monopoly house

That Time I Made $18K in Real Estate But Still Lost

Like a lot people, I’ve made some really poor decisions in real estate. I got caught up in the 2008 real estate crash like millions of other investors and home owners. To have any type of financial future I had no choice but to foreclose on a rental property and short sell my primary residence. I lost tens of thousands of dollars in the ordeal and only recently has my credit recovered.

Throughout it all I held on to one small rental property in Charlotte, NC that I purchased back in 2007. The property was a simple first floor two bedroom two bathroom condo. I was able to keep this home in my possession because the rental income covered the mortgage and the HOA, which was only about $400 and $165/mo, respectively. Even at less than $600/mo with the mortgage and HOA combined I still lost a boatload of money on this property. Maybe a shipload of money would be more accurate. Or a tanker full of money. The repair costs, special assessments and extended vacancies made it impossible to turn a profit. Not even the tax write off could turn this into anything more than a money pit.

I happily sold this property, closing on it Wednesday and booking a $18k profit. That is a lot of money, in fact it is the most money I have ever received in one day. However, I wonder could I have done better just by simply investing in the S&P 500 index and avoiding all the headaches that come with owning a rental property. I put down approx. $5,000 to buy this home. If I instead invested that $5,000 in the S&P 500 it would worth about $8,700 as of Wednesday’s close.

S&P 500 Return 2007-2017

$18,000 vs $8,700, seems like real estate is the clear winner…right? Well not so fast! I had to spend $5,000 just to get the property fixed up and ready to sell, so that shrinks the difference to $4,300. I’m not a tax expert by any means, but for the sake of this exercise let’s make a bunch wildly favorable and likely inaccurate tax assumptions. Let’s suppose Uncle Sam is only going to tax me at 15% on the profit after I subtract the $5k I spent to prepare the property for a sale. 15% of 13K is approx. $2,000. Subtracting the $2,000 for taxes from $13,000 (18K – $5K) leaves me with $11,000 in profit. Subtracting $8,7000 from $11,000 leaves me with just a $2,300 difference between my real estate venture and the S&P 500.

An extra $2,300 over 10 years doesn’t make this a worthwhile investment. A pitiful $230 a year isn’t worth all the headaches and inconveniences of a rental property. Also, if I was to add up all the money spent on repairs/maintenance, missed rent due to vacancy, property management fees, special assessments, etc. I’ve lost a mountain of money!

For example, the home has been vacant this entire year and so I’ve had to cover over $4,000 in mortgage, HOA payments and home owners insurance payments. Just the overhead for this year wipes out the $2,300 in profit difference! If I was to go back and account for all the other years the overall loss would be something truly awful. So although it does feel good to finally get this monkey of my back along with a nice fat check, I realize I could have made a lot more money a lot easier in the market.

How to Avoid My Mistakes

You have to make sure your real estate investment makes economic sense. If you are purchasing a property primarily for rental income you need to be sure the income will far exceed the mortgage, HOA, insurance and maintenance costs. My most recent rental rate was $750/mo, after you subtract the property management fee, mortgage and HOA I was left with only about $125 in profit. Such a minuscule profit gets devoured quickly by repair requests, special assessments, insurance and any extended vacancy.

A couple of hundred dollars in profit per month is not worth the trouble, personally I think the minimum should be at least $500/mo at the start. Hopefully overtime rent will rise so that $500 profit becomes $600 or $700. The only way for rent to rise though is if your property is in a desirable area which is another mistake I made. My Charlotte rental wasn’t in a bad part of town, but it wasn’t in a area of the city with a great deal of amenities. It would have been better if my property was in downtown Charlotte, or close to a major employer in a hip part of town. If so my rental would have appreciated far more and I would have been able to demand a higher rent. These are considerations I unfortunately didn’t account for back in 2007 when I made this purchase.

In hindsight I acted too quickly with all my real estate purchases, each of them ended up being really horrible decisions. My inexperience, impatience and ambition proved to be a toxic mix. I hope that if you are planning on venturing into real estate that these words of advice are helpful. Being a landlord comes with a tremendous amount of responsibility and requires a ton of capital. You need to be sure the investment is one that will payoff via monthly income and appreciation to make it well worth the hassle. Otherwise, as illustrated above, your money might be better just invested in the market.


Leave a Reply