Diary of a Rental Property

Diary of a Rental Property

J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

I had a blast writing my Diary of a New Construction Project thread, and the feedback I got from that was great. So, I've decided to try another one...this time tracking and discussing the ongoing saga of a rental property that I'm in the process of buying, rehabbing and renting out.

A few details about this project and thread:

  • I'm not a professional landlord, and while I've had a couple rental properties in the past, they were all short-term and relatively turn-key (I didn't have to do much for the short time I owned them). This time, I'm looking to hold some properties longer-term, and the one I will be discussing in this thread will be my first longer-term property.
  • Because I expect this to be a longer-term hold, I expect this thread could continue for a quite a while. Obviously, I won't have stuff to post everyday (especially once the house is rehabbed and in service), but I'll try to follow-through for as long as possible, and hopefully until the end of the project, whenever that is.
  • I really have no idea what I'm doing when it comes to holding long-term rentals, so I'm guessing this thread will be more of a "what not to do" thread, as opposed to a "what to do" thread. That said, I'm open to all constructive critique, and hopefully advice, opinions and feedback I get in this thread will actually help me to be more successful.
  • I will, of course, post as much detail about the project as feasible, without risking giving away anything inappropriate about tenants, etc. I'll try to provide all documents, invoices, pictures, budgets, schedules and financials down-to-the-penny, so everyone will know just how well (or how badly) this project goes. Maybe we'll even get some insight into the "50% Rule" while tracking a real life project.
  • I have a partner on this project. It's a good friend of mine, and I'll likely be referring to him throughout the thread. Let's call him "Brian"...which makes sense, since that's his name.
  • This "diary" is going to start in the past, when I first found the house. I've been keeping notes in anticipation of starting this thread, and I imagine I'll be caught up to real-time in the next couple weeks. But, you'll notice that the dates on the first several posts will be in the past, and that's why.

Please feel free to ask any questions, provide any advice or give any opinions throughout the thread. I may not listen to all of them, but I always appreciate the feedback.

Now, on to the thread...

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Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
12y

Looking forward to following along J! Now you are playing in my world! :)

See this reply in the discussion

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  • Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    Please tell me the $856 wasn't just for the blower motor!

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    11y
    Originally posted by @Cal C.:

    Please tell me the $856 wasn't just for the blower motor!

     Blower motor, adding freon and tune-up.  About $300 too much by my estimates...  :-(

  • Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    I agree that is about $300 too high.  Makes me wonder a bit about your PM.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    11y
    Originally posted by @Cal C.:

    I agree that is about $300 too high.  Makes me wonder a bit about your PM.

     They have 2000 units under management, so they're a larger firm.  My guess is that they use retail (i.e., Yellow Pages) contractors, and 50% more expensive isn't surprising...

  • Wholesaler/ Investor · Houston, TX · Member since 2014 · 491 posts · 113 votes
    11y

    awesome thread 

  • Real Estate Investor · GA · Member since 2015 · 59 posts · 33 votes
    11y

    @J Scott thanks for starting this thread and being so very open with us through out your new "buy & hold" investing. 

    I read it from the beginning, and when you stated that you began marketing the property and only listed it on gosection8, I said out loud "Oh no! He should have hired a property manager..."

    One of my mentors made a bold statement that I can never forget. He said "If you are not the type of person who can evict your mother out of your rental home, on Christmas morning, in the middle of a snow storm for not paying rent, then you shouldn't manage your own property." Now of course that is a bit extreme, but it made a point. 

    Another route you could have gone, was to pay a real estate agent half month - full month rent to just lease the property for you. When I first got my license, I worked for a PM company who managed 5000+ homes for a large hedge fund. I was #1 in the entire hedge fund when it came to "pre-leasing" properties. I had about 1/3 of the homes I was responsible for leased before there was even a solid finishing date. 

    I even took side leasing jobs from local investors for as little as a $500 referral fee. Its a marketing game. I haven't marketed for renters in well over a year and a half, but I still get 3-4 rental leads per month that call in. 

    At this point, I'm learning from my experiences as well as the experiences of others to begin adding "buy & hold" properties to my own investment strategy as well. 

    The details of this thread was very well needed and received, than you again. 

