I'm getting my butt kicked

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I'm getting my butt kicked

Nic S.Pro Member
Danville. CA · Member since 2017 · 313 posts · 220 votes

I grossly underestimated maintenance and make ready costs for my KCMO portfolio. Operating costs are through the roof and net income is non-existent in my first year of business. 

I started with 2 SFH turnkeys which have performed well but then I bought 3 duplexes that are crushing my cash flow. All properties had a 3rd party inspection but between evictions, capex costs, and turnover costs my business will be losing money in 2020.

I think I scaled too quickly. 1 unit total in 2019, 7 more in 2020 for a total of 8 in <12months. I underestimated the amount of reserves I'll need to ensure my portfolio pays for itself. 7 of the 8 properties exceed the 1% rule and appreciation is happening in KCMO. 

I keep telling myself its 'a long game' but it sure feels like I'm doing something wrong. 

I'm on writing this to share my personal experience, these are fantastic lessons I'm learning but it wasn't how I envisioned year 1 going. 

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Mark Cruse
Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
5y

I have absolutely have no idea why people are suggesting you sell the properties because you are running into issues that´s merely part of business. You inherited bad tenants; get some good ones. If once all the rehabbing is complete and you will be making decent cash flow, it can be profitable for the next few years. If you do things right you may be able to recoup everything in a reasonable time frame.  There are very few landlords who have never had a losing year so telling you to sell when you hit rough waters makes no sense. You sell when there is no potential to be any better and losses are indefinite.  Selling right now you lose all the thousands you have put into it which compounds what you have already lost. It does sound like you expanded too fast but you are in  so buckle down and fix it. If 5 years from now you have a stable  = portfolio and your cash flow is through the roof you will be damn happy you didn´t take sell advice. In business things are not always pretty and this is hard but to me it seems like you have the ability and drive to make this into a winner!  I have been down this road so I´m speaking from experience.........

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    I think your problem is not realizing what the problem is.  The problem is you seem to be focused on the properties being more important than the cash flow.  This is true based on the fact you are accepting the properties as a given, and the negative cash flow as a bad byproduct of it.  The negative cash flow isn't the problem...it's the result of it.

    What you need to do is get rid of the problems.  If you think your properties are more important than fixing the negative cash flow, I can assure you if you sell your problem properties, you can always replace them with more problem properties...maybe, if you're lucky, with properties that have an even greater negative CF. Then again, you might be able to replace them with properties that, brace yourself, actually have positive CF.

    The mistake wasn't expanding too fast. The mistake is keeping the problem properties, and the negative CF that comes with it for reasons I have yet to understand.

    16Reply
  • Sean T.
    Rental Property Investor · MA · Member since 2014 · 420 posts · 213 votes
    5y

    @Nic S. first, good for you for sharing and for the aggressive growth!

    I think the key word from your entire post was "business".  Contrary to the many pundits out there, businesses often have steep learning curves and initial costs.  2020 might be a "cash loser" but your scale and numbers should realign as you work through the growing pains. 

    We read about analysis paralysis all the time and I really think it is because of all these rules out there, 1%/2%/50% etc.  You went out and did it.  That says a heck of a lot about you and the growth potential for your business.

    31Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @Joe Villeneuve I think I'm following you. I guess some more context will be helpful, I purchased these properties at a negotiated rate due to these foreseen issues. Me fixing these problems is what is causing operating income loss. The one key thing I learned was to not inherit other people's tenants. I will not do that again.

     Are you suggesting I sell and walk away? Or continue to fix and dig myself out of a hole? I'm trying to follow what you're saying.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    Sell and walk away.  Cut your losses now.  Recover them on the next deals...and more.

    1Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @Sean T. Appreciate it! And thats what I tell my friends and family, the desire to get out of a W2 has to be greater than the desire to be secure but under someone else's employment. 

    @Joe Villeneuve Thanks for the feedback! I have thought about 1031 exchanging a portion of my portfolio in 2021. I want to take advantage of the cost segregation studies I've done and tax benefits of ownership in this upcoming tax season.  

