On December 6th, I closed on the sale of my house. Not the house we have been living in the last four years, but the property I bought thirteen years ago, when I was 23 and stupid.
More than a decade after this hapless journey began, I can finally close the door on this chapter of my life. I can also reflect on the event in its totality, and see if there are any lessons to glean.
Boy, are there lessons.
If you don’t feel like clicking those links, here’s the TL:DR summary: I bought an overpriced house at the height of the housing bubble (late 2016) and I financed it 100% with no down payment, since I didn’t have enough money to actually buy a house.
The rest of this post will be a postmortem analysis of the purchase, rental history and sale of the property, followed by some commentary and lessons on homeownership.
Although I make it out to be a terrible decision, there were many aspects to this property purchase that were, in retrospect, quite good. The only real mistakes I made were in the timing and the terms of the financing. Bad timing is rarely avoidable in the moment, but the way I financed the house was definitely an error on my part.
The house is a multi-family structure, built in 1895. It features a shared driveway, detached two-car garage, and sits on approximately 0.25 acres.
It has three floors and is zoned as a two family residence, with a finished attic that was advertised as an “in-law apartment.”
- First Floor: 2/3 bedrooms, 1 bathroom. 1000 square feet
- Second Floor: 2/3 bedrooms, 1 bathroom. 1000 square feet
- Third Floor: 1 bedroom, 1 bathroom. 700 square feet
The first and second floors have their own front entrance, and rear access via a shared stairwell. The stairwell goes to the third floor, but since that is the only access, it cannot be considered a separate dwelling. Hence, only two units. The basement contains separate heat/hot water utilities, as well as shared washer/dryer units and storage space.
The house sits in a moderately dense, working class neighborhood of a quaint, New England town. We’re situated almost directly in the old town center, right between Main Street, Center Street, and the green. Two major interstate highways run through town, and it’s a convenient commute to both of Connecticut’s biggest cities.
The house has a Walk Score score of 86. Within a 5 minute stroll, I had access to numerous restaurants, bars, convenience stores, parks, the train station, and almost anything else I might need. The neighborhood has added two breweries, an excellent beer bar and a wine bar since I moved. Looking back, it was a fantastic place to spend my twenties.
Here’s where things went south. As I mentioned in the previous post on this house, my financing terms were not just unwise, they were moronic.
If you can remember back to the 2005-2007 time period, anyone could get a loan. Seriously, you could buy a $500,000 house if you could produce a couple pay stubs from your job flipping burgers. Lenders did not care about debt-to-income ratios and stable employment. They just wanted to peddle houses.
This is what the purchase details looked like:
Purchase price: $305,000
Down payment: 0% (100% financed)
30 year fixed mortgage @ 7.25% interest rate
These days, people would choke at the idea of paying 7.25% interest to buy a house. But actually the rate for a well-qualified borrower putting 20% down was roughly 6.4% at the time, so this wasn’t all that terrible.
The property taxes ranged from $4,000-5,000 during the course of ownership, which is pretty reasonable for Connecticut, but certainly not cheap. The insurance was roughly $1,200 per year while the property was owner-occupied, and was in the $2,000 range when it was fully rented.
Before I go any further, there’s one more detail I haven’t mentioned until this point: I bought this house as part of a partnership with a friend of mine. We were in similar situations, so we decided to buy a multi-family property together as a ‘business investment’. We lived in the house as roommates, and split all costs 50/50. This was a way to mitigate risk, but it didn’t make the initial purchase decision less stupid.
The Rental History
Obviously, we had no experience with rental properties when we closed on the house. Hell, I barely had any credit history at that point.
So I took some pictures of the floors we would be renting, found a boilerplate lease agreement, and started advertising on Craigslist.
Our initial strategy was to target a private university that was 10 minutes away and dealing with a housing shortage. We actually got exactly what we were looking for with the first tenants, but failed to reach that mark during the subsequent 12 years of renting.