  • USA · Member since 2015 · 15 posts · 0 votes
    10y

    Reviving this once again! Thanks for this awesome look into the anatomy of a rehab and rental project, very informative and helpful!

    I noticed in your P@L sheet above that there was no expense deducted for a mortgage payment or interest payment to the portfolio lender you talked about for 65% LTV. Perhaps I missed it but could you recap your financing for this project because it does not appear that you financed this out of pocket, but yet I do not see additional expenses deduced out for repaying the loaner.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @Account Closed:

    Reviving this once again! Thanks for this awesome look into the anatomy of a rehab and rental project, very informative and helpful!

    I noticed in your P@L sheet above that there was no expense deducted for a mortgage payment or interest payment to the portfolio lender you talked about for 65% LTV. Perhaps I missed it but could you recap your financing for this project because it does not appear that you financed this out of pocket, but yet I do not see additional expenses deduced out for repaying the loaner.

    I paid cash for everything and the plan was to refi to a portfolio loan.  But, I don't need the cash right now... So I haven't yet refinanced my cash out.  There's currently no loan on the property.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    Just another quick update on this one...two things worth mentioning since my last post a few months ago:

    1.  The dryer died.  This was expected...it was old and I figured it wouldn't even last the first year.  The PM replaced it from a scratch-and-dent store for about $350 (including delivery and installation).

    2.  I got a message from my PM about two weeks ago saying that we had a renewal coming up in late February, and asking if I wanted to raise the rent.  I said that I was happy with the current rent (market rents haven't increased in the area) and that I was happy keeping it the same if they renewed for a year.

    He came back last week and said that the family that was living there was planning to buy a house next year and wanted to know if I'd be willing to do a 6-month lease or a month-to-month lease at a $50/month increase.  I said that I would be fine with either -- I like the idea of a 6-month lease, but the month-to-month also works at the higher rate, as I know that just because they *want* to buy a house, it could be a while before they actually can.

    He came back to me the other day and indicated that they would be signing a month-to-month lease at a the $50/month increase (total $1500/month), starting March 1.  They have to give 60 days notice to vacate.

    So, it's possible that we could need a new tenant as early as March 1 (if they were to give notice in the next 3 weeks) or they could be around for quite a while longer...I guess we'll see.

    I'll post a financial update when we hit the 1-year mark in February...

  • San Antonio, TX · Member since 2015 · 47 posts · 18 votes
    10y

    @J Scott Thank you for taking the time to share this (saga) story. It's been helpful for me as a newbie, not even knowing what I don't know. I really appreciate you!!

  • Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    @J Scott How about an update to this thread since its now been a year.  

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @Cal C.:

    @J Scott How about an update to this thread since its now been a year.  

    Tenants will have been in a year at the end of this month...  Once I have a full year's worth of data, I'll update the thread with the first year numbers!

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    Next week will be one year since we got our first tenants into the rental, and as promised, I wanted to provide a detailed update of our financials for the year.  Before I jump into the financials, here’s the long-and-short of our year:

    • Tenants moved in the end of last February, and decided to go month-to-month starting March 1 of this year.  They are looking for a house to purchase, and I agreed to allow them to go month-to-month with a $50/month rent increase and 60 days notice prior to terminating their lease.
    • We had about $1200 in maintenance costs this year, which included a couple HVAC issues (new thermostat and broken compressor) and replacement of the dryer, which we knew was old and was near end-of-life.
    • We probably put in about two hours of time/effort on the house this year. That was mostly email and phone calls with the property management company and paying other bills (HOA, utility, insurance, etc). So, this was nearly a passive investment for the year.

    Here is what our Profit and Loss Statement (P&L) looks like for the first year (this assumes no additional surprise expenses before next week):

    A few financial notes before I jump into the financial metrics:

    • This represents 12 months income at $1450/month, plus a few extra days that were pro-rated for early move-in.  The data would be more accurate if about $50 was deducted from the gross income line for those extra days.  That said, it was easier to just let the numbers be off by a percentage point than to go back and alter my books – this is more than evened out by the fact that there was a $200 electric utility expense from prior to move in that was paid after.  So, my numbers are actually a bit better than indicated.But, it’s close enough.
    • There is no CapEx in this report, as CapEx doesn't show up on a P&L – and because we didn't have any CapEx last year. That said, most CapEx (roof, exterior, etc) is covered by the HOA, so that number will be proportionately lower long-term (though there's a monthly HOA cost in our expenses).
    • Property management fees include an entire00 first month tenant placement fee ($1450) – given that the tenants are staying more than a year, this number is disproportionately high.