    1Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    Congrats on making moves! Dump the problem properties while market is hot and invest in the types of deals that work for you. Those 2% duplexes often are flops as you mentioned after evictions, etc. For 2-4 units I like class A/B areas with high credit tenants. 

    5Reply
  • Marco G.
    Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
    5y

    @Nic S.

    Is the problem that you’re in a temporary cash crunch because you have too much to do and not getting money because properties are vacant while you do the rehab?

    If you bit more than you can chew that’s a lesson to be learned but the answer isn’t to give up if you can get through it.

    What will it look like once the work is done and you are generating revenue? How long will that take and what will your cash position be at that point?

    Even if the numbers look good when you’re done, but your cash position will be bad, you can sell one and replenish your reserves.

    You might have just put yourself in a bind, but you have to see what it looks like at the end, determine whether you can get there, and what you will do once you’ve reached that point.

    On the other hand, if you paid too much and you’re going to be upside down after you’ve finished everything and spent a lot of money with negative cash flow, that’s a different story and maybe you need to cut your losses.

    Good luck.

    10Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @Marco G. I'm at 75% occupancy now and my portfolio still cash flows. You bring up a good point, I'm in a cash crunch due to unexpected vacancy and underestimating rehab costs. I am dipping into other cash reserves that originally we're intended for RE. 

    At 100% occupancy it's going to take me 6 months to recoup my capital which isn't ideal but not the end of the world. It's a tough pill to swallow. 

    5Reply
  • Marco G.
    Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
    5y

    @Nic S.

    I think you’ll be ok. You learn from this and can plan better going forward. Six months would fine for me. If you dipped into your RE budget that’s ok because this is RE! You probably mean for acquisition, but it’s not like you’re dipping into your food budget or borrowing.

    2Reply
  • Bill P.
    Investor | Syndicator | Instructor · Cincinnati, OH · Member since 2008 · 435 posts · 198 votes
    5y

    @Nic S. Think about grouping your duplexes into a separate llc. Find some investor that would like to buy into the properties after you give them pro forma and actual accounting. In this manner you may be able to replace your negative cash flow with the influx of new funds. I have bought into many other investors problems and have helped turn then around. Of course, it depends a lot on your new investor and the degree of your problems.

    5Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @Bill P. the units cash flow once I get past this capex stuff. not a bad idea, thanks for taking the time to comment. 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    @Nic S.  What is the problem with them?  It is the inspector did a bad job and you are having to fix things that you didn't expect to?  Are you updating things or fixing things that are broken (eg changing paint colour from beige to grey or broken pipes)?  Look at each property on its own and run the numbers.  If there are some that don't make financial sense, sell them.

    3Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @Theresa Harris all good questions; nothing is wrong with them per se. All the fixes I knew about but I didn't account for bad tenants and rehab costs. I have had to rehab 3 units in the past 2 months costing ~$12k total, this unexpected costs has caused me to lose money. I didn't have the $12K saved in reserves which is why I'll be at a net loss in 2020. 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y
    Originally posted by @Nic S.:

    @Theresa Harris all good questions; nothing is wrong with them per se. All the fixes I knew about but I didn't account for bad tenants and rehab costs. I have had to rehab 3 units in the past 2 months costing ~$12k total, this unexpected costs has caused me to lose money. I didn't have the $12K saved in reserves which is why I'll be at a net loss in 2020. 

     Are you doing renos to units after the tenants are out or with bad tenants in place?  If it is a short term thing and one off, then sadly that happens where everything breaks as once.  In the spring, I evicted one tenant (clean up was a mess) and had to get a washer/drier for another and I forget what else happened.

    0Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    Renos after the tenants are out. 2 renos I was expecting the 3rd I was not. 

    0Reply
  • Adam Martin
    Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
    5y

    It sounds like you grew too fast, maybe that last property you should have held off on so you had better reserves but you can't change the past.  The good news is the renos are done so hopefully you will be set for a while.  You had some bad tenants, it happens but it sounds like you knew that going in and bought at a discount so some of these costs were just you earning your discount.  Focus on screening new tenants well, don't be in a hurry, while vacancy is a killer you have seen what a bad tenant can do.  I think you will be fine, just hang in there  and see what 2021 brings.  If you have some underperforming properties get rid of them then and you should have a couple years experience to know what to replace them with.  Not every year is a winner, I had to replace a waterline, ac unit, and some other minor things but they are new now and I should be good for a while.  

