When do your rentals typically start making money/making sense?
Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes
When do your rentals typically start making money/making sense?
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesRentals should start making money, as in profit, from the day you buy them...or don't buy them. Why else would you buy a rental property if you're losing money every month? Equity is great, but it is undefined, and untouchable (useless) until you sell the property, so you can't count that as profit until you can count it as money (cash).
Riddle me this Batman: How many properties can a REI sustain at one time, if they are paying for the tenants to live there?
49 Replies
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Rentals should start making money, as in profit, from the day you buy them...or don't buy them. Why else would you buy a rental property if you're losing money every month? Equity is great, but it is undefined, and untouchable (useless) until you sell the property, so you can't count that as profit until you can count it as money (cash).
Riddle me this Batman: How many properties can a REI sustain at one time, if they are paying for the tenants to live there?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
Originally posted by @Scott Goulet:
Hi everyone! I'd like to say in a fairly experienced investor, still a newbie at heart though. I have 8 doors over 3 properties.
1 specific property, I purchased in 2019 and in 2019 I took a net $9k loss, and in 2020 I finally cashed flowed, but over the course of the entire year after financing expense on cash flowed $1500. This is a triplex and gross income is about $2k, but the actual income is so irregular. I swear every month there is something the property management company is fixing.. plumbing, oven not working, something leaking, etc.
My wife just wants us to start managing ourselves, but in my mind yes well make more, but then it wouldnt be passive.
My question is: at what point do rentals that need work, start cash flowing steadily?
I feel like my management company says yes to every single little thing my tenants ask for.. my managment company made more thsn I did in 2020, even though the tenants are paying on time everytime, but these maintenance requests are killing me.
When I purchase my units, I buy them at a discount, so obviously there is some deferred maintenance, but I dont have the money to fix everything right when I buy them. Just as some background.
With a PM I'd be surprised if you truly cash--flow in 5 years. CF is tough to gauge in that deal as 1 bad tenant or over-priced repair will claw back cf from previous periods. Add on to that risk the fact you don't have the capital to bring the property up to snuff after purchase.
If your rentals are in your back yard you need to self-manage especially if newer and can't afford the general raking you will receive.
My PM (retained on one community purchased last year) must inform me prior to sending out a licensed tradesman (after reviewing the high repair costs the previous owner experienced)
Yesterday they wanted an electrician to replace the balast of a crappy 4ft fluorescent light. Quote? $150. Who repairs that crap? I grabbed a new $25 50,000 hr modern LED fixture to swap. PMs just don't get it.
Speaking as a self-manager on rental homes purchased in the past 5 years in an expensive market, the cf goes positive in about month 25. That means replaces fix-up costs but not DP. That also doesn't count equity captured or forced. True cash-flow only.
In equity / expensive markets though, the cf is just the lunch money. Equity is college. COC may not be great, but IRR is.
- New to Real Estate · Claymont, DE · Member since 2021 · 8 posts · 13 votes5y
Answering the question on cash flow and when a property should net positive is still a bit out of scope for me, but I've dealt with a bit of project management, so maybe I can help there.
My personal view is to treat every relation in a business venture like a sub-contract. If you feel the property manager (PM) is costing you money by bending over backward for the tenant, then you may need to step in and tighten the reigns a bit. Your current structure is unknown to me, so this is an assumption.Before considering taking on the management yourself, I would ask for more documentation of the repairs (pictures, root cause, material list, labor cost, etc.) and ask to be consulted before maintenance work is completed. Adding this level of scrutiny usually adds the transparency needed to figure out what's going on. If it still seems like there are excessive repairs, then for non-emergency items, you could take the time to visit the property and go with the repair person to visibly inspect the problem and walk through the repair process with them. This will tell you whether there is a systemic issue or the property really has many gremlins running around.
I'm sure I will run into my fair share of issues like this soon enough, so I hope this perspective helps in some way.
- Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes5y
@Joe Villeneuve I understand why we buy rental properties and yes some months do cash flow well. I did buy the properties right and all my properties go above and beyond the 1% rule.
However, I can never predict my income due to property management sending me little maintenance things every month.
