Poof - 2 years of cashflow on 3 houses gone in one day!

110 Replies

Attention skeptical wannabe landlords who think there is NO WAY rental property expenses run 40-50% of income, or that rent minus PITI = cashflow. This post is for you:

I always dread the first few hot days of summer.  I just know my phone is going to start ringing and my checking account balance is going to get smaller.  Within about 2 hours yesterday, I received calls from tenants at 3 separate houses saying their central air conditioning was not working.  They were all older A/C units, and I was limping along hoping to get another year of life out of them. 

After sending my HVAC guy out on the service calls, he calls me at 8 pm to let me know that all 3 units are shot, and that he didn't think it was a good idea to dump any more money into them.  I take a deep breath and ask the question, "How much?".  He tells me that the replacement cost would be $2,700 per unit, or $8,100 total.

Ouch.  This is a major reason that most newbies do not last in this business.  In just one day, 2+ years of $100/door cashflow was effectively wiped out on 3 separate houses.  This is why it is SO IMPORTANT to allocate your income for inevitable expenses and repairs.

While it really sucks to have all these hit in a short period of time, if you are properly capitalized with an adequate maintenance account, these types of expenses can be absorbed as a cost of doing business.  And remember- just because you have gone a couple years without any major expenses, all that means is that you are all the more likely to experience those expenses in the near future.  

What about you?  Does your business have enough in reserves to withstand the A/C unit trifecta in one day?  I know mine sure didn't when I first started buying rentals...

Thank you for sharing your experience. I'd like to add something about those good years with low expenses: take that large(r) bank account balance as motivation to ask yourself "what preventative maintenance should I do with this money? What systems are old and on their way out?"

Wow. Sorry for your loss.

Thanks for sharing sir, really appreciate your candid honesty. Great lesson learned and I am learning more and more how important it is for us to continue to save and not thinking of rent rolls as profit.

Sounds like your accounting is sound and like you stated that can be capital business losses/investments and deductible and depreciated.You have done good work here.

OUCH! What are you meaning when you say $100/door cash flow? $100 per month on each cash flow?

Thanks for the advice

James

@Owen D.

Wow, that's a very hard triple blow to absorb.

But, the pain could have been tempered in my view,  if you had purchased home warranty service for each property.

I have this "insurance" at all my properties and in the event of an issue with any appliance, heating and/or AC I request a dispatch. If it's in the middle of winter and there is no heat or AC in the mid summer there is 4 hr dispatch window.

In the event the repairman is unable to fix the problem, they will replace the appliance or equipment.

Coupled with that there is only a $75 fee per call. This of course is for the vendor I use.

So, I suggest you look at this service to offset large future spending on similar issues and put a lid on those hefty expenses.

@Linval T. , that is certainly an option.  However, I have analyzed the costs of home warranty options in my area and have determined it is more beneficial financially for my business to self-insure.  But, I still do have the PITA factor to deal with... ;)

Thanks for the clarification Owen.

I wonder why the gurus skip that topic when they pitch their $1997 courses. 

As the painful lesson above demonstrates:

If there isn't a line in your spreadsheet about Cap Ex, add it.  My personal minimum is $150/month/roof.  You WILL spend this money and it will come rocketing out of your account $2700/$5500/$14000 at a time.  If you've saved it still hurts, but at least you prepared for it at the beginning.

This certainly sucks for @Owen D. but let it be a lesson for everyone. PITI is just the beginning. It is followed by maintenance, Cap Ex, PM fees (Pay Yourself:) ), vacancy and utilities. There is always the possibility of more expenses as well.

Ouch, I know that feeling. Last year, on one of our fourplexes, our PM called to tell us that one of our units' upstairs toilets was clogged. Well, that snowballed into a major drain pipe leak that had soaked into 2 downstairs kitchens (the clogged toilet was just the first symptom that was noticed). $24,000 later, we had 2 kitchens demoed and replaced and a new bathroom vanity and floor, not to mention a repaired drain pipe. Talk about writing some serious checks. That wiped out over 2 years' worth of profits for that building.

