When Investment Properties Attack
Oct 9th 2012 1:45PM
Updated Oct 10th 2012 2:13PM
During the heady days of the housing bubble, many Americans bought second homes and investment properties, believing that the value of these properties would increase. Then came the bust, and some owners turned to renting out those recently acquired homes, condos, and apartments. Zillow.com (Z) has referred to these folks as "accidental landlords."
If you're finding yourself in an accidental-landlord situation, take it from those who have tried it: While renting out properties can help to cover mortgage payments, provide a stream of income, and sometimes even a tax shelter (when properties generate taxable losses or decrease in value), the landlord business also has a pricey dark side.
"What a Huge Mistake!"
Tara Kennedy-Kline, an entrepreneur in Shoemakersville, Pa., says that she and her husband once saw renting property as way to invest in their sons' futures. But the dream quickly turned sour.
"What a huge mistake! Our first tenants left as a result of an eviction notice after four months of not paying rent, and they trashed the place," says Kennedy-Kline. The next renter they found didn't turn out any better than the first. "The second tenants stopped paying rent in May and we couldn't get them out until November and that was by forced eviction by a constable."
Steven Glassberg is an attorney with offices in New York City and Port Washington, N.Y., whose practice includes all aspects of real estate. He says that being a landlord is harder than most people think it will be.
Kennedy-Kline took the both tenants to court and won. But winning in court isn't the same as getting paid. Now Kennedy-Kline and her husband are into the collections process for more than $5,000. "Even the sheriff can't get our money," she says.
Non-payment isn't the only issue people face with their investment properties, Glassberg says. "Add in maintenance, insurance, carrying costs, and it is not a business for most people."
Here are some other tales from the front line of landlording.
The Tenant Who Tried to Burn the House Down
Problem tenants aren't just an issue for inexperienced landlords. "I got a real estate license in 1992 and bought my own first property that same year," says John Braun, a landlord in Minneapolis and St. Louis. "I now have a little portfolio of eight units, which I view as my retirement account. I take great pride in having helped to gentrify my neighborhood, which is a much more attractive place now than it was 20 years ago."
Improving the neighborhood has had its costs, however. "I have had an angry tenant move out leaving diapers smeared to the wall by their contents and feminine products stuck to the bathroom fixtures in the same way. That was someone I evicted because I surprised her one afternoon while she was smoking a bong in her living room with her 2-year-old on her knee and an electronic home-monitoring bracelet on her ankle."
What could be worse? Plenty, Braun has found: "I had one tenant who tried to burn my house down on New Year's Eve."
Ruined Appliances, Outsize Water Bills, and Legal Expenses
Josh Scharf, a landlord with several properties in Brooklyn, N.Y., tells a similarly horrifying -- and expensive -- story.
In 2010, new tenants moved into one of his apartments. "Soon after [they moved] in, the water usage in the building skyrocketed from $60-$70 per month to over $300 and even approaching $400," he says.
Scharf discovered that the tenants were selling showers and even taking on other renters. "Effectively, they monetized every part of the apartment at my expense -- showers, toilet usage, cooking rental, etcetera."
Evicting the tenants proved difficult. "Eviction for non-payment in NYC can sometimes take six months or more, and landlords rarely recoup that money," Scharf says. "I was able to get these tenants out of the apartment in three months after they started to not pay rent."
Scharf settled for two months payment -- but he was still left with the water bill, legal expenses, and the costs of cleanup, which were substantial.
When Rental Property Becomes a Crime Scene
Landlords expect some amount of wear and tear on their property. But few expect their rental units to become toxic. That's what happens when someone uses a property to cook meth.
Dawn Turner runs the website MethLabHomes.com and sometimes hears from landlords whose properties have become highly contaminated crime scenes after being used to manufacture methamphetamine.
While there are no statistics available about how many landlords have had their properties turned into meth labs, Turner says that those thinking of getting into the landlord business should be aware of the danger: "Meth lab testing and decontamination costs can add up very quickly, which is one reason that some investors may think twice about buying or owning rental property."
Ball's in Your Court
Real estate lawyer Glassberg notes that the courts are "notoriously slow to enforce a landlord's rights." Depending upon the lease, the landlord may be able to hold the tenant personally responsible for the damage, but "this is extremely difficult and exceedingly rare," he says. "The landlord is usually stuck with the bill to fix his property."
Glassberg has seen one reliable way landlords can protect themselves, however. Landlords can insist upon "a personal guarantee from a third party for any damage in excess of the deposit." However, "I have only seen this in context of a student in college renting an apartment that their parent is paying [for]. The parent is the guarantor."
What's your take, DailyFinance reader? Have you lost money as a landlord -- or as a tenant? Share your story in the comments section below.
Catherine Baab-Muguira writes Fool.com. The Motley Fool owns shares of Zillow. Motley Fool newsletter services have recommended buying shares of Zillow."