I guess this is a general problem with PM, not with the real estate itself.
- 5yLien VuongBusiness MemberReal Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
It's always been in my experience that the first year is the leanest year because you're getting in tune with the property and addressing deferred maintenance from the previous sellers. However, it's not truly a 'loss' even with the $9k as exemplified as I have depreciation of the asset, debt repaying from tenants, as well as expenses deducted from my tax liabilities so it's still a win for me.
You're 100% correct that you should not be managing it as it is a passive stream, you should really be considering establishing certain boundaries with your PM then. For example: They're OK to repair all items under $250 in cost, anything above that you must address with landlord so you can review the job order properly. That should help open a better line of communication with your PM and help you control expenses of the building.
The Elle Group5153 Reviews - Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes5y
@Steve Vaughan words of wisdom for sure. I read the long distance real estate investing book by david greene, and have been trying to implement it.
Buying cheaper properties elsewhere, but then I have rely and trust that my management company isnt screwing me.. no real way around that it sounds like?
- Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes5y
@Joshua Hower I have tried to get my PM company to send me pictures but they just will not do It for anything less than $300, but it just seems like month after month there is a slew of charges that are just under the $300 threshold.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
Originally posted by @Scott Goulet:
@Steve Vaughan words of wisdom for sure. I read the long distance real estate investing book by david greene, and have been trying to implement it.
Buying cheaper properties elsewhere, but then I have rely and trust that my management company isnt screwing me.. no real way around that it sounds like?
I'd do what I did and require them to inform me prior to sending out a licensed tradesman willy-nilly.
All the sudden my wall heater and a/c units are being cleaned by their maintenance team vs being replaced by an electrician. All the sudden they aren't repairing old crap like my fluorescent light balast.
Make them make another step. They have no incentive to reduce your repair costs, especially if they get an override on repairs like most do.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Scott Goulet:
@Joe Villeneuve I understand why we buy rental properties and yes some months do cash flow well. I did buy the properties right and all my properties go above and beyond the 1% rule.
However, I can never predict my income due to property management sending me little maintenance things every month.
I guess this is a general problem with PM, not with the real estate itself.
The problem is in the analysis...and using the 1% rule as a way of defining a good deal. Obviously it didn't work. Never us percentages as an answer when doing analysis. It will lie to you, and at best tell you nothing of value. Let me ask you this. When you did the "1% Rule" analysis, how much cash flow did that analysis say you would be getting?
Also, when you did the analysis, did you include the usual monthly number for maintenance? If you did, what did you use to assign a value to it?...another percentage?
- 5yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
It sounds like you don't trust your PM- and maybe you shouldn't, but there are lots of great PMs out there. I run a good sized PM company in my market and, for the record, we would never manage for an owner who insists that we run every single expense by them. On the flipside, we wouldn't perform every little task that a tenant requests, we use our judgement with the tenants safety and comfort in mind and striking a balance between that and reasonable expense. I'd say within our own portfolio, the average owner spends about $300 per year, per door on maintenance. That can vary wildly based on the quality of the property.
I know LOTS of property managers that don't own rentals- some that are even tenants themselves, but the manage hundreds of doors. It's difficult to be an effective PM if you don't have an investor's mindset or experience.
Property management isn't something that just anyone can or should do, just because they own a rental. I'd start with either a frank and friendly with your PM or shop for another PM that has better judgement- hopefully one that invests on their own.
- 5yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
"it just seems like month after month there is a slew of charges that are just under the $300 threshold."
So, we had a new client teach us a lesson about this issue. They fired their old PMC to hire us because of this exact same issue. Seems their old PMC was breaking repairs into several work orders to keep them under the owner approval threshhold and avoid owner approval for anything.
This client asked us how we could address this issue. We came up with a clause stating we could only do 2 "repairs under owner approval threshhold" per month before owner approval is needed. The client was happy and after thinking about it, we added it to all our management contracts as we thought it was fair.
You might consider negotiating something similar with your PMC and if they won't agree, start looking elsewhere.
