How To Lose Money on a Rental Property

[Corey Dutton]

A real estate investor I’ve known for many years specializes in ‘fix and flip’ investment properties. He will find the “dog house” in a neighborhood, transform it into a “cute house,” then resell it within 6 months or less. This same investor decided to get into the buy and hold, rental property business. He was presented an opportunity to buy 4 rental properties in Killeen, Texas. His mother was living in Killeen at the time, and he thought she could help manage the properties. So he purchased all 4 houses for less than $30,000 and then put approximately $15,000 into cleaning them up and getting them ready to rent. How could he possibly lose money on these houses after getting them so cheap? He thought he was so smart.

The real estate investor used a hard money loan to purchase all 4 houses, and he used his own money for the repairs to the properties. Within less than 5 weeks, he had them all fixed up and had 3 of the 4 of the houses already rented.

But within only 2 weeks, he had lost one of the 3 renters, so he had to get the house cleaned again and market it for rent. After the second month’s rent was due, the other 2 renters in the other 2 houses both did not pay. He finally managed to get the 4th house rented, but the renters immediately discovered a leaky toilet and some other items his contractor had missed. This cost him double the deposit the tenants gave for the rental on the 4th house. The other two deadbeat renters never paid, so it took 30 days to get each of them out of the two houses. Once he got one of the deadbeat renters out, he discovered they had done nearly $2,000 of damage to the house in the 3 months they had occupied the property.

How do you lose money on a rental property that cost less than $10,000? After he sold the 4 houses and paid capital gains tax, this real estate investor vowed never to purchase rental real estate again. He decided to go back to what he knows best, buy and flip investment properties.

[Kyle J.]

Originally posted by Corey Dutton:

How do you lose money on a rental property that cost less than $10,000?

Apparently one way to lose money is not to do proper tenant screening on your tenants.