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! :)

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  • Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    12y

    How long do you normally "allow" for bids and estimates before you want to actualyl physically start a project . . as time is money, I'm interested in what benchmarks you give yourself. 2 weeks? A month? I would think that it could vary based on how you financed a project (cash as opposed to HML or borrowing) but maybe not? Just curious!

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Christina R.:
    How long do you normally "allow" for bids and estimates before you want to actualyl physically start a project . . as time is money, I'm interested in what benchmarks you give yourself. 2 weeks? A month? I would think that it could vary based on how you financed a project (cash as opposed to HML or borrowing) but maybe not? Just curious!

    Best case, we have bids in hand, contracts signed and are ready to start work the day of closing (or the day after). But, given that we're in a new market and don't yet have contractors and given that this sale was retail (the house wasn't vacant so we couldn't just come and go with contractors), we decided to wait until after closing to start getting bids.

    I'm hoping to start work next week, and hopefully the rehab shouldn't take more than 2-3 weeks (the contractors we've been talking to are smaller teams, so things won't move super quickly). With contractors, it's typically, "Better, faster, cheaper -- pick two!" We pick better and cheaper...even if it takes a bit longer...

    But, typically, I would have wanted to have started renovations much more quickly -- ideally the day after closing.

  • Dallas, TX · Member since 2011 · 308 posts · 59 votes
    12y

    I noticed your paint costs went up $500. What changed? Also for your 'other' line where you have smoke detectors, mini blinds, etc., how do you determine a price for the labor? I would think a set hourly rate would be best...

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Bryce Y.:
    I noticed your paint costs went up $500. What changed? Also for your 'other' line where you have smoke detectors, mini blinds, etc., how do you determine a price for the labor? I would think a set hourly rate would be best...

    We decided to partially finish the basement (the finish part will be painted). Also, we may go with a 2- or 3-color paint scheme, instead of a single color.

  • Investor · McKinney, TX · Member since 2012 · 588 posts · 224 votes
    12y

    @J Scott , do you normally list specifically what materials to buy (SKU#) in your scope of work so the contractor buys what you want? or do you buy the materials and they just install?

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Shawn Thom:
    @J Scott , do you normally list specifically what materials to buy (SKU#) in your scope of work so the contractor buys what you want? or do you buy the materials and they just install?

    I buy all the finish materials, including:

    - Doors/Windows

    - Cabinets/Countertops

    - Lighting Fixtures

    - Plumbing Fixtures

    - Flooring/Tile

    - Appliances

    - Etc...

    I ask my contractors to provide all the building materials, including:

    - Lumber/Fasteners

    - Sheetrock

    - Paint (I specify color)

    - Rough Plumbing/Electrical (Pipes, Wire, etc)

    - Etc...

    For some things, it's a grey area (siding, roof shingles, trim, etc), and for that, we'll discuss ahead of time if I'll provide it or if they will -- generally, it will depend on how picky I am about the specific material being used and who gets stuff cheaper.

  • Investor · Rockville, MD · Member since 2013 · 24 posts · 0 votes
    12y

    @

    Thanks a lot for posting Scope of Work here. Even though I am not new to the Scope of Work, WBS, etc ... but I never experience it with any of the construction/rehab work.

    Given that you are fairly new to the area and starting your Baltimore network:

    How do you find and screen contractors? Do you use Angie's list / meetups / etc to select your team?

    I am sure I'll see you at one the meetups.

    Andrey

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Andrey Y.:

    Given that you are fairly new to the area and starting your Baltimore network:

    How do you find and screen contractors? Do you use Angie's list / meetups / etc to select your team?

    I prefer word of mouth recommendations from other investors I meet. The three contractors I had bid this job were all referrals. One was someone who was doing some work on my partner's personal residence (my partner found him on Craigslist and he was really good), one was referred by the wholesaler in the deal, and the other was from a local real estate mailing list.

    I'm not a fan of Angie's List, as the contractors tend to be more retail focused -- and priced. And certainly I like getting recommendations from those I meet at the local Meetups.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y

    FEBRUARY 5, 2014: LABOR BID

    We had three contractors come take a look at the property last week, and two of the three sent us bids -- the third wants to discuss the bid over the phone -- I've asked him to send it to me in email first, but he hasn't...so I've written him off.

    The first bid I received was for $21K+. The second bid was from the guy who coincidentally was doing work around the corner on another rental property -- he prefers to only bid labor and have us purchase all materials. But, he gave us a bid on about 80% of the labor tasks, and his prices were very competitive. Ultimately, his labor bid for those tasks came in at 30% below my estimates (about $2000 less), so we already have a savings over the estimate I originally prepared.