Logical Property Management4.9458 Reviews - Specialist · Crossville, TN · Member since 2018 · 73 posts · 27 votes5y
@Scott Goulet I make money day one on all mine currently but I am not in a super expensive market so they cash flow a little more. That being said all my management is in house and with that I have more control. If you are buying deals that aren’t high cash flow ( which you should know before you purchase ) you should have enough set back for “incidentals”. And by no means am I dogging you for not having enough cash we have all been there and the more deals we do the better we get at managing our assets and so will you! Scott you have got a heck of a start so don’t get scared off by a couple of unwanted bills it happens you just have to plan for it in advance. Also managing your own properties is definitely not passive but you will see way better returns if you do and as you grow you will learn how to manage and you will then just need to bring in a in house manager in to become more passive in that role. Keep up the good work it will pay off!
- 5yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
You don't make money in the beginning when there is lots of deferred issues such as maintenance, occupancy etc. If a property has alot of deferred maintenance you have to tally it up and address it. Something you might consider is looking at the repairs and see if that is what they are. If you are fixing things that should addressed based on age it is cheaper to have an electrician you call go out and do a number of items at once rather then wait for things to break. Sometimes a periodic inspection can turn up issues. I don't know if your PM has markup but markup and emergency calls can drive the cost up. On the other hand if you are getting calls that are inflated or are things that shouldn't have been done you need to address that with the PM.
- Rental Property Investor · Sacramento, CA · Member since 2016 · 267 posts · 214 votes5y
Like almost any question on this site, the answer is that it depends. The type of deal, market, down payment, etc. all matters. In more general terms though, there is ALWAYS something with apartments. We both know it's the nature of the game. That being said, what are the problems you're dealing with?
I bought a value-add deal with a partner in 2018, fully expecting it to not cashflow for 12 months. We were going in, gutting apartments, and renovating the entire space. We did in fact cashflow after 12 months, but we are certainly spending more money on maintenance and repairs than I would have guessed two years ago.
The big question I would be asking myself is whether or not your management company is incentivized for things to go wrong at your property. Do they have a maintenance arm? Do they charge profit above and beyond time and materials?
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes5y
Originally posted by @Steve Vaughan:
Originally posted by @Scott Goulet:
@Steve Vaughan words of wisdom for sure. I read the long distance real estate investing book by david greene, and have been trying to implement it.
Buying cheaper properties elsewhere, but then I have rely and trust that my management company isnt screwing me.. no real way around that it sounds like?
I'd do what I did and require them to inform me prior to sending out a licensed tradesman willy-nilly.
All the sudden my wall heater and a/c units are being cleaned by their maintenance team vs being replaced by an electrician. All the sudden they aren't repairing old crap like my fluorescent light balast.
Make them make another step. They have no incentive to reduce your repair costs, especially if they get an override on repairs like most do.
How many old T12 4-foot fluorescent lighting fixtures does a tradesman make $150 each on by replacing the $10 ballast before he throws the PM giving him all that business some free repairs on his own flips and rentals?
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes5y
Originally posted by @Scott Goulet:
@Steve Vaughan words of wisdom for sure. I read the long distance real estate investing book by david greene, and have been trying to implement it.
Buying cheaper properties elsewhere, but then I have rely and trust that my management company isnt screwing me.. no real way around that it sounds like?
The sad reality is, no. Not until you have both the knowledge and the volume to catch them and make your threat to take your business elsewhere mean something to them. Steve's run his own properties for years -- he knows a light ballast is an electrical limiting device, he knows what it costs, he knows how much a new LED fixture costs and how easy it is to replace a 4-foot lighting fixture with a much smaller device that provides equal illumination. That knowledge doesn't come easy or cheap. And that's electrical. The PM will pull exactly the same kind of BS on plumbing, HVAC, drywall replacement and repair, siding repair, chimney repair...
Did you hear that VP Kamala Harris can't move into the Naval Observatory yet because they have to line all the chimneys? Why doesn't the Naval Observatory have high-efficiency furnaces and boilers and on-demand water heaters that take direct vents and don't require chimneys? Somebody's getting a sweet kickback for managing that property, that's for sure. - Rental Property Investor · Huntington Beach, CA · Member since 2020 · 6 posts · 2 votes5y
I think the real threshold issue is that of scale. If you only have a handful of doors and you have one or two major issues, it can wipe out your cashflow in a heartbeat. Trust me, I dealt with a major leak on one of my properties and it cost me $10K.
