Rental repairs wiping out profit

Investor · TX · Member since 2020 · 57 posts · 60 votes

As far as the single family expenses. I was taught to fix up everything day 1 (AC, flooring, paint etc...) when you first buy it. Then about 5yrs down the road you're supposed to sell and roll into another like property (fix up/like new day 1) or cash out refinance to obtain capital for future repairs on the older house. I prefer the cash out refi and have pulled a ton of money out of my rentals to cover repairs and get additional capital to buy more properties. Regarding tenants moving out and you having to repair stuff due to them. Take a bigger deposit and bill them for anything over the deposit. Lawyers for that.

If you are going to start buying more doors, you might want to start thinking about switching to multifamily (over 100 units). I recently switched to multifamily as a passive investor, and also started buying some on my own. When you buy the larger multifamily properties, repairs and expenses are part of the underwriting model. So if 10 ACs break, that is usually factored in the analytics. Plus you typically have a maintenance team that is onsite that are salaried to fix stuff. Typical projected returns as a passive investor in my experience are doubling your money every 3-6yrs and usually getting a cash flow return during the project of 6-10% (norm now is 7%). So 100k in, 200k at exit which includes your cash flow payouts (7%). Most have a target hold of approx 5yrs.

I still have 3 Short term rentals and 7 long term rentals. But the rest of my capital is going into the MF space to avoid the hassles you spoke of. Was in 20+ CRE deal last year and 5 went full cycle, all over 30% ARR. I usually put about 80% of my capital in cash flowing MF, and the other 20% in developments, deep value adds, etc...

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Ryan SajderaBusiness Member

Realtor · Manhattan, KS · Member since 2016 · 170 posts · 89 votes

4y

I think this is where economy of scale comes into play a little bit, but that really pertains to some of the major CAPEX items like roofing, etc. Don't forget that you're not only getting cash flow, but you're getting appreciation, tax benefits, and your tenants are paying down the mortgage. You really have 4 legs of the real estate stool making you money. If one goes away (monthly cash flow) to expenses, well you still have 3 other legs keeping your stool up!

[email protected]

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Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

4y

Quote from @Matthew Paul:

I can not understand the $200 to $300 a month cash flow . Not worth the time . A roof here , a furnace there , a repaint and some repairs are just small bumps in the road . Normal operating expenses .

@Victor Baronich Sounds like the rent is too low , and or poor screening , and you didnt run numbers correctly .

What do you shoot for with per month cash flow? I believe rent is very high for the area. I definitely could have goofed the numbers.

Do you mind sharing your requirements when looking for a rental? Perhaps my criteria is too low.

@Victor Baronich

My first requirement is ..... What will it rent for done all in . I work backwards from there . As far as cash flow per month $700 is my minimum I like more . I dont believe in financing to the max , I maybe finance 50% of the purchase price . 7 doors at $700 a month plus is over $5 K a month . So a new furnace or water heater is no big deal . A month or 2 waiting for a good tenant , no big deal . Sure , I have what people call "dead equity " . But when you save that $5K a month and a good deal drops in your lap , you can go in all cash and then refinance what you want .

I have one vacant right now , a 2/1 for $1850 a month . It cost $3000 and 30 days to get ready after a 4 year tenant left . I have had 2 qualified applicants out of 15 . was showing today and possibly have 2 more . I am in no hurry .

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Adam Wigdorski

Rental Property Investor · NY · Member since 2017 · 132 posts · 90 votes

4y

@Victor Baronich

No offense to your business plan but my experience has been Sfr’s unless your doing air bnb are trash. At a minimum you may want to shift to doubles. Or sell and 1031 the whole boat to a small multifamily unit.

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Kyle Gendron

Real Estate Agent · Albany, NY · Member since 2016 · 34 posts · 8 votes

4y

Single Family's are tough Ive never got into them, difficult to cash flow and when vacant you have nothing coming in at ALL....especially with debt. I read several of the comments and I didn't see one suggestion. Assuming you don't want to sell these and move to Multi-Units you have to ask one major question.

Why are your tenants turning over so often? Is the location just transient? Are you asking too much? Are the utilities too high?

Quick turnovers will kill a lot of good deals. 300 cashflow isn't enough unless that includes a large repair % you are taking out every month. What are your numbers? How much to do you take out for vacant % repairs ECT ?

Also finding the right materials will help you big time, buying the cheaper flooring and even paint will only bite you in the but down the road. I have hardwood floors and they stand up to beatings. Vynal sheeting and quality tiles will last FOREVER if installed correctly.

Quality paint and painting every house exactly the same will help cut down costs then you can buy in bulk ( 5 gallon buckets ) you can go with white but I feel that's lame. Find the colors you like and stick to it ...forever. I found a few differnt grays with white trim works for us the neutral color appeals to most everyone. Also make sure you pick a brand that's going to be around I use beher from home-depot but sherman williams prob be fine... the main point here is so that you can buy in bulk and store it properly so when a turn over comes up you just grab it and go and you can match the old stuff on the walls... then you can just paint or ( have the painter) roll out the blemishes and in SOME cases not even have them cut in get a discount lol I know this sounds cheap but when you find the right colors no one notices. hope this helps !