Every time I ask my barber if I need a haircut, he says yes.  Not saying your a/c guy wasn't straight with you, but wanted to warn others not to take every technician at their word.  If you don't know the tech and their integrity, get more than one opinion!

Sorry that happened all at once to you, @Owen D. Thanks for pointing out the importance of reserves!

I have to agree @Owen D.  I had an insurance claim last year for roof and siding on a property, and because insurance doesn't pay for code upgrade on rentals, I had to cover ice and water shield, and some other things, on top of the steep deductible. By the time I got done, even though insurance was paying $15K, I was still out almost $4,000 from my own pocket. I didn't expect most of that expense. 

I also once preventively replaced a furnace, and found out the AC was actually shot too. Another unexpected 3-grand. 

I haven't personally priced a home warrantee, but my personal residence had one when we moved in. I tried to use it once, and the technician that was sent out knew less about my dishwasher than I did.

The point is, stuff comes up. You need to be prepared. If too many of these situations came up at the same time, you could go broke without some deep reserves. 

@Owen D.

 when you say you cash-flow $100 a door, is that before or after you account for replacement costs in your rentals?

@Jeremy Pace , I mean most investors target $100 per door as a cashflow number. If those investors are not also setting aside proper amounts out of their monthly revenue to account for CapEx items like these and treat any unspent money as "cashflow" each month, they will be in for a rude awakening when these big ticket repair costs hit.

@Owen D.

I'm so relieved to hear you say that. I can't even count the number of times I've been at REIA meetings and people have said "Oh, PITI is $550 and the rent is $650, for an impressive $100 in cashflow per month" and my eye starts twitching.

This post has been removed.

Originally posted by @Steve Vaughan :

Every time I ask my barber if I need a haircut, he says yes.  Not saying your a/c guy wasn't straight with you, but wanted to warn others not to take every technician at their word.  If you don't know the tech and their integrity, get more than one opinion!

Sorry that happened all at once to you, @Owen D. Thanks for pointing out the importance of reserves!

 On the other hand, your barber knows your hair will grow again and you will be back.  He might not be anxious to sell you a brand new hair management system that means you won't be back for 5 years.

Heating and air systems don't last forever. Why don't investors pay $350.0 per year on home warranty policies. I know there is a max they pay out on major systems but if you have an older house it is inevitable that something will break down.

@Owen D.

Owen, with that kind of a loss it sounds like you might be a motivated seller!

Would you be interested in ...........

LOL

@Gordon Cuffe, home warranties are basically insurance products.  Insurance products are designed to be profitable for the insurance company.  I can't speak for all other investors, but I prefer to self insure and set aside reserves for these expenses and save myself some money in the long term.

@David W., everything is for sale - make me an offer!  ;)

And the solution is.....

Get a bigger truck?

Buy more properties. Spread out the risk. It is always difficult to make a living on rentals that are not paid for. Babysit them until they are paid for.

Also, having home warrantees is no answer, in fact not at all feasible.

Originally posted by @Gordon Cuffe:

Heating and air systems don't last forever. Why don't investors pay $350.0 per year on home warranty policies. I know there is a max they pay out on major systems but if you have an older house it is inevitable that something will break down.

 The math doesn't actually work.  Self-insuring is significantly cheaper if you have the discipline to retain reserves.

Also, they take forever to actually repair things.  My houses don't have central AC.  But when I looked at a home warranty policy that would have covered the boilers, I saw they had a clause that promised a response (not completed repair, just response) within 3 days.

Three days, just for a response, to a broken boiler in January in New Hampshire?  I don't think so.  

With a home warranty you have to deal with their vendors on their terms. I've heard complaints of waiting a week or two for a part to get ordered. 

Insurance companies are some of the most profitable businesses in the country and really should only be used for things you couldn't afford to pay for otherwise (such as the total loss of a property or a liability lawsuit).   If you can't budget for the repairs of your properties then you're probably in the wrong business (or buying the wrong properties).

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