    Our Net Income was $8756 – on a total cash investment of $79,374, that represents a cash-on-cash return of about 11.03%.  

    My goal is typically about 12% cash-on-cash return, but this number will fluctuate over the years, and this is certainly within my acceptable range.

    Our total expense ratio (including rent loss and CapEx) for the year is about 49.83%.

    While this number will fluctuate over the years with changes in CapEx, vacancy, additional turn-over costs, amortized tenant-placement costs, etc., for the first year it falls squarely in line with the "50% Rule." While not every house will fall this perfectly into that range, it's a good way to double-check that costs aren't too out-of-whack. That said, I expect expense ratio to be a little higher when averaged over the long-term, as CapEx and vacancy tend to be more costly after the first year than in the first year.

    I ran a quick IRR analysis of what my compounded return on this investment would be if I sold today at market price (including selling costs), and got somewhere around 18.4%. Not that I'm considering selling today, but I'm guessing that number will go down over the next couple years -- but I don't have a better place to put the cash, so it's not a good option.

    Happy to answer any questions!

  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    J.  Eleven more of those and you'll have ~1million generating $105 - $110K/year ... college fund.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    I just put another one of these under contract one street over.  Exact same house.  Paying $3500 more for it than the first one and expect the rehab to be similar to the first.  So, the numbers should be close to the same.  Closing next Thursday...

  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y
    Originally posted by @J Scott:

    I just put another one of these under contract one street over.  Exact same house.  Paying $3500 more for it than the first one and expect the rehab to be similar to the first.  So, the numbers should be close to the same.  Closing next Thursday...

    Atta boy ... that leaves 10 ;-)

  • Attorney · Brookhaven, GA · Member since 2013 · 26 posts · 26 votes
    10y

    Makes you miss my low fees, eh?  : )  Kudos!  

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @Bo Wagner:

    Makes you miss my low fees, eh?  : )  Kudos!  

    I more miss your quick closings!  The closing agents around here take a month to get a simple cash transaction done.  This one is closing quickly because they already have the title work done (there was a previous buyer who backed out)...

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    Just a quick update...

    Purchased another property in the same subdivision a couple months back.  Purchased for $61,500 from a local wholesaler, put in about $25K (should have been closer to $20K, but my wife wanted to manage the rehab and this was her first one), and put it on the market with my property management company two weeks ago.  They found a tenant within a few days who moved in the following week.

    So, that one is rented/occupied at $1450/month.

    As for the first property (the one this post is about), the tenants have been paying $1500/month since February on a month-to-month lease.  About 3 weeks ago, they gave their 60-day notice.  The PM company started showings a week later, and as of today, we have a Section 8 tenant lined up at $1450/month starting when the current tenant leaves.

    I haven't seen a formal condition report on the property, but the PM has been in there a lot recently (doing showings) and says it's clean and in good shape.  So, hopefully a quick and easy turnover.

  • Rental Property Investor · Glen Arm, MD · Member since 2015 · 105 posts · 41 votes
    10y

    @J Scott Just embarking on my first rehab/buy and hold property in Baltimore (closing next week), so this thread was incredibly helpful to me. Thanks a ton for walking us through your experience!

  • Rental Property Investor · Waldorf, MD · Member since 2015 · 155 posts · 76 votes
    10y

    This is a great thread. Been on BP almost a year and hadn't run into it yet. Thanks @J Scott

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    8y

    Someone reminded me about this thread today, and coincidentally, it's been just over three years since we put this property into service...  Looks like I missed the two year update, but thought I would provide the three-year update for anyone who might be interested...

    • We're on our second set of tenants since we purchased the property.  The first tenants lasted for about 18 months, and these tenants are about 18 months in as well -- they have 6 months left on their lease.
    • We haven't raised the rent in three years -- it's still at $1450/month.  We're still right about market rents for this area, give or take $25 or so.
    • I've probably put about 10 hours of effort into the property over the past three years -- our property management company has been pretty good, and other than a few late payments, our tenants have been pretty good as well.

