The Anti-Investment: Money Pit Rental Properties

by Dave Peniuk

I was so excited to get out there and build up my positive cashflow from rental properties. Fresh from a real estate investing course from one of those late night gurus, I was motivated, armed and very dangerous. I bought a triplex (Money Pit!) in Niagara Falls, ON for $113,000. I got it cheap and I put down only 10% because the vendor was willing to give me a promissory note for a small loan (there weren't 90% loan-to-value mortgages from lenders like there are now). They teach you at these courses to find the motivated sellers that will "hold paper" on the property, and I found one!

It was an older building with tenants on disability or other forms of government support. It looked a little rough, but it seemed to only need cosmetic touch ups. When I bought it, the numbers indicated that I would earn about $400/month after expenses and financing so I figured that I would be able to afford the odd repair.

As I set out painting, replacing carpets and putting in things like new doors, I uncovered some serious problems such as:

• a leaky roof
• electrical wiring was not safe
• plumbing was old and falling apart
• mould in the bathrooms
• rotten wood.

On top of all of that, I received complaints regularly from a tenant that thought everything should be fixed overnight. Inside his unit I discovered a complete mess. He'd destroyed the walls, had cats that had urinated throughout his unit and destroyed all the window ledges. This tenant eventually called the city of Niagara Falls who then inspected the unit and ordered me to make a variety of repairs to his suite - most of which were directly caused by the tenant or his cats! Because the laws in Ontario do not allow landlords to collect a damage deposit, the only recourse is to use last month's rent or take the tenant to Small Claims Court to recoup your costs. It's just not worth the effort to take a tenant with no money to court.

After weighing my options (and my costs and time), I decided rather than spending several thousand dollars repairing the money pit, I would try to sell it "as is". If you have ever seen "as is" in a sales listing, be careful. This often means there are conditions of the building that are less than stellar and require a thorough inspection and/or repair.

Because I had the orders from the city to repair the problems with the unit, and because I was stressed out dealing with the tenants, I sold the property for $104,000. Yes, that's $9,000 less than I what I had paid 2 years earlier in an appreciating market and after spending about $10,000 in repairs. To throw even more money away, I had to pay legal fees and the sales commission to my realtor. All in all, I lost about $25,000 in 2 years! That's why I called it the Anti Investment.

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