The college guys were, by far, the easiest tenants we had. We got along with them extremely well, probably because we had very similar backgrounds and I was only about a year older than them.
The afterglow quickly faded with the second group of guys. They were ‘local’ kids in their early 20’s who didn’t want to live with their parents anymore, and we soon found out why. The following 12 months would see an endless stream of sketchy visitors, all-night partying and various other illicit activities. The police came to our house on more than one occasion, and we tried to toe the line between reasonable landlords and concerned neighbors. The rental arrangement broke down toward the end of the year, and the apartment was vacated in poor condition with approximately $1,500 in missed rent payments.
Over the next few years, various combinations of family and friends occupied the second and third floors. We struggled to find qualified tenants during this time, so it was a matter of ‘taking what we could get.’
Moving on Up
In 2013, the eventual Mrs. BF and I had been together long enough to decide we wanted to ‘take the next step’ and move in together. Unfortunately, there wasn’t room for her on my floor (roommate), and I wasn’t about to pay my half of the mortgage and rent another place. So we found a compromise.
The only thing that the third floor was missing in order to be a fully functioning unit was a kitchen. So I watched a ton of YouTube videos, and then started building. It wasn’t fancy or pretty, but it worked. Mrs. BF and I soon moved up to the third floor.
In retrospect, this was one of the best periods of my life. Sharing approximately 700 square feet between the two of us and her permanent foster dog Punky was really fun.
In late 2015 we bought a single family home and relocated there. For the final three years of ownership, the entire house was rented out. As you’ll see in the next section, we never even really broke even with the house when fully rented, hence it was an easy decision to sell it.
Now I know you’re all here for the numbers. Without further ado, here’s the yearly breakdown of costs and income received on the property.
Some commentary on these numbers:
Mortgage: the full cost of the mortgage (principal, interest, taxes, insurance, and PMI) was quite high for the first few years. This makes sense, considering we borrowed the full cost of the home at 7.25% interest, and were paying roughly $200 a month for private mortgage insurance. Yuck.
We were able to refinance in the 2011-2012 time period, which lowered the interest rate to 4.375%, but didn’t remove the PMI (still didn’t have a 70% loan-to-value ratio).
Utilities: we had various utilities arrangements during our tenure. We always paid the water bill and trash pickup, and most of the time we provided internet access since it was no additional cost to us. The spike in 2017 was due to a leaky faucet; it was literally running almost full-flow for months, and the tenant only made us aware of it after we received a $1,200 water bill. Sigh.
2016-2019 Rental: as mentioned, we moved out at the end of 2015 and rented out the entire house from that point on. Actually, one family rented all three floors during this time. What we gained in only having to collect one rent payment was more than balanced out by the amount of trouble these tenants caused us over the years. They were behind on rent payments for at least 75% of the time and caused a massive water bill due to negligence, among various other transgressions. Years of headaches.
So overall, how did this ‘investment’ pan out? Here is the final breakdown, taking into account the savings from tax deductions and proceeds from the sale.
The overall cost to me for this 13 year period was approximately $600 per month. If you only want to count the 9 years it functioned as my residence, then it would be $875 per month. Most one bedroom apartments in this area would rent for at least $700-800 per month, not including utilities.
The verdict: I certainly could have done worse with my housing situation during that time period. I was lucky, in a way, because it could have been much more costly.
A House, or a Home?
Allow me to wax poetic for a moment.
This house started as a poorly planned business venture and a means to get out of my parents’ house. It was a way for me to continue the collegiate lifestyle and make my first attempt at adulting.
There were certainly times that I lamented buying the house. This was often triggered by a late payment, a broken sink, or a 3AM rave.
Two people were born while living at my house. Luckily, no one died here, but we did have one armed robbery.
I formed great friendships with some of the tenants. We enjoyed many drunken nights jamming on guitars in the basement with our first group, who I still maintain contact with to this day.
