April 12th 2021
Buy one Property a Year for Ten Years. Never Amortize for more than Fifteen Years. Never Sell. Three simple rules. Not necessarily easy. But simple. And yet, time and time again people who attend my seminars or read my material get started on that path, but then they fall off the rails. And generally what they have problems with is rule number 3 – Never Sell.
What happens is this. The property goes up in value over time. The mortgage starts to decrease. They begin to accumulate equity in the property. Then along comes a problem tenant. Maybe they damage the unit. Maybe they stop paying the rent. Whatever the specific issue, it’s irritating for the owner. And he thinks “I don’t need the aggravation. I’ve got equity I can get my hands on” and he sells. He ends up with some cash and the problem goes away.
I totally understand what happens. It’s like having a toothache. You can’t think of anything else. And so you go to a dentist and get the tooth pulled out. Pain stops. Problem solved. Of course, you can’t chew on that side anymore, but hey, the ache went away.
And that’s what ultimately happens to the investor who gives in to the aggravation of a bad tenant and the temptation of achieved equity and sales. Before long the money he got from the sale is spent. It’s gone. And so is the property. He’s got nothing left except a story to tell.
How many times have I been out in a car with an agent or acquaintance only to have them point out the window to a property we are passing, “See that property?” they tell me. “I used to own it. I sold it a few years ago. Worst mistake I ever made.” Property is long gone. Money is all spent. They are left with a story to tell their grandkids, and that’s it.
Today the climate is right for landlords to be tempted to fail on rule number three. Let me explain. First, tenants are struggling to pay the rent. Many have been laid off or on reduced hours due to COVID. Those who have been collecting CERB are going to get a rude awakening. No tax has been deducted. But that money is taxable. When things get more back to normal they are going to have some unexpected tax bills. In some cases, CERB will have to be paid back in full. When there isn’t enough money to cover all the bills, something has to give. It may be rent.
Then there is the fact that due to rapid escalation in the marketplace, any long-term tenants are paying far below market rent. And there really isn’t much you can do about it.
This brings us to the added aggravation that there is currently a freeze on evictions. Even if there were not, the eviction process is months behind. You simply can’t solve a tenant problem quickly through the courts.
But the cherry on the top is that property values are increasing by leaps and bounds. Year over year increases in the 25% - 35% range. A lot of money can be had by selling that rental and people are lined up to buy it. It’s tempting I know. But…don’t do it. Resist the temptation.
With the aching tooth, you could have opted for a root canal and crown. A little more aggravation and cost, I know, but you’d live to chew another day.
And with that rental property, problem tenants come, but problem tenants go. That growth in equity will still be there, solidly invested in the real estate where it will be protected and not spent, and moving forward you’ll have a revenue-producing asset that you can be proud of, rather than just a story of lost opportunity you can tell to your grandkids.