by Domenick Tiziano
The following is an excerpt from Domenick’s latest book: The Accidental Rental, A complete guide to converting your home into a profitable rental property. It tells the story of how he went from an accidental landlord to house hacker and real estate investor. He continues to invest in rentals and real estate deals to this day.
In 2004, I purchased my first condo after moving out of NYC. I couldn’t stand paying $1,850 in rent for a tiny apartment on the Upper West side. I was living in my condo for a while before I outgrew it.
It was 2008 and the housing market started crashing after experiencing one of the biggest gains in history. I purchased close to the top of the market and I didn’t want to sell at a loss, so I decided to keep the small condo, save money and look for a larger one. My wife and I bought a two bedroom condo just blocks away in 2008. At the time, the housing crisis wasn’t raging yet, and it looked like we were getting a good deal.
We were very wrong but I’ll get to that shortly.
My realtor quickly found someone who was well qualified to rent out my first condo and I became a landlord for the first time in my life. Everything went well. My tenant paid the rent on time and never complained about anything.
The only issues that ever came up were the periodic leaks from the unit above which seemingly only happened during the holidays. This had happened while I was living there so I was familiar with the drill. I was close by so I could manage things. Eventually, he wanted to break the lease early, so I let him out penalty-free.
I thought being a landlord was easy.
Then I became an Accidental Landlord
In 2009, we had to relocate out of the country but by now, no one could buy a home. Lenders stopped lending. That made our decision to become landlords again an easy one. We still had the small one bedroom condo and now we were going to move out of the bigger condo to rent it out. How much harder could it be having two condos instead of just one?
Hard. Very hard.
The next several years turned out to be some of the most stressful of my life. Not because being a landlord of two condos is fundamentally harder than one, but because the numbers were not in our favor in condo number two. Far from it.
The Numbers
We purchased the two bedroom condo for $443,000. A good rule of thumb with rentals is that you need to charge about 1% of the purchase price to make the numbers work. This is called the 1% rule.
In this case, that would be about $4,400 per month.
Here’s what our 2009 Profit & Loss Statement looked like:
When we rented it in 2009, rents were actually falling and we were only able to get $2,500 per month. Operating expenses were less than 50% of Gross Rents (the 50% Rule). However, our debt service costs were too high. We took out 2 loans to buy the property: A primary mortgage at 5.75% and a HELOC at 4%.
We were losing $1,157 per month or almost $14k per year! That didn’t include the mortgage principal, so our cash flow was even worse. It was very stressful.
Clearly, this wasn’t a good investment but what choice did we have? Home prices were falling and no one could get a loan to buy a house even if I could have sold it at a steep loss.
That’s when we truly became Accidental Landlords.
Trial By Fire – Making A Rental Profitable
There are only two ways to make a rental more profitable: Increase income and reduce expenses. I would need to do both to get out of this financial hole. However, I knew the rent couldn’t be increased until I could get some renovations done. That wasn’t going to happen while I was overseas. So instead, I focused on reducing the expenses.
Over the next few years I successfully appealed my property taxes, paid off an HOA assessment, streamlined repair expenses, and saw interest rates drop on my variable loans. All in all, this saved me about $700 per month.
I then focused on increasing rents when I got back to the US. I spent the next couple of years remodeling the kitchen, bath, and floors. This, plus rising demand for remodeled condos, helped us raise rents about $500. Our vacancies dropped too, which helped me grow income even more.
Here’s what the P&L looked like 5 years later:
We had finally turned that loser rental into a marginally profitable one. But I wasn’t satisfied. I realized that the condo was never going to be a great investment so I waited for the right price and sold it in 2015 when I could recoup all of our sunk costs.
From Accidental Landlord To House Hacker
By this time, I was bitten by the real estate investing bug. I wanted to turn that cash into a real investment.
We bought our next house in the suburbs with the intention of converting it into a rental later. It was a live-in flip. This was a significant mindset shift from our condo. Instead of looking for the perfect house, we instead focused on finding the perfect investment. We found a house that we could live in while we added value to it over time through renovations.
It wasn’t pretty but it had the perfect attributes for a single-family rental. It was located in a good town and in a sought-after school district. It was a cozy three bed, two bath home. Perfect for a growing family looking to move out of their apartment. All it needed was repairs to everything. Seriously, this place needed to be gutted in almost every room. That’s how we got it so cheap.
We started by ripping the living room down to the studs and getting rid of the beams that made the ceiling look too low. Then we installed wood floors throughout the house and painted all the bedrooms. This really improved the overall look of the house but we weren’t finished. Eventually, we renovated the bathrooms, kitchen, and made the basement more livable by adding HVAC.
In a few short years, we rebuilt the whole place and realized over $100,000 in equity. What made that possible was that we didn’t over-renovate. We made nice upgrades that our target renter would appreciate but we didn’t go overboard trying to make this the best house on the block. That helped us realize a huge return on our investment.
That property is still our most profitable one by far.
You Can Do It Too!
If you are serious about house hacking to build wealth but are worried or don’t know where to start. That’s OK. We were all there at some point. The good news is there are many more resources available now than ever before. Read blogs like this one, join forums, and read books dedicated to people like you who are looking to make a better life for themselves through real estate.
Whatever your case may be, you recognize that becoming a landlord is a great way to build long-term wealth and financial freedom. Let those of us who have done it show you how!
