The Ugly Side of Real Estate Investing

The Ugly Side of Real Estate Investing:

Lessons from a Rental Property in Warrensville Heights

Real estate investing is often glamorized as an easy way to generate passive income, build wealth, and enjoy the benefits of appreciation and tax advantages. But as any seasoned investor will tell you, it’s not always smooth sailing. I recently visited one of our rental properties in Warrensville Heights, Ohio, and it provided a stark reminder of the challenges real estate investors can face.

In this blog post, I’ll give you an inside look at the “ugly side” of real estate investing—what happens when a rental property ends with an eviction and a costly rehab. Whether you’re an investor or a Realtor, this post will offer valuable insights into managing expectations, preparing for the unexpected, and protecting your investments.

The Property

This is a single-family home that had been rented out for a few years. Initially, things were going well. The tenants paid rent, and from an investor’s perspective, everything looked good. But real estate, like any investment, comes with risks. And unfortunately, this tenancy ended in an eviction.

If you’ve been in the business long enough, you know that when tenants move out, especially after an eviction, there’s likely some cleanup and repair work needed. A good rule of thumb is to expect to spend up to one month’s rent on prepping the unit for the next tenant, especially after a tenancy lasting one to three years. If the costs exceed that, it’s usually a red flag. In this case, however, the damage far surpassed typical expectations.

The Damage and Cleanup

When I first arrived at the property, the exterior didn’t look too bad—just some leftover furniture and debris. But the real horror awaited inside. The interior of the house was in complete disarray. There was paint spilled on the floors, the kitchen was trashed, and the whole place was filthy beyond belief. I hadn’t even received a quote for the cleanout yet, but I knew it was going to be significant.

Once I ventured into the basement, I realized how much of a challenge lay ahead. The basement was piled high with trash, abandoned furniture, and junk. The cleanup alone will run into thousands of dollars before any repairs can even begin. And that’s before we even get into the kitchen, which needs to be completely gutted due to the extent of the damage.

While the cleanout is a big expense, the rehab costs are even more daunting. To get this house back into rent-ready condition, I’m looking at a rehab bill of about $35,000. That’s right—thirty-five thousand dollars. It’s not a number any investor wants to see, especially when you were expecting typical move-out prep costs.

The Reality of Real Estate Investing

This is a reality check for anyone thinking about diving into real estate investing. While the rewards can be significant—cash flow, tax benefits, and property appreciation—there are times when you’ll take a hit. Investing isn’t just about mailbox money, as the saying goes; it’s about managing risks and preparing for those inevitable times when things go wrong.

When a property needs extensive repairs, like this one, it’s essential to have cash reserves set aside to cover these unexpected costs. Not having enough reserve capital could jeopardize your ability to continue your investment journey or delay the property’s profitability.

What You Can Learn from This

Always Expect the Unexpected – No matter how well you screen tenants or how much you trust the process, things can still go wrong. This property is a prime example of how even seemingly good tenancies can end in costly evictions and repairs.
Have Adequate Cash Reserves – Having enough reserves to cover unexpected expenses is crucial. A $35,000 rehab bill is not something every investor can absorb easily. Without sufficient cash reserves, an expense like this could set you back for months or even years.
Work with Professionals – Whether you’re a DIY investor or you work with a property management team, it’s essential to have professionals on your side. From property managers to experienced Realtors, working with experts can save you money and stress in the long run.
Don’t Get Discouraged – Real estate investing is a long-term game. Yes, you’ll have setbacks like this, but you’ll also have properties that perform well, offer steady cash flow, and appreciate over time. It’s important to stay focused on the bigger picture and not let one bad experience derail your entire investment strategy.

Final Thoughts

Real estate investing can be a fantastic way to build wealth, but it’s not without challenges. Stories like this aren’t meant to scare you away from investing, but rather to prepare you for the realities of what it entails. It’s not always smooth sailing, and occasionally, you’ll encounter significant setbacks. But with the right preparation, mindset, and professional support, you can weather the storms and come out ahead.

If you’re an investor looking for support, or if you’re considering getting into real estate, our team is here to help. The 21 Mike Team specializes in working with investors, and we can offer guidance through both the good and the bad of real estate investing. To learn more or schedule an appointment with me or someone on our team, visit 21mike.com.

Stay prepared, stay informed, and may your investments be more fortunate than this one!

— Mike Ferrante, Team Leader, The 21 Mike Team at Century 21 HomeStar

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