    Here is the side by side list of tasks the contractor bid, along with my original estimates for the what.

    Based on this, it appears that our total budget could end up being closer to $15K than to $18K, which from a cash-on-cash standpoint, should give us a nice little boost in returns. Assuming the rest of the bids still come in where we expect... :-)

    And yes, the contractor is both licensed and insured...

  • Dallas, TX · Member since 2011 · 308 posts · 59 votes
    12y

    Interesting. So is it safe to conclude that labor prices are actually similar to Atlanta? I have a couple questions if you don't mind:

    1. When using someone for the first time, how closely do you monitor them? Do you visit the job site daily?

    2. I'm curious about your decision to replace the toilets. I know you mentioned you always replace them in flips, which I can understand, but I'm not so sure renters will really appreciate a new toilet as much. Of course I am assuming there is nothing wrong with the current toilets.

    3. How soon before you start marketing your property? Will you use an agent? CL?

    Thanks!

  • Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    12y

    @J Scott

    This is probably a dumb question but when you use a contractor where you supply the materials, does your contractor usually pick them up for you or do you have to deliver to the site? Are you using local outfits for materials or going the big box route (or combo of the 2?) . . along this line, does the convenience of having most everything under one roof with an HD or Lowes when you are purchasing equalize savings of getting materials from different vendors and having to track all of that (i.e., time = money).

  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    @Bryce Y.

    We always replace the fixtures (toilets, shower, faucets) in our new acquisitions with modern, low-flow fixtures to cut down on water consumption - the cost of which has always been in our hands {until now ... we are embarking on our first retrofit of sub-metered water into one of our properties}.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Bryce Y.:
    Interesting. So is it safe to conclude that labor prices are actually similar to Atlanta? I have a couple questions if you don't mind:

    1. When using someone for the first time, how closely do you monitor them? Do you visit the job site daily?

    2. I'm curious about your decision to replace the toilets. I know you mentioned you always replace them in flips, which I can understand, but I'm not so sure renters will really appreciate a new toilet as much. Of course I am assuming there is nothing wrong with the current toilets.

    3. How soon before you start marketing your property? Will you use an agent? CL?

    Thanks!

    1. Normally, we've seen other work that the contractor has done (we'll ask to walk through a project) and that will give us an idea of how organized and clean he is, which is my biggest concern with a new contractor. Also, I like to use contractors where I have a recommendation from another investor, so I have an idea of what to expect (can he be left alone for more than a day or not). In places where I have a full time project manager, he'll spend a couple hours/day at the site with new contractors; in places where I'm managing myself, I'll visit the first day and see how things are going, and then decide if I need to stop by everyday or not. If I do need to stop by everyday, it's probably not a contractor I'll use long-term.

    2. As Roy said above, low flow fixtures are good and also having the peace of mind knowing the plumbing fixtures aren't old and about to break (which can cause massive damage).

    3. We'll start marketing as soon as the rehab is done. We'll put it on the MLS (my wife is licensed) and if we decide to consider Section 8 tenants, we'll put it on gosection8.com. We'll also put it on CL.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Christina R.:
    @J Scott

    This is probably a dumb question but when you use a contractor where you supply the materials, does your contractor usually pick them up for you or do you have to deliver to the site? Are you using local outfits for materials or going the big box route (or combo of the 2?) . . along this line, does the convenience of having most everything under one roof with an HD or Lowes when you are purchasing equalize savings of getting materials from different vendors and having to track all of that (i.e., time = money).

    Hey Christina -

    We'll generally do one delivery from Home Depot for all our finish materials (light fixtures, plumbing fixtures, appliances, etc). If we're buying materials and the timing works out, we'll also have other materials delivered at the same time (sheetrock, lumber, trim, etc). More often than not though, the contractor needs the building materials prior to the delivery of the finish materials, in which case we'll have him buy the building materials directly, and we'll either reimburse him or he'll use our HD card.

    For the most part, we'll use HD for our finish materials. But, if we're doing something higher-end, or if we're doing a big project, we may use some specialty distributors to get better prices.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Bryce Y.:
    Interesting. So is it safe to conclude that labor prices are actually similar to Atlanta?

    Missed this question earlier...

    Actually, Maryland is more expensive than Atlanta, from the data I currently have. This contractor is charging about what I would have expected in Atlanta (maybe a bit more), but I think he's on the low side of what you'd typically find here.

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y

    Very interesting so far.

    Looking forward to following the progress and seeing the results once you get someone in there and what the rents are.

