So the first house I ever bought, which became my first rental almost 3 years ago, is becoming a problem child.
1955 brick ranch in North Atlanta. B neighborhood. The house has a lot of character and I even leased it to a movie company for 2 months for them to film in! I have a lot of sweat equity in it as well for the years I owned.
Valued at $165k and I have about $55k equity. Rent $1265 and PITI is $706. There is a full service pm (maintenance as well as tenant screening and search). I'm hands off.
2 issues: one I can't keep the property cash flowing. I haven't had back to back cash flow months since last summer. Second is vacancy which is a recent occurrence.
2013 wasn't a bad year if I recall but last year I put a new bathroom in as a result of a leak and rotting floors and I did a new roof. Both I knew were issues from owning it. Then to start the year the hot water heater went out. Also in December the long term tenants left. The PM (who takes first month of new lease/tenant) got the place rented and I found out yesterday they're moving out. Aggggghhh!!!! I told the PM I'm not paying for him to put another tenant in there. He said he'd take out his profit if I'd cover is search/marketing expenses. I'm probably going to be ok with this and we will have to discuss. The place usually has a good list of potential renters when it hits the market.
Also I know this year the HVaC is an issue. I feel like I'm in a protracted rehab. The tax benefits from all the write offs last year made up for the lost cash flow. But still I'm attached to the property and it's being a pain right now.
I could sell it and 1031 into a MFH, but not sure if I should just weather the storm. Looking for similar stories and what you did. At some point the CapEx has to slow down, right??!?
I thought I was a buy and hold guy looking for good cash flow and moderate appreciation. Not sure right now...
Thanks for any feedback
This is why it is important to know your time horizon ( estimated years before you sell the property ) and have a cost reserve stable estimate ( projected capital items to replace and expected labor and material costs to do so in what years ).
I find many investors do not calculate for this and overpay for a property on the buy side.
History of the property is key.
As an example say a 20 unit multifamily building the current owners shows lower expenses. When the property was built brand new the owner had low capex. They are now selling in year 12. You want to buy the property and hold for 7 years. Your capex outlay should be much higher over your ownership then the sellers. The reason is big ticket items will be reaching the end of their estimated life expectancy.
I use a system I paid 99 bucks for one time years ago www.rentalsoftware.com
It is Excel based and let's you input all these metrics for residential or commercial. Douglas Rutherford the owner is a CPA and an investor himself.
It's good software that will not break the bank to use.
I would be really curious to find out why your new tenants are moving already. There must be a reason and if it's because of the PM you'll never find out unless you ask them. Are you priced too high? Did they sign a 1 year lease that they are breaking?
When you did your initial analysis, did you factor in these maintenance items? Did you account for the true expenses? New investors often fall for the "cash flow = rent - PITI" myth. Because you're using a PM (and an expensive one at that), you are really getting hit with the 50% rule. So, cash flow = (50% * rent) - P&I. Or, $630 - the P&I part of your payment.
But even that's only good for a big portfolio over the long term. In the short term, you can experience big swings. Especially if you have known maintenance issues. Honestly I think the best approach is to do everything you can up front and include those costs as part of your acquisition cost.
Frankly it sounds like your unit is overpriced. An overpriced unit is harder to rent than one priced at or a little under market. New prospects are looking at multiple properties and can have a better idea of the market than you. So, if you're high vs. your competition, good prospects will go elsewhere. When you get a tenant, its the one that's been rejected from other properties, so they're willing to pay your higher price. But they become troublesome and end up leaving. In your place I'd do some of my own research about rents and competition in this area and be sure you're in line with the market.
"Character" can be good or bad. Character in the form of interesting details but a modern floor plan and up-to-date internals is good. Character like I house I once owned, not so much. That house had what amounted to a tiny bathroom in a hall, two different rooms that could only be accessed via another room and one room with a huge beam in the middle of the floor.
Jon Holdman, Flying Phoenix LLC
I think your biggest problem was not addressing some of the repairs before renting it in the first place.
When buying an older home, I feel it is imperative to fully inspect the plumbing, electrical, roof, water heater, tile and subfloors in bathrooms/kitchens, HVAC/furnace, gutters, and such. If any problems are found, it is in your best interest to repair/replace them prior to renting the property. If any of the mechanicals look long in the tooth, replace with new. It will save you a lot of headache later.
