Ten years ago, we decided to move from San Diego county to a pleasant community forty minutes to the north. Since this was during the Great Recession, selling our beautiful townhome was not a viable financial option. So we turned it into a rental, a step that just never proved profitable for us.
Our strategy was to hang onto the unit until the real estate market recovered and meanwhile supplement our retirement through rental income. A solid plan. It should have worked. There was just one flaw – The unit was burdened with significant costs.
These included a high mortgage, as we had previously tapped some of the equity. The HOA dues were big too. Added to these were insurance and property management fees. When it all worked out, the monthly profit was under $200, and twice-annual property tax payments ate that up. At most, it turned out to be a break-even situation.
But we figured that was OK. As the real estate market recovered, the value would appreciate back to pre-2008 levels and we could eventually sell the townhome at a profit.
Now here’s the fly in the ointment. When after a few years the tenants moved on, we were invariably left with significant repair bills – damaged flooring, appliance replacements, painting, etc. – things that went way beyond normal “wear and tear.” Yea, we would get their one-month deposit, but that didn’t begin to cover restoration costs. And pursuing legal recourse would have been a quagmire. The rental turned into alligator, eating into our savings.
We went to this movie more than once! And you are right, there is no one to blame but ourselves. Many of my Boomer friends have rental properties, BUT they do hands-on management. They have the personalities and skills to do this; we did not. It cost us dearly.
Thank God the real estate market recovered to a point where we could finally sell the property. No, we didn’t recover all our investment over the years. However, the rental had become a financial albatross and we are happy to just get out from under it, take our meager gain, settle our tax bill, and go forward into retirement with financial peace of mind.
Looking back, our overall strategy worked…sort of. There were not many options for handling upside-down properties after the Great Recession hit. Had we been more experienced about property management, turning our home into a rental could have proved profitable. Eventually, we got on top of the situation and are now moving on. But it’s been an “E” coupon ride that I recommend others avoid.
The Message for Baby Boomers
Our experience offers several insights for Baby Boomers thinking of retiring with an income flow from rental properties:
- A property’s financial profile needs to support an acceptable monthly cash flow (Duh!)
- You need a financial reserve to handle unexpected costs, including unexpected restorations and periods of vacancy.
- Most Boomers who are successful at achieving a retirement cash flow from single-family rental properties actually mange the properties themselves. Else, you better be damn sure your property manager is properly screening tenants and stays on top of the situation.
- As we get older, most Boomers who have rental properties eventually get tired of the hassle of dealing with them. It’s good to have an exit plan.
- When it comes to selling rental properties, timing in a cyclic real estate market is everything.