As of October 31, 2004, I said good bye to my W-2 wage job. Most people thought I was crazy to leave such a cushy job. But, of course, I knew exactly why I left. I had planned the departure for four years since the market crash of 2000. I set out to achieve my five-year investment goals of accumulating 25 rental-housing units as a source of retirement income – in preparation for the worst-case scenario of losing pension and Social Security benefits.
The first four units were purchased in Michigan where we live. The very first one was a pre-foreclosure property. The other three were foreclosed properties. We bought them at the “right” price – at least at the time. Then the unthinkable happened. The market values of these properties kept dropping to the point where they became far lower than the low prices we had paid. (As of this writing, this condition remains.) I became afraid to keep on investing in Michigan.
Then came the opportunity to invest down south in Mississippi. After Hurricane Katrina, Congress enacted the Gulf Opportunity Zone Act of 2005 to encourage investments – providing a huge tax incentive for new constructions for rental properties – so that those who lost homes would have a place to live.
Despite the natural disaster, the southern economy, in general, seemed far removed from the dire economic conditions of Michigan. It seemed like a great place to invest. So we did.
First, we bought three duplexes; then two additional duplexes; then two six-plexes – totaling 22 rental units. We felt good about making these investments at that time.
As of December 31, 2009, I met my five-year goals – just as I had planned in 2004. I worked tirelessly to meet these goals. I could not have been more proud of my accomplishments. I was no longer throwing my hard-earned cash to the faceless entities on Wall Street. I did just about everything by the books, doing due diligence, making sure that positive cash flow was going to be there for the rest of my retirement life.
Before long, however, the Mississippi economy went south as well. (No pun intended.) Real-estate values everywhere continued to plummet. Initially, because I did everything by the books, based on my then “conventional” wisdom of buying real estate, I kept thinking, “It does not matter how far the market values of these properties plummet – so long as the cash flow remains positive.”
Over time, particularly with our investments down south, the rental rates deteriorated so much so to the point where it began to impact our cash flow – big time. Rental revenues were not coming in to cover the mortgage payments. That’s when the majority of my pension and Social Security income went to pay for the mortgages. Soon, that was not enough. Then we began dipping into our retirement savings to keep them afloat. Eventually, we began to see the writing on the wall. That is, these so-called “income producing” properties could instead end up sucking up all of our retirement funds dry – until there is nothing left.
Several years ago, as an investor in training, I learned all about short sales. Back then, banks were not yet in tune with what was happening in the real world of real estate. In fact, I tried implementing a short sale – and decided it was not for me. Trying to help a person out of a serious real-estate problem through short sale can be a heart-wrenching experience. Worse yet, you did not know for several months whether or not a bank was going to understand the gravity of the situation and accept your proposal to help the homeowner out of the dire straits.
Let’s fast forward several years. Never, in a million years, did I anticipate that we would be on the receiving end of a short sale as a solution to our problem. But here we are – that is exactly what is happening with the first six units that we had purchased in Mississippi. The rest, which we purchased with seller financing, are in litigation.
The values of some of these properties plummeted to just about a quarter of what we had paid in 2007, merely six years ago. That is, we paid $210,000/duplex in 2007; now they’re selling for roughly $50,000/duplex.
The actions we finally decided to take via short sale helped stop the heavy bleeding in terms of monthly cash flow. As of this writing in March 2013, we’re on the road to completely downsizing out of the Mississippi market. There will probably be a lot more lessons to be learned before everything is settled and cleared out of our books.
Needless to say, these events are not pleasant to have to live through. If nothing else, however, it’s giving me great materials for my book sequels.
Most importantly, I do like the fact that I’m facing head on, day in and day out, what concerns me the most. This, I think, is the essence of freedom. I cherish my daily life – in the country of my childhood dreams – where I’m able to choose to do whatever it takes to remain free and independent. And I’m determined to keep it that way.