I would NOT recommend managing the property yourself as this is just a headache. It's worth the 8-10% to have someone else deal with the problems, but you want to make sure you have the RIGHT property manager. If you aren't happy with the one you have, maybe you should interview a few others and make the change when your contract permits. - Rental Property Investor · Mesa, AZ · Member since 2018 · 17 posts · 12 votes5y
@Scott Goulet personally I do Airbnb’s. They both cost me $8k upfront in deferred maintenance and furnishings. They are in Florida. I am in AZ. I manage them myself. I have a good housekeeper and a backup, a bug guy, lawn guy, plumber and handyman. I call them for help in sticky situations. You do t need a property manager just trustworthy connections. And a good lawyer for your lease agreement! :)
- Rental Property Investor · Hugo, MN · Member since 2014 · 283 posts · 257 votes5y
@Scott Goulet you should interview some new property managers. Find 3 or 4 and ask for referrals from current property owners so you can hear from them on what the experience is like working with that particular property management company.
- Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes5y
All of you are awesome, I appreciciate all of the feedback. Biggerpockets make landlording bearable sometimes.
@Krystal Stone -how did you find those trustworthy connections if you dont mind me asking?
- Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes5y
Sounds like it's your PM.
We feel into the same thing with our PM on our short-term rental.
We moved into our rental in May 2020, and they sent us a $300 maintenance bill for May and June for "lock maintenance." Obviously, we called then out. Literally every time we came to visit prior, the cleaning was not up to snuff.
In the long run, they will scam you if they can get away with it. Especially people who are out of state or want the "set and forget" investing.
Not all PMs... but your story fits the pattern.
- Investor · Saint Louis · Member since 2020 · 55 posts · 20 votes5y
@Scott Goulet
Hi Scott, when you say you buy them at a discount, what do you consider a discount? If you buy a house that would be valued at $150k if it's in great shape (ARV), but you buy it at $130k because it needs $20k work, then there is no discount. If you buy that same house for $100k, well now you have equity and can refinance it to pull out all the costs to upgrade the house, and probably most of the down payment (aka BRRR). Then you will have much smaller maintenance issues.
Besides that, anytime you are analyzing a deal, make sure you are including all the potential maintenance costs, property management costs (even if you manage yourself, some day you may not), assume vacancy costs each year, actual recent taxes, instance, etc. After its all said and done, if you don’t have a worthwhile positive rate of return (7% bare minimum but usually want over 10%) then it’s not a good deal. Run the numbers conservatively not best case scenario.
Hope this helps.
- Investor · Saint Louis · Member since 2020 · 55 posts · 20 votes5y
@Scott Goulet
Also, you are hiring the PM, so you are in charge. You can require they check with you before every single work order. If they disagree, fire them and find a new PM.
- Member since 2021 · 109 posts · 130 votes5y
You are paying a management company 8-10% of rent to rubber stamp maintenance requests and then pay for repairmen. If you live nearby, you may consider being your own PM. If you live far away find another PM. 8 doors would be a lot to manage by yourself. You may want to PM your most cheapest 5-6 doors or so, and manage a few of the highest rent price ones yourself to try it out. PMs do have some positives, I think tenants are more likely to pay a landlord that is a PM if times are tough than a landlord.
If become your own PM, and you find a good plumber/electrician/handyman etc do not use them a second or 3rd time without getting a quote from them and two others. Repairmen love to jack up the price once they think you have used them before. Once you find an honest, good and price competitive (doesn't always have to be cheapest) repairmen company you can ease up on the quotes. Get all the appliance and AC model numbers written down, if they text and report an issue you can Google and youtube the symptoms, then go check it out before calling a repair guy.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes5y
The fact of the matter is if a PM knows you haven’t managed yourself you are easy to take advantage of if you’re PM is that kind of person and runs their business a certain way. I would look for a PM that is top of the line in terms of reputation.
That is vital for someone who has never managed because you don’t know what you don’t know and these less than honest PMs see you coming from a mile away.
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