Rental Property Investor / Construction Manager · Raleigh, NC · Member since 2015 · 201 posts · 103 votes
I am investigating purchasing another long term buy and hold property that has a septic tank. The market I am looking in seems to have decent returns so I am interested but in my opinion having septic vs. sewer is a risk and could be a large one should something serious happen. I was wondering if anyone has any thoughts on ways to protect a LL from a tenant that may potentially pour something down the drain and ruin the septic (i.e. concrete).
In general, my portfolio consists of B properties in good neighborhoods but there is always that chance of something happening. As a precaution, I build into my costs to have the septic tank pumped every 2 years (about $150-$200) so this helps with some of the risks. My question is really if anyone has any experience with other ways to protect my property from a potential issue in the future. Any thoughts are welcome and thanks in advance.
I used to pour one of the commercial products down the drain every 6-9 months and do the pump out as well. That worked well until the Lower Colorado River Authority changed the rules for a certain geographic area and to meet the conditions of a sale/transfer I had to install one of the concrete lined septic tanks. That's been a few years now but IIRC that cost me close to $10,000 including all permits and inspections.
I used to pour one of the commercial products down the drain every 6-9 months and do the pump out as well. That worked well until the Lower Colorado River Authority changed the rules for a certain geographic area and to meet the conditions of a sale/transfer I had to install one of the concrete lined septic tanks. That's been a few years now but IIRC that cost me close to $10,000 including all permits and inspections.
I would have been OK if I kept it a rental but we had moved to Colorado. We sold it with $3,000 down on a seller finance deal but 4 or 5 years later they walked away from it. We spent a few days getting it back ship shape but at our age, early 60s then, we didn't want to do another seller finance so we listed it with an agent in the town who we knew really well. Got a close to full price offer in a week and everything went well until this issue came up. After 11 years of ownership we got out whole but, due to a weird thing in the tax law having to do with a change of basis on seller financed deals, we ended up with about a $35,000 capital loss. We immediately sold some mutual funds to take advantage of it all in one year.
This is a reason to work closely with a CPA who knows her stuff. We notified her in March what was happening and she gave me a worksheet to plug in all my numbers and two weeks later she told me that news.
What had happened was (not all these are exact but I'm not digging out my old tax forms)
We bought the place for $50,000, put about $1,500 into fix up and sold it for $70,000 with $2,000 down.
After a few years they walked away but I scared them into deeding it back to me. I had to put about $1,000 into fix up and painting but as the neighborhood had improved with new construction and the road was now PAVED (qualify for FHA/VA loans now) I added central heat and air.
We resold it for $99,000 with $3,000 down and they walked away a few years later. This is the part in my original answer.
One of the reasons they walked was the economy in that part of Texas, never great, small town, had gotten killed in the 2008 crash. With the new septic our net on the sale was a bit less than $60,000, but our basis had changed with the most recent sale (or maybe mortgage amount) so we had a huge capital loss, despite only losing a few thousand cash on cash.
@Shaun Palmer I am way late to this conversation but couldn't resist. Other than what is already mentioned, I will pull from my previous live as a Civil Engineer. Probably the most challenging item is not so much the money as the changing regulatory environment (no pun intended). Many areas are updating their regulations because septic systems are at best rudimentary treatment systems and in areas of high concentration (>1 system per 5 acres) and high ground water, they are not adequate. Be aware that just because there is a system in place, does not mean you can get a permit to replace it if it were to fail. In addition, high ground water may require you to construct a mound system which can costs 3-5x what a "normal" system would cost. Check out your local regulations. You should also contact a septic tank construction contractor and have them evaluate the system and give you a back of the envelope figure to have it replaced. They should know if you will be facing any of the high cost issues.
A good inspector should be able to tell you if the system is adequate and functioning properly. They can also tell you whether a septic system is risky for that area.
I have no problems with septic. They function great as long as they are not abused. I provide my tenants with a Septic Care Addendum that trains them on how to avoid septic problems and then I have the tank pumped every 2-3 years. I've had fewer problems with septics than with sewer systems.
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