The dumbest thing ever, what I learned and what it cost me – so far

The dumbest mistake I ever made was buying property with a friend. I know – hindsight is 20/20 and for a while I thought it was the best thing I ever did. Now – not so much.

Here is what happened:
In 2003, I was a summer intern at the company I work at now. My internship was hundreds of miles away from home. I worked through college and grad school and saved up about $50,000. Pretty good, huh?

I wanted to buy real estate. I needed to buy real estate. I looked at an apartment in the city where my internship was thinking I would move into it if and when I got a permanent job with my company. But the job would not start for a year because I had one more year of school left. I did not think I could afford the payments while I was away and didn’t know how to be a completely-absentee landlord, so I passed.

Instead, when I moved back home I saw a three-family house for sale. The price seemed great (at the time…). It was fully rented with tenants in place more than paying for the monthly costs. So I jumped in – with a friend as a partner. We closed some time around December 31, 2003. What happened to the absentee-landlord concern you ask? I reasoned that my buddy would still be there, so while I would be absentee, the property would not be run by an absentee landlord because my buddy would be there.

January 2, 2004 – the water heater burst. Yes – it was something like two days after closing. I should have known. For a while it seemed like a terrible investment. The pipes froze and burst – multiple times. We had to crawl under the house and fix them (because it was too expensive to hire someone). Then the drain pipes froze. We had to rip the wall open and patch/fix them. Long story short (too late?) is it was one thing after another. But the money was working and the tax benefits were good.

Fast forward five years later – one woman decided she was not going to leave a 6-bedroom apartment we had rented for $3,500 per month. She also wasn’t going to pay. It took almost a year to get her out – and more money! Many of the tenants had issues. There were lawsuits, and police calls, and people who decided to just up and leave, and illegal sublets, and I could go on.

Then we realize we had a “sub prime” loan. Maybe we should have realized it earlier, but all hell broke loose some time around the time the woman decided she wouldn’t pay (but would stay). So we started hemorrhaging money. It hurt. It still hurts. Our mortgage(s) adjusted – big time. Our property is down in value (also big time). The world was falling apart around us and we were not immune.

In summary – so far we had one bad year (2004) followed by two good years (2005 and 2006) followed by two terrible years (2008, when the woman decided she wasn’t paying, and 2009, still feeling it). 2010 is OK – somewhere in between.

What did I learn? Take things slowly. Don’t decide you want to do something or buy something and then figure out a way to make the square peg fit in the round hole. That’s what I did. I wanted property and made sure I got some.

The things I probably should not have done include: getting a subprime loan, getting a second subprime loan, refinancing the second subprime loan for a third subprime loan and pulling out money we didn’t need and just not paying enough attention to the investment.

Lesson learned. What it cost me? Only time will tell. A lot of stress. Some hair. Some strain on my friendship and marriage from time to time. And some money – not sure exactly how much because I’ve had (a) tax savings, some positive cash flow and (c) a lump-sum initial benefit of pulling money out. But I’ve had to loan thousands of dollars to the building to make the mortgage(s) over the last couple of years. Ouch.

What was your dumbest money mistake so far? Any thoughts about mine?