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Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

4y

Some of this advice is questionable. People, if it´s not your cup of tea don´t throw shade on stuff based on personal ideology. SFRs are not bad. If you run your numbers correctly and understand how to manage your portfolio they can and have created vast wealth for many. Also, there are scenarios where $100 and $200 cash flow can make sense. If a person had acquired 12 homes in the Anacostia/Deenwood areas in DC 5 year ago with that kind of cash flow, it has dramatically increased now. In addition, most likely they have well over one million dollars in equity. Numbers, timing, execution, area and strategy all in conjunction with each other will almost make any RE asset class work. My point in this is there are newbies and many others seeking professional guidance from experienced investors. They should not be influenced to steer away from something that can dramatically benefit them. I do SF, Multi and STR and they all work. Just last month we had many people expressing that low income areas cant work.

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Salvatore Lentini

Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes

4y

@Victor Baronich - I agree with @Mark Cruse, SFRs are not bad they're just a preference for some people and not others. While I'm not a fan of boarding houses, I know investors that do really well with them. I'm not a fan of Section 8 but I know others that ONLY do Section 8. Every type of investment property/strategy has its pros and cons. I have SFR, MF, office, commercial, triple net and mixed use. My SFRs do not throw off a ton of cash flow but have increased in value $1m+ over the past few years. That's real money (especially when you do a cash out refi!). Way more than I would've made off of them if they cash flowed well each month. So don't JUST look at cash flow. Look at your equity build up due to appreciation and principal paydown. And don't forget the depreciation benefit to your tax returns! You don't want to be losing money but sometimes "break even" is ok if you're making money in other areas. I like having a mix of different property types, because like I said, they all have their pros and cons.

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Jeff F.

Investor · Lake County Illinois · Member since 2019 · 1 post · 0 votes

4y

@Victor Baronich

My experience would be to get any repairs done that are close to their useful life. It would definitely be more upfront cost, but it gets rid of the headache and the extra cost of doing repair, repair, etc.

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Craig Clinton

Investor · Nutley, NJ · Member since 2017 · 72 posts · 56 votes

4y

Quote from @Victor Baronich:

Hi, I have been into rentals now for about 4 years. We currently have 12 rentals, all sfh's. What I am finding is that essentially we make no money and probably lose money slightly overall. I was very careful when buying to cashflow at least $200/month after all expenses (most are over $300). The problem is when a tenant leaves. Often I am replacing floors, or painting/pressure washing, and other misc repairs. And while it is quick to turn around and rent again, that 3-5k in repair costs kills the profit. One unit needed a new AC, for example. I am blessed to have family that does that so I got it replaced at wholesale, but it still wiped out a year or more of profit.

I keep thinking all I have to do is buy more and more and eventually it will show profit. But is that a reality? I mean if I had 50, well then I have 50 roofs, 50 water heaters, 50 AC's, etc to maintain. So do costs just adjust right along side cashflow?

Since a kid I was taught the Robert Kiyosaki mentality of use debt and OPM. So I don't pay for acquiring my rentals, I have investors do that. My responsibilities are the repair costs. Maybe I should pay them off to open more cash flow, but that means sinking a ton of money into the business that could be doing something else. So is that really smart?

To those that have been doing it longer and maybe have more units, what have you found over the years? Is there a breaking point where you have so many you start profiting?

I must admit, I did not read the 33 replies before me, so if I am repeating what others have said, my apologies. I don't know your market, but my first thought is cash flowing $200 per month is low. I try to cash flow at least $700 per month on each property. I don't know if that's right or wrong, but that's my rule. Now, I have to be more picky with what properties I purchase, but the deals are out there. You just may have dig deeper for them.

You are 100% correct with 50 houses = 50 roofs. I don't have any single family rentals. I flip single family homes so that i can take that profit to buy multi family properties to rent out.

I would not pay off the mortgages. Just my opinion. Interest rates are still historically low. You can use that $$ to but more properties instead of paying off your current homes.

Can you increase rents in different ways to help you out for now?........rent parking spots, add laundry machines & charge a fee?

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Scott JohnsonBusiness Member

Specialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes

4y

That's red flag numero uno. Real estate is a marathon, @Victor Baronich, not a sprint.

"I have a big circle of wealthy friends and they know I know business (obviously not rentals, lol) so they lend me money for whatever I want to do since I have a history of returning."
Red Flag number two. Overconfidence.

"No section 8, I would say mostly B. They are nice houses in nice areas. One or two are C's in low-income areas."

This tells me that the money you're borrowing has to be prohibitively expensive. The properties may also be older.

People get caught up in the "get rich quick" mentality and use professionals words (in this case Robert) to try to justify their misguided decisions. If your rentals aren't providing the return you expected, you're doing something wrong. Stop... Think... Reevaluate... Execute. Or just keep doing what you're doing, trying to justify your decisions, and piss your tenants and your investors off. Totally up to you.

Oh:

"I understand. But I also read on these forums, people making huge incomes from rentals. Or at least that is how it seems to be presented."

More proof if a "get rich quick" mentality.

Tough love, but I hope this helps!

[email protected]

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Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

4y

@Victor Baronich if you're evaluating your returns on the basis of cash flow a lone then you are grossly understating your returns. Real estate returns are comprised of four sources. 1. cash flow, 2. equity through mortgage paydown, 3. equity through appreciation and 4. depreciation tax benefit. Vast amounts of wealth have been made through long term ownership of SF properties.

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Rental repairs wiping out profit

Rental repairs wiping out profit

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