First year worse?

5 Replies

Hi,

  Do you guys see a difference in your first year revenue compared to later years?  I bought a four family last year.  It was a short sale. With 2 none players an a lot of deferred maintenance , I didn't do as well as I hoped.  It always seems like the next few months will be better. Does this happen to you?   

Generally, is the first year about what you get or are the first few years a little rougher?

Thanks 

You are speaking to the acquisition costs which typically include make-ready costs on a home that has deferred maintenance. These initial renovations/ make-ready costs should not really considered part of your cashflow projections even though that initial investment will certainly subtract from your bottom line/ profits. I typically harden/ replace any items that need to be taken care of prior to putting a rental in service to avoid future headaches. Others might tackle those issues when those units finally become vacant if they were occupied to begin with, then raise prices on that unit if it was under-market. It really depends if you choose to take care of the deferred maintenance all at the beginning or tackle it piece meal. It also depends on the level of deferred maintenance on where you'll see your actual cash flow change. You essentially need to be analyzing the up front cost to acquire and renovate to be make-ready and divide by the projected cashflow to see your cash on cash return, hopefully beforehand to see if the needed renovations are worth the cash flow and how long it will take for you to break even, percent of return on your cash investment, etc. to see if its worth your time.

Its a long winded way of saying, it depends on how neglected the unit has been beforehand and how well you estimated your maintenance costs. Perhaps work on being proactive in taking care of that deferred maintenance so future years don't have as high maintenance costs...

@Andy Young   Yes generally the first year is the worst normally for cash flow on a rental.  There are often a lot of little things, like needing a mail box or fixing a window that won't open,  fixing a loose carpet or getting a door to open and close without sticking, well you get the idea.  There are bad years, where more than one house needs a new roof, or you have to dig up a sewer line.  Some of those can hit you pretty hard.

You had two non-payers (reading the typos that way at least, I assumed it was what you meant to write).  Vacancy will kill your cash flow whenever it occurs, so you can't just blame that on first year - although vacancies are more common when first trying to get a unit rented.

My bad. I did mean non-payers. They were inherited tenants from the person we bought it from.  we seem to do okay with the tenants we screen. Thanks a lot for the response!

Inheriting tenants is management intensive at first for me anyways.  To get acclimated to the property I will usually pick up the rent the first few months to have a presence and size up the tenant were dealing with.