    Here is what our Profit and Loss Statement (P&L) looks like for the combined three years:

    Our Net Income appears to be $24,252.88.  But, you'll notice that that includes a depreciation line item (which is just a paper loss) of 4,752.00.  Adding that back into the net income, we have a total net income over the three years of $29,004.88.

    On a total cash investment of $79,374, that $29,004.88 represents a cash-on-cash return of about 36.54%.  But, that's over three years -- dividing by 3 yields an annualized cash-on-cash return of 12.18%.

    My goal is 12% cash-on-cash return on unleveraged properties (we paid for this with cash and never refinanced), so we're right on target for this one.

    Our total expense ratio (including rent loss and CapEx) for three years is about 43.5%.

    While this number will fluctuate over the years with changes in CapEx, vacancy, additional turn-over costs, amortized tenant-placement costs, etc., for the first three years it's a good bit less than the "50% Rule."  I expect that over a long-term hold, we'll be closer to the 50% range for expense ratio -- with little turnover costs, vacancy and non-payment thus far, we're pretty much maximizing our income ratio right now.

    I ran a quick IRR analysis of what my compounded return on this investment would be if I sold today at market price (including selling costs), and got somewhere around 18.2%. Not that I'm considering selling today, but always good to know.

    For reference, we now own 41 units...

    Happy to answer any questions!

  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    8y

    @J Scott awesome 3 year look at this asset.  Thanks for the information.  Just a few questions regarding this property.

    1. was the property purchased rehabbed and rented on day one? if not, and you completed rehab to the property pre tenant placement, were  those expenses included in this review?

    2. In the insurance section were there any insurance claims that included the payment of an insurance deductible?

    3. What would you rate the class of property?

    4. What the property sourced by you, your company, purchased through MLS or through a wholesale transaction?

    5.  What is your ball park value current day compared to the value upon acquisition?

    6. Is the same management company in place since acquisition?

    7. Security deposit is -$15.60.  Do you do "move in fee" with your tenants or simply remove security deposits from the equation for a new tenant?

    8. Lastly, is there any particular reason you have not to put debt on the property?

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    8y
    Originally posted by @Shawn Ackerman:

    @J Scott awesome 3 year look at this asset.  Thanks for the information.  Just a few questions regarding this property.

    1. was the property purchased rehabbed and rented on day one? if not, and you completed rehab to the property pre tenant placement, were  those expenses included in this review?

    2. In the insurance section were there any insurance claims that included the payment of an insurance deductible?

    3. What would you rate the class of property?

    4. What the property sourced by you, your company, purchased through MLS or through a wholesale transaction?

    5.  What is your ball park value current day compared to the value upon acquisition?

    6. Is the same management company in place since acquisition?

    7. Security deposit is -$15.60.  Do you do "move in fee" with your tenants or simply remove security deposits from the equation for a new tenant?

    8. Lastly, is there any particular reason you have not to put debt on the property?

    1.  You can see all the details on the first few pages of the thread.  All cost associated with the rehab go to the basis of the property -- they are not expenses on the P&L.  The cost basis was the 79,374 that I mentioned above.

    2.  The insurance expense is just the premium -- there haven't been any claims.

    3.  I'd consider this a B- or C+ property in a B area.

    4.  You can see all the details on the first page of this thread.

    5.  Property value likely hasn't changed much since we purchased it.  Perhaps an increase of 5-10%.  Highest and best use is as a rental, and a landlord likely would have paid about $95-100K turnkey when we purchased it; a landlord would likely pay $100-110K now as a turnkey rental.

    6.  Yes, we've had the same management company for three years.

    7.  That is just the money we kept from one of the security deposits to cover some damage. We charge one month's rent as security deposit, but that money is just escrowed (we owe it back to the renter), so it's not on the P&L.

    8.  We have more cash than we have deals right now, so I'd rather have the cash in a property earning 12% than in the bank earning 1%.

  • Investor · MANTECA, CA · Member since 2016 · 44 posts · 7 votes
    8y

    The original post was four years ago.

    What was the cost of labor per hour back then,  vs now in 2018.

    Handyman labor  then and now ?

    Licensed contractor , then and now ?

    Here in CA, rates are so high in 2018.  $$

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