    So going the devil advocates stance, what would the rents be like if you don't go as nice on the rehab? As a few others have said I would not be inclined to do over that kitchen (at least not the cabinets, I'd paint it and put down tile since it is nice and it is durable) I also would just change out some stuff in the bathroom (No pooper and would tile that as well, looks like it had wall paper so I'd get that garbage out of there).

    What is the drop off in rents and quality of tenant (Though if you need the high end unit to get section 8 I assume the quality doesn't really go down) for the "freshened up" place that isn't fully updated?

    You can always go back and do more work if you aren't getting enough rent or having issues getting it rented. You can't unspend the money if it turns out it was overkill.

    That being said so far sounds like you can make the place pretty nice for pretty reasonable prices and might very well be well worth doing.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Shaun Reilly:

    So going the devil advocates stance, what would the rents be like if you don't go as nice on the rehab? As a few others have said I would not be inclined to do over that kitchen (at least not the cabinets, I'd paint it and put down tile since it is nice and it is durable) I also would just change out some stuff in the bathroom (No pooper and would tile that as well, looks like it had wall paper so I'd get that garbage out of there).

    What is the drop off in rents and quality of tenant (Though if you need the high end unit to get section 8 I assume the quality doesn't really go down) for the "freshened up" place that isn't fully updated?

    It's a good question, and I've run the numbers using several scenarios, though not this particular one...so let's do it...

    If we still went the Section 8 route, but didn't redo the bathroom or kitchen, my best guess is that we'd see rents $50-100 lower (just a wild guess). For the sake of analysis, let's say $75. That's $900 per year in reduced rent.

    The cost of the additional renovations should be about $5000:

    - Cabinets: $2000

    - Countertops: $1000

    - Bathroom Sheetrock: $500

    - New Toilet, Vanity, Faucet: $1000

    - New Tile Floor: $500

    The other stuff we'd have to do anyway, including kitchen floor (which is in really bad shape), tub surround (deteriorated and water getting behind it, causing mold), shower door (it's destroyed), etc.

    So, a $900 annual return on an initial $5000 investment ends up being an 18% cash-on-cash return. That's right about where we're projecting our COC currently, which means from a financial standpoint, it's a toss-up and doing the work or not doing the work should result in about the same returns.

    Of course, there are other things to consider:

    - More rehab means more things to the tenant to destroy

    - More rehab means longer time until the unit is rented

    - More rehab could mean a better quality tenant

    - More rehab should make it easier to rent the place

    - More rehab means less chance of failing a Section 8 inspection

    - More rehab should mean fewer repair issues

    There are Pros and Cons in that list, and they likely cancel each other out (actually, they likely don't cancel, but I'm not experienced enough to analyze it in more detail at this point).

    So, I can't really argue with your point about doing less...though if it's a financial toss up, I'd rather go the route where finding a tenant is easier and maintenance calls are likely to be reduced. Which still gets me to lean in the direction of doing more.

    But given that I hadn't done that particular analysis, I truly appreciate the "devil's advocate" stance!

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    @J Scott - I suggest you get a better understanding of how the Housing Authority there determines the landlord's portion of a Section 8 voucher. In my area, the voucher is for a specific dollar amount based on number of bedrooms for which the tenant is approved. Then certain tenant paid utilities reduce the voucher amount to yield the landlord's portion. Condition comes into play obviously when the tenants shop around and for the annual inspection and for tenant retention. Now, if the Section 8 tenant works a job so as to have some income, then the tenant is allowed to contribute up to 40% of income as additional rent above the voucher amount; but such a tenant must pay 30% to 33% of income toward the rent in the first place, so you can only capture 7% to 10% of that tenant's (measly) income.

    That's what I have discovered for my area.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Steve Babiak:
    In my area, the voucher is for a specific dollar amount based on number of bedrooms for which the tenant is approved. Then certain tenant paid utilities reduce the voucher amount to yield the landlord's portion.

    Thanks Steve...I definitely need to get better versed in how the numbers are determined. I know that a 3-bedroom in this area is approved at $1483 by HUD, but I also know that different amenities contribute as well (washer/dryer, microwave, ceiling fans, etc).

    So, it's possible that market rent is actually higher than what I'm anticipating, but another 3-bedroom recently rented for $1400, which leads me to believe either they knew less than I did, or I still have a lot to learn... :-)

  • Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    It sounds like Section 8 is a lot different in your area than mine. I have a bunch of Section 8 rentals and the most I've ever gotten for a three bedroom is $860. Does that $1,483 include utilities? If so, you will be suprised at how high they estimate utilities. Once they start backing utility costs out, that $1,483 could drop to a significantly lower amount.

    I always thought the utility costs that they estimate were sky high until I walked into some of my rentals in winter and see how hot they keep the house. I keep my house at 70 because I don't like high bills. I see their thermostats set at 80 all the time.

