I purchased my first piece of real estate with almost 100% financing back in 1978. I was 27 years old. It was a beat up triplex with central heat and electric. The price for the three units was $8,500. It was located in a then-blighted area of South Philadelphia. It was close to the school where I taught so it was easy to work on the building for a few hours each day after classes.
After settlement I went to the home and wondered what part of crazy I was listening to when I agreed to purchase this house. The real estate agent told me that we could access two of the units but the second floor tenant would not give us access. I purchased the home anyway without any inspections and began my days as a landlord.
At the time, I was a full-time woodworking and construction technology teacher. I thought that I could do all my own repairs at cost and that my first venture into real estate investment would be a quick success. Not so.
Pro Tip: Separate Metered Utilities are Key
My first piece of advice to you is never buy real estate where the tenant does not have metered utilities. You only want properties where utilities are separate or be ready, willing and able to install them immediately after settlement before you begin renting the property.
Lessons of a New Landlord
One of my wood shop students came to class saying that his family was looking for an apartment. I met his mom and she agreed to the terms of an acceptable lease and moved in. The landlord paid for heat and electricity.
Pro Tip: Always Investigate Potential Tenants
I did not do any background checking, no credit report, nothing but blind faith that they would move in and be a happy tenant in my triplex.
They did not pay the second or third months’ rent and would call and say the oil had run out. It was on an automatic oil delivery. I had three tenants and only one was paying on time. Within a week of another oil delivery, I got a call that the oil had run out again. I went to the home and knocked on the door of the first floor unit where the thermostat was, and found the unit to be 85 degrees inside. The unit with the thermostat for the entire building was located near a window the tenants had broken and they did not attempt to even cover the window with cardboard or call me to make a repair. They simply turned up the thermostat. The second and third floor units had their windows open because the heat was too overwhelming on their floors. I was spending more on oil than the rents plus most of my teaching salary combined.
The first floor tenants had no interest in paying the rent nor did the inherited second floor tenant. The third floor tenant paid on time but her entire rent check was spent on my oil bill.
I soon found out that taking tenants to court for non-payment and eviction was a 9 month process back then. I was on the verge of bankruptcy with my new real estate investment. I replaced the broken window glass but the financial damage was done. Too many oil deliveries, I had been heating the outside, too little rent, and not enough teacher income to overcome the monthly overhead.
I told the paying tenant that she should begin looking for another rental because there was no way I could continue to support this losing real estate investment anymore. I found out too late that first floor tenant had been evicted many times in the past and was a professional at mastering the art of free rental housing from rookies like me. I also had a conversation with the second floor tenant and he agreed to move voluntarily when I told him the facts about my situation.
A Little Bit of Luck
Then divine intervention occurred. I ordered another load of oil and before they could deliver it a debilitating snow storm hit South Philly. None of the small streets could be plowed. It took at least seven days for my street to become passable for an oil truck. The oil in the triplex ran out on the first day of the storm. Three days later, a radiator froze and flooded the first floor. When the first floor tenant called I suggested she use the back rent she owed me to find another place since the unit was no longer fit for a tenant and repairs could take months.
Within five days of the storm all the tenants had moved out. The water was turned off. No more oil required. I hired an architect to help me redesign the entire building with separate utilities. I began to demo the interior of the building over the next year and set up the first floor with a small wood shop. I had a small construction company with another teacher friend and we used the triplex for material storage and as a base of operations for the next few years.
In the summer of 1983, I married my wife and we moved to Denver, Colorado. We stayed for almost four years.
Before I left for Denver I purchased new windows for the third floor of the triplex. We gutted the third floor, reframed for the new windows and when I realized we were moving to Denver I stored the windows at the triplex and closed up the newly framed window openings on the third floor with plywood. At that time, the city of Philadelphia was boarding up vacant homes trying to stop drug dealers who were squatting and dealing in anything vacant.
My home was maintained by a local subcontractor I worked with and who lived down the street. He called one sunny day and said that the city had ripped out the first floor windows, doors, my marble lentils over the windows and doors and removed my marble steps. $20,000 worth of tools, equipment, scaffolding and materials were removed from the property.
I never received any notice, only a $1,700 bill for the close up work performed. Years later, I went to a hearing and the judge threw out the bill but said that all the materials and tools removed from the building were a loss to me because you have to sue the city within 6 months of this type of wrongful event or the statute of limitations runs out.
Because the city removed the supporting lintels above the doors and windows and placed the cinder block at the front door on top of the interior flooring instead of the foundation wall, the building began to sag and fail. The cost to remediate was way above the value of the building. Eventually, the city took down my triplex and the triplex next door. I now had a vacant lot.
I received a bill from the city for about $12,000 for the demo and then another bill for thousands more for stucco they claimed to put on the attached neighbor’s home when they took my triplex down. Since they took both buildings down together, the city tried to charge me not only for the demo that they caused but for work on stucco never performed.
The city contacted me for a hearing regarding the two bills and I arrived with my young daughter. I wanted her to experience first hand the trials and tribulations of owning investment property. Eventually the judge agreed that the city caused the problems leading to the required demolition and agreed that the stucco work had never been performed. The judge was a reasonable man and sought a compromise. I agreed that if I tore down the building at cost it was take approximately $2,000 for labor and dumpsters to take down the building. He asked for $2,400. I agreed if they would take $100 a month for 24 months with no interest and he agreed.
I paid off the $2,400 and kept the vacant lot well maintained and allowed a community gardener to grow fruit and vegetables at no cost in return for keeping the lot clean.
When the city contracted out the demolition they had huge heavy equipment with steel tracks that damaged the concrete walkway. The city was unresponsive about replacing the concrete. They started sending threats of lawsuits if I did not replace the concrete. I would respond politely asking them to replace the concrete that they destroyed during demolition. A stalemate occurred and they left me alone.
Long Term Success
During 2016, finally, the South Philly real estate market was on fire. It was time to sell my vacant lot. Purchased in 1978 for $8,500 and I sold it in 2016 for $60,500. I held onto that property for thirty-eight years. My first investment property was like a masters degree in what NOT to do in real estate investing. Although the ownership included a lot of grief, aggravation and stress, I wish now that I had purchased 100 of those properties, but only those with separate utilities. 100 of those paid off vacant lots today would be worth somewhere around $6,500,000 today.