The Truth About Passive Real Estate
Real estate investments are often sold as “passive income.”
After investing $100M+ in real estate for our investors, I feel a tad differently about this topic.
Real estate is a great asset class, but it’s an operationally intensive business. A lot of the job is damage control because sometimes… things go horribly wrong.
Here are my top 10 investment property nightmares:
1. A Texas tornado.
I received a Google alert about a tornado in Austin, TX where we owned some property. Anxiety inducing, but I thought, “Hey Texas is huge, what are the odds”...and then went back to work.
A few hours later, I received pictures of my now roofless house.
“Mailbox money baby!”
It could have been much worse, thankfully everyone was fine.
Ended up being $50K in damage. Insurance wanted to pay $12K; I fought them higher but had to come out of pocket ~$30K.
2. Tenants turned house into a dog breeding business.
This was not cool.
Dogs are great. I love Lucky, our golden retriever. Maybe that’s why I tended to look the other way on tenant rules involving pets.
But 10-20 dogs in one home!
The smell was so bad contractors refused to enter for basic repairs. When the tenants moved out we did a ton of rehab work. The home looked spotless, but nobody would rent it. No matter what we did, the smell flat refused to go away.
Ultimately, I ended up paying up to replace all interior surfaces including ripping up the floors to swap out the subfloors. One year of zero rental income.
3. Hurricane Irma.
24 hours of watching the storm torpedo directly toward our property like it had a tractor beam on it.
Direct hit...you sank my battleship.
Stressful couple days. Pictures from the staff looked bad, but the damage was actually pretty minimal - just a couple days of clean-up and rehab work. Crisis averted, but new grey hairs never turned back.
4. An Ivy League lawyer tenant with a biker-gang boyfriend
Perfect tenant on paper. But her new boyfriend, not so much. Lots of Police reports and property damage. My favorite was they decided to set up their own net-less driving range on the roof. Frequent calls from the neighbors yelling about all the golf balls flying around the community. Neighbors must not have been golf fans.
This led to a drawn-out eviction from a professional tenant that could do her own legal work. Good times.
5. Getting sued over a ~1 inch “curb” at a property management office.
Speaking of legal, these fun frivolous lawsuits are typically lawyer driven scams. They’ll send staff to properties looking for fringe ADA access violations and then recruit tenants (who were not at all handicapped) to manufacture a complaint.
I fought it for awhile on principle, but ended up writing a small check to make it go away / avoid wasting more time.
6. A lift station failure.
If you don’t know what a lift station is, I envy you.
Hydraulic pump failure + sirens in the middle of the night followed by “Black-water” overflow. Which is a nice way of saying there was ‘you know what’ all over the property. Environmental agencies, city involvement and a couple scary letters with large proposed fines if not resolved quickly.
There was a much cheaper way to solve, but ultimately went with a more permanent (expensive fix) as I was losing sleep over the possible fines.
7. The Hoarder
Basically needed a hazmat suit cleanup crew. They found a surprising number of cats.
8. The flood that wasn’t possible
Property was near a river but not in a flood zone. Had engineers assure me a flood would never happen. Well, things happens. Got the call about the flood the first day of a summer vacation. At least the wife and kids had a nice time. I think. I was glued to the hotel room all week dealing with the resulting fallout. Then spent much of the next year coordinating with various state agencies to rebuild infrastructure / trying to fix the property.
9. Property Manager theft
She was leasing vacant units, not telling us and instructing these tenants to pay her management company directly. Small oversight in her genius plan: when there is a plumbing problem and you don’t answer the phone, angry mothers will go to the edge of the earth to find and yell at the actual property owner to fix it.
10. The mystery water leak from hell
Utility bills started spiking from $5K to $30K per month. Couldn’t find the leaks for months. I can still remember the sting from seeing that bill each month. We had a revolving door of specialists at the property with state of the art diagnostic / leak detection equipment. They each spent days onsite, looking like Landman wildcatters searching for oil.
What did they find? Bupkis.
Still not certain, but it was likely pin hole leaks in the galvanized pipes throughout the property.
It took a ~$250K water pipe replacement for the entire 10 acre property to resolve.
Conclusion
Most of the time real estate works out great. But unless you get really lucky, bad + annoying + expensive things are going to happen. These events seem to compound over time by the number of properties you own.
Don’t get me wrong, it was worth it for that part of my career. The returns were stellar.
But over time I started caring about something else.
Hassle-adjusted returns.
Today we still invest heavily in real estate. However, we only partner with talented, regional operators (who love the game) instead of running properties ourselves.
We invest via real estate debt and income strategies that tend to generate monthly cash flow without the operational headaches.
Same asset class, just without the drama.
That shift led us to build Evergreen Income for our clients, which is a model focused on private income investments designed to produce defensive cash flow at much higher potential yields than bonds.
If you’d like to learn more or see what we’re currently recommending to clients, reach out to our team at info@evergreencap.com
- Brad Johnson