I plan on that every time out. Now, I understand that finances may prohibit the immediate repair/replacement of every almost-problem. Oh, how I understand that. But it's the smart thing to do. If at all possible, find a way to pay for these right out the gate. If you let them linger, you'll regret it later.
You're finding that out now. You knew there was an issue with the roof, but you didn't replace it right away. You knew there was an issue with the subfloor in the bathroom, but you didn't repair it right away. If the HVAC is running out of life now, now is the time to look into replacing it.
If you're proactive about problem items in the beginning, you won't feel blindsided and overwhelmed by things breaking down "out of the blue" every few months.
Thanks @Joel Owens I'll look into the software. I backdoored into this rental property (and REI) when I moved and was underwater and couldn't sell. Now I'm on top and never did these long term CapEx calcs. Assumed I hold forever but need to educate myself more on the issues.
Thanks @Randy E. Sounds like i do need to be proactive and will get the jump on the HVaC. Although I've been a landlord for almost 3 years I've only been really learning the last 3 months. I appreciate the help.
I had similar feelings about my first rental 4 years ago with several cap expenditures and two rounds of bad tenants in about a 18 months span. However with patience, my luck turned around now that I've had the same tenant 3 years and counting and on two occasions they have been the ones to ask me to sign a new one yeas lease after the old lease expires. Since putting a new HVAc unit in 2012, my expenses have been less than $300 for 3 straight years. I think brighter days may be ahead of you.
Sounds like u moved away from the east coast away to the west coast rather soon after buying the property in question.
at least its not actually haunted? =D
so, why did the new tenants move out so fast, any clue? were they month to month, or thus did they breach their lease term grossly?
Thanks for the encouragement @Lee G. I plan on holding the unit so all this CapEx, while all at once, will eventually end. I may be overpriced on rent too.
@Account Closed No I lived in it for 7 years before I moved.
But yes the tenants broke the lease 2 months into it. 2 young girls with a co-signing parent that made $40k/mon. PM says they work 30mi away and found a place that is closer.
Sounds like a PM problem to me.
@Sue K. it could be. The previous tenants he put in there were fine for 2.5 years. Maybe I need to lower the rent too as someone mentioned earlier. I'm hesitant to switch PMs right now as the vacancy issue is a recent occurrence. Also I'm going to make sure I don't get charged the first month rent for the new tenant is a requirement of mine to stay with this company.
Originally posted by @Zach Adams :
Sue Kelly it could be. The previous tenants he put in there were fine for 2.5 years. Maybe I need to lower the rent too as someone mentioned earlier. I'm hesitant to switch PMs right now as the vacancy issue is a recent occurrence. Also I'm going to make sure I don't get charged the first month rent for the new tenant is a requirement of mine to stay with this company.
I disagree about lowering the rent. You had someone agree to rent it at that price. So, the price is fine. If anything, you might need to raise it. You'd have to see what the market will bear.
If you lower rents, you get more applicants - that you don't want. Also, great applicants might wonder what's wrong with the unit.
I don't get why your manager would rent a SFH to two young girls who need a cosigner. Maybe this is just a glitch? But, that seems like a bad decision to me.
Plus, what's up with the maintenance costs? Does your manager use their own people?
I highly suggest you get more hands-on. This sounds like a rip-off manager, to me. That's nuts to have that much wiggle room between your costs and the rent you're getting - and to be losing money like that.
I'd question whether or not you really needed a new hot water heater - was it some minor fix? And the PM got to charge you inflated charges for putting in a new one, and maybe made a profit on the sale, too? Does he/she also charge you to "supervise" their own maintenance people?
It just doesn't make sense. This isn't just a vacancy problem, since your last tenant was there for 2.5 years. This really sounds like a shyster PM, ripping you off.
Is he/she also an agent ready to sell it for you, too?
I suggest you write up your own PM contract, find a new PM, and find your own handymen. I know all managers aren't rip-off artists, but many are. And what happens is it's the constant maintenance costs that they get you on - not their measly 10%.
@Sue K. I'm not quite ready to make a switch but yes, some of the decisions of late have been suspect. Having lived in the house for a number of years I'm aware of some of these issues. I've demanded multiple quotes and used my contacts before as well. I would consider, if more issues continue or surprises , attempting to self manage. I might know a good handyman in the area that could work for me. It's the CapEx that's getting me, not monthly maintenance. But I do plan on watching more carefully and entertaining the idea of a change.
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