I met the future Mrs. BF in my house. She brought over a mason jar of homemade kombucha on the day we met. It smelled and tasted putrid, but I thought she was nice and asked our mutual friend to start inviting her out more often.
I picked up my homebrewing hobby, which turned into a homebrewing obsession, and finally a part-time job / side hustle. Through time and dedication, my kitchen progressed from a drain-pour factory to a nano-brewery of sorts.
I discovered Mr. Money Mustache and Early Retirement Extreme while sitting at my desk in this apartment. I can’t remember what I was actually searching for at the time, but I remember being floored by Jacob Lund Fisker’s lifestyle and his implicit critique of my own lifestyle. Immediately, I was hooked.
For almost every Memorial Day at the house, I challenged my friends to drink their height in Busch Light in a game we called “Wizard Staffs”. I had the supreme combination of stature and tolerance to often win the contest, but I don’t really remember the results.
Owning a large, old house also forced me to hone my DIY skills. I fabricated bookshelves that could fit into my 9×9 bedroom. We built a kitchen so that Mrs. BF could move into the third floor. I learned how to repair floors, walls and lighting so that I didn’t have to blow more money on a contractor or electrician.
Mrs. BF fostered at least a dozen dogs in our small apartment, sometimes two or three at a time. I learned to love these mutts, even as they defecated all over my floors.
At the time we moved out, I had lived nearly one third of my life in this house. In many ways, it helped shape the person that I am today. For this reason, I will never truly regret anything about the house and how everything panned out.
Some Lessons on Landlording
Analyze the situation before you get into it
This one seems pretty obvious. In 2006, I had no concept of cap rates, the 1% rule, or how to otherwise evaluate a rental property. Hell, I probably didn’t even calculate how much it would actually cost me per month in the best situation. I suffered as a result, with more than 50% of my income going to housing costs in the first few years.
Don’t lower your renting standards until you absolutely must
We endured quite a long period of sub-par rental incomes. This was partly due to the Great Recession, but also due to us lowering our standards. In retrospect, we should have held out longer for higher quality renters, and not settled for sub-prime candidates. Here’s a tip: if your prospective tenant can’t afford to give you first and last month’s rent at the time of signing, don’t let them sign!
Don’t give renters any credit for being reasonable, rational, or reliable
I can’t tell you how many times I was f’ed over by some form of tenant apathy or negligence. Broken faucets were the least of the problems. On numerous occasions, I would enter the renters’ apartment to find the heat blasting and windows open in the dead of winter (we were paying for heat, obviously). One tenant went on vacation for a week in the summer, and left all the windows open with the AC cranked. Last year, the tenant stopped paying the gas bill until the gas was turned off. He also didn’t tell us the heat was shut off, and used electric space heaters to keep the pipes from freezing. It took us 6 months to find out why the electric bill was $600 per month.
Bottom line, renters don’t give a shit about your house, your property, or any other terms of human decency. Of course, some of this trouble can be avoided by raising the quality of tenant and not settling for less. Still, nobody will care about your property as much as you do.
Don’t overlook maintenance and vacancy costs
Shit breaks. I’ve replaced most of the sinks and drains in the house TWICE since 2007. As you can see, we had some low cost years, but we also had some really costly repairs. We also had extended periods of vacancy (or partial vacancy) during the course of renting the place. If you don’t properly account for these things, they could easily break you during an unlucky stretch. It’s always better to plan for it, rather than be blindsided by it.
I hope I’ve given you a balanced view of my thirteen years of landlording. In reality, I was just house hacking before the term had been coined.
I won’t deny that the whole experience was trying at times. However, I learned a lot during the process, and I came out on the other side mostly unscathed.
Would I have done things differently, given a second shot at it? Absolutely. But considering how disastrous this decision could have been, I feel pretty lucky having survived.
Am I planning on getting into rental properties again? Well, technically we’re renting out our basement right now. And yes, I’d definitely consider it again. But next time, I’ll be sure to actually evaluate the decision before taking the leap!