    3Reply
  • John Teachout
    Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
    5y

    It's not at all uncommon to have to spend money to get a property stabilized. I think you'll be fine as long as you can afford the losses in the short term. Unless a property is fully rehabbed, there's usually stuff that breaks during the first year of ownership. Usually people acquire properties at a more measured pace and the higher performing ones carry the weak ones until they too are carrying their weight. Hang in there. This has been a tough year for many landlords for a number of reasons.

    7Reply
  • Mark Cruse
    Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    I have absolutely have no idea why people are suggesting you sell the properties because you are running into issues that´s merely part of business. You inherited bad tenants; get some good ones. If once all the rehabbing is complete and you will be making decent cash flow, it can be profitable for the next few years. If you do things right you may be able to recoup everything in a reasonable time frame.  There are very few landlords who have never had a losing year so telling you to sell when you hit rough waters makes no sense. You sell when there is no potential to be any better and losses are indefinite.  Selling right now you lose all the thousands you have put into it which compounds what you have already lost. It does sound like you expanded too fast but you are in  so buckle down and fix it. If 5 years from now you have a stable  = portfolio and your cash flow is through the roof you will be damn happy you didn´t take sell advice. In business things are not always pretty and this is hard but to me it seems like you have the ability and drive to make this into a winner!  I have been down this road so I´m speaking from experience.........

    41Reply
  • Marco G.
    Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
    5y

    @Mark Cruse is right. Sometimes it comes in batches but over the longer timeframe it smooths out.

    Two out of the last three years I had NO vacancy and minimal repairs/maintenance. Great years. The year in the middle is where I had three years’ worth of turnover, two AC’s go out and replaced a roof. That year was a really tight year.

    4Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    5y

    One unknown rehab and a couple of unknown turnovers should not be a material part of the long-term equation.  If they are, something is wrong as that is just par for the course.  Two of the rehabs were known and are essentially part of the acquisition cost.

    Below are the primary successful strategies in buy and hold:

    • Add value and insulate against short-term blips in monthly cash flow or market downturns
    • Buy properties in locations with strong (and predictable) appreciation
    • Purchase cash flow monsters (2-4%ers) with hands on local management

    Near 1%'ers with no value add and little appreciation will be a problem.  That may not be the case here though and this may just be short-term transition/acquisition costs.  Good luck.

    6Reply
  • Stan M.
    Investor · Ithaca, NY · Member since 2019 · 10 posts · 12 votes
    5y

    @Nic S. I would aim for larger multifamilies on your future acquisitions. When you have more units under the same roof it helps buffer some of the downside surprises you are describing.

    2Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    Don’t sell anything ! Dude ,It’s part of the business . The first couple years are going to be hard this is expected especially if you are not a seasoned investor . Your still wet behind the ears and getting the places stabilized and systems in place . As long as you bought right you’ll be fine if you hold it long enough and don’t quit plugging away . Chill out put your head down and move forward even if it’s an inch at a time . You’ll get through it eventually and be glad you didn’t give up ! Don’t listen to these guys telling you to sell them off.. geez! Look if it was easy everybody would be a real estate millionaire!

    10Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @Dennis Wayne  @Mike Dymski  @Marco G. @Mark Cruse   man I needed to hear this. 

    5Reply
  • Nic S.Pro Member
    OP
    Danville. CA · Member since 2017 · 313 posts · 220 votes
    5y

    @John Teachout each property was purchased off market and I should have been more measured for sure. They were all purchased as buy and hold 10%-15% under market value so I am grateful for that but you're right the better performing properties aren't able to keep up with the under performing properties because volume is high right now. I have stopped buying properties until these are stabilized. 

    2Reply
  • Arta Montero
    Member since 2019 · 182 posts · 45 votes
    5y

    @Nic S. I am hoping it’s only this year. I lost a lot on one of the house rentals this years. I had a terrible property management that wasted me 10k. Thank God ended contract with them since I felt trapped.

    2Reply
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