average investment > The Perils of Investing in Rental Properties in the Wrong Location

The Perils of Investing in Rental Properties in the Wrong Location

My venture into the world of out-of-state real estate investment took an unexpected and nightmarish turn when I purchased a rental property in Cleveland, Ohio.

After three years of non-payment, I finally managed to evict the tenant.

While my other rental properties in Colorado have rarely posed eviction challenges, even during the COVID-19 pandemic, this distant endeavor unveiled the harsh reality that some cities and states can turn property ownership into a landlord’s worst nightmare—especially for out-of-state landlords.

The key lesson here is to diligently research before you leap!

Why Did It Take So Long to Remove a Non-Paying Tenant from My Property?

My journey began in 2015 when I acquired a turn-key rental property in Cleveland, Ohio, through my IRA.

Unlike my other Colorado properties, which I had acquired in a more conventional manner, this particular house was sold to me by an acquaintance for what I believed was a reasonable $45,000. It was meant to be a fully managed rental, or so I thought, until the COVID-19 pandemic upended everything.

With the city covering tenant rents, my tenant ceased paying, and when the City of Cleveland ceased its support, rent payments never resumed.

To manage the property, I had enlisted the services of a property management company, Monument Real Estate, which, in retrospect, proved largely ineffective and inept. Initially, Monument informed me that eviction was impossible because the property needed certification as lead-based paint-free, a requirement imposed by the City of Cleveland for rentals constructed before 1978.

However, my property, constructed in 2005, was exempt from this rule—an exemption I had been conveying to Monument for months before they grasped it.

Once the lead-based paint hurdle was cleared, Monument informed me that I couldn’t pursue eviction because my IRA needed registration in Ohio for Cleveland courts to hear the case.

Unfortunately, the company I had engaged for registration refused to register an IRA. Multiple legal consultations yielded the same bleak conclusion: an IRA is not a corporation, and consequently, it cannot be registered. This exasperating ordeal persisted for several more months, pushing the timeline close to the three-year mark while the tenant continued not to pay.

How Did I Ultimately Evict the Tenant?

During this protracted battle, I had suggested “cash for keys” to both property management companies as a means of persuading the tenant to vacate the premises. However, the tenant was unresponsive to any form of communication.

Upon switching property management companies, the new one also attempted “cash for keys” with no success. Fortunately, this new company did assist in registering my IRA.

Their strategy was to register the IRA as a corporation with the Ohio Secretary of State (SOS). While initial attempts were unsuccessful because an IRA is not a corporation, the SOS worked collaboratively to find an alternative solution. Eventually, my IRA was registered as an entity conducting business in Ohio, which paved the way for the court to consider the eviction case.

At the first court hearing, no significant progress was made, merely the scheduling of another hearing. The tenant was provided with a free attorney by the City of Cleveland to contest the eviction.

My property manager suggested that we propose “cash for keys” in court, as this would demonstrate our commitment to resolving the situation and compel the tenant to respond. We offered $2,000 in court, a sum exceeding the monthly rent, which was less than $800.

Meanwhile, I learned that the tenant had filed a lawsuit against the property management companies, seeking $35,000 in damages. To my astonishment, I received a package from the tenant claiming the same amount in damages from me.

Their demand included $10,000 for “cash for keys” and an additional $25,000 for emotional distress allegedly caused by the notes and calls from my property management companies attempting to offer “cash for keys.”

To my surprise, the tenant accepted the “cash for keys” offer in court. She was given a 30-day window to vacate the property, failing which we could proceed with an immediate eviction. Fortunately, the tenant did leave, and I regained possession of my property.

How Could I Have Avoided This Rental Nightmare?

I must assume full responsibility for this arduous ordeal and acknowledge my errors:

Excessive Trust in Others: I placed undue trust in individuals who purported to possess local knowledge and who presented the deal as a lucrative opportunity. Unfortunately, these representations turned out to be far from accurate. If I had sought an independent assessment of the property, I might have avoided the ill-fated purchase.

Reliance on Recommended Property Management: I also accepted property management recommendations from these acquaintances, despite the fact that the initial company they suggested ceased rental management activities. Subsequently, Monument Real Estate was recommended without my personally vetting them. A more thorough due diligence process on my part could have uncovered Monument’s inadequacies sooner.

Failure to Swiftly Dismiss Inadequate Property Management: I was aware of Monument’s ineptitude from prior incidents, including accounting errors and communication lapses. Regrettably, I waited far too long before replacing them with a more competent property management company.

Conclusion:
If I were to embark on an out-of-state real estate investment again, I would undoubtedly conduct more rigorous due diligence. Most likely, I would avoid relying on turn-key companies and instead engage a local real estate agent and property manager to help identify promising opportunities. Additionally, I would seek the involvement of an impartial third party to scrutinize potential investments and would exercise greater caution when placing trust in others.

I personally possess the means to navigate the complications that arose in this case, primarily because my other investments have proven to be lucrative. However, for a novice investor without a diversified portfolio, the same situation could easily spiral into a catastrophic ordeal.

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