan Fourneau
15 days ago
Reply to  R Quinn

Thank you!! I enjoy your writings very much R Quinn.

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