    I will say that the only reason I accept Section 8 is because the money is guaranteed. Even then, I sometimes question if it's worth it. It's not just the additional paperwork and red tape, but the tenants usually have issues - cleanliness, bed bugs, entitlement mentality, etc. I only accept it for my low end rentals. For my more expensive ones ($900+ per month), I would never consider it.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    12y
    Originally posted by @Rob K.:
    It sounds like Section 8 is a lot different in your area than mine. I have a bunch of Section 8 rentals and the most I've ever gotten for a three bedroom is $860. Does that $1,483 include utilities? If so, you will be suprised at how high they estimate utilities. Once they start backing utility costs out, that $1,483 could drop to a significantly lower amount.

    I was told the fair market HUD rent in Baltimore County was $1483 (for a 3 bedroom) by another investor who I trust, but I had never verified that information. Upon reading this question, I hopped on the HUD website to see if I could figure out if that included utilities or not...what I found was that the $1483 was actually an incorrect figure (don't know if the person who gave me the information was using 2013 data or had the wrong county).

    Here is the info directly from the HUD site (couldn't link it because it was a dynamic URL, not a static URL):

    The fair market (50th percentile) rent for a 3-bedroom in Baltimore County is actually $1599. Though I still have no idea if/how utilities are figured into that...there was nothing online about utilities being included in fair market rent, so this is something I'll need to ask the local HUD office next week.

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y
    Originally posted by @J Scott:
    Originally posted by @Shaun Reilly:
    So going the devil advocates stance, what would the rents be like if you don't go as nice on the rehab? As a few others have said I would not be inclined to do over that kitchen (at least not the cabinets, I'd paint it and put down tile since it is nice and it is durable) I also would just change out some stuff in the bathroom (No pooper and would tile that as well, looks like it had wall paper so I'd get that garbage out of there).

    What is the drop off in rents and quality of tenant (Though if you need the high end unit to get section 8 I assume the quality doesn't really go down) for the "freshened up" place that isn't fully updated?

    It's a good question, and I've run the numbers using several scenarios, though not this particular one...so let's do it...

    If we still went the Section 8 route, but didn't redo the bathroom or kitchen, my best guess is that we'd see rents $50-100 lower (just a wild guess). For the sake of analysis, let's say $75. That's $900 per year in reduced rent.

    The cost of the additional renovations should be about $5000:

    - Cabinets: $2000

    - Countertops: $1000

    - Bathroom Sheetrock: $500

    - New Toilet, Vanity, Faucet: $1000

    - New Tile Floor: $500

    The other stuff we'd have to do anyway, including kitchen floor (which is in really bad shape), tub surround (deteriorated and water getting behind it, causing mold), shower door (it's destroyed), etc.

    So, a $900 annual return on an initial $5000 investment ends up being an 18% cash-on-cash return. That's right about where we're projecting our COC currently, which means from a financial standpoint, it's a toss-up and doing the work or not doing the work should result in about the same returns.

    Of course, there are other things to consider:

    - More rehab means more things to the tenant to destroy

    - More rehab means longer time until the unit is rented

    - More rehab could mean a better quality tenant

    - More rehab should make it easier to rent the place

    - More rehab means less chance of failing a Section 8 inspection

    - More rehab should mean fewer repair issues

    There are Pros and Cons in that list, and they likely cancel each other out (actually, they likely don't cancel, but I'm not experienced enough to analyze it in more detail at this point).

    So, I can't really argue with your point about doing less...though if it's a financial toss up, I'd rather go the route where finding a tenant is easier and maintenance calls are likely to be reduced. Which still gets me to lean in the direction of doing more.

    But given that I hadn't done that particular analysis, I truly appreciate the "devil's advocate" stance!

    Good analysis.

    Estimates seem reasonable. Even if you are off on what it will do to the rents I doubt you are so far off that it swings it so far one way or the other that it isn't still going to be pretty close to a tossup.

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y

    Section 8 seems to vary a lot region to region, which is surprising given it is a federal program.

    In my area (that has very high heating costs BTW) I don't think that they take utilities into account at all. I happen to have 2 units in the same city about a mile from each other that are both 2/1 condos that I rented out to Section 8 tenants within 2 weeks of each other. I got the same initial rent on both and the same rent increase on both this year. One includes heat and the other doesn't.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    The local Housing Authority will sometimes break things down by zip code; you should see if that is what you are seeing in that area.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    BTW - when you try to communicate with your local Housing Authority, don't be surprised if as a landlord you might not have things divulged to you. After all, the caseworkers don't attach to the landlord - they represent the tenant.

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