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Owning Rental Property: Year Two

Two years of being a landlord

Someday we’ll give you a new paint job!

It’s been almost two years since we became landlords. We are not professional real estate investors in any sense of the word, just people, like many of you, who are looking at investments that will build wealth and allow us to be financially independent. Here’s how we did in year two of owning rental property.

Residential Property

The residential property is humming along nicely. We did turn over a tenant, but the property management company had one waiting to move in, so there was no loss of rental income.

There are some things that will need to be done on this property eventually. Some of the windows should be replaced, the furnace is old, and the dishwasher and washer/dryer set are probably from the late 80’s. We are prepared for any of these expenses whenever happen, but so far, so good. I’d say we are on deferred maintenace at this point. Aside from a few minor repairs, we haven’t spent much except for property management, mortgage, and taxes. This rental has netted $4081 for the year. Not enough to retire on, but not bad for such a little house.

Commercial Property

rental repairs can be expensive

Pretty building, crappy furnace

I’m almost hesitant to write about this building because what we are doing probably goes against all investment property rules. Since there is more than one way to skin a cat, I’ll spill the gory details. You gotta take the good with the bad, right?

This property is seller financed, meaning the former owner holds the mortgage. I love this because it meant almost no closing costs, and we got a very good deal. The kicker is that he wanted a 6 year payoff term, so the monthly payment has to be high. In fact, we lose $4.77 each month because the rent does not quite cover the payment.

Repair City

Speaking of deferred maintenance, this building has been on that plan for at least a decade. I actually owned half of it before last year. My former co-owner was of  the “don’t fix it unless it’s completely broke” philosophy. I agree to a certain extent, but the cooling system and furnace were ancient.

No one is sure, but we believe the furnace was from the 40’s and used to be coal operated. At some point, it was switched to natural gas. It was a giant hulk of a thing that makes the scary basement furnace in Home Alone look like a kiddie toy.

Cooling was done by 3 evaporative “swamp” coolers, which used to be popular in dry climates. Modern air conditioning systems are generally much more efficient these days. As a result, for several months of the year, part of our office was too hot and part was too cold.

Patients complained.  In the winter, staff wore their coats indoors and we had space heaters in the hard to reach places. It’s a wonder we haven’t burned the building down.

We all fried during July and August because you can’t leave exam room doors open due to privacy issues. I love to sweat through my eye exam, how about you?

Anyway, my first item of business was to find a better solution. I also worried that the furnace would completely poop out in the middle of January and force the office to shut down. I got a few estimates for all options, but ultimately decided to bite the bullet and replace everything. We now have a modern, efficient heating/air conditioning system and it works wonderfully!

With a few other repairs plus taxes and insurance, the commercial property comes in at $-18,332 for the year. Yep, 5 figures in the red.

Would You Buy That Property Again?

Despite the horrible return, I would buy the building again. We knew this repair was necessary and had the cash to pay for it. Even though the  monthly payment would keep some people awake at night, in just over 5 years, we’ll own it outright.

Yes, we could lose the tenant. The optometry practice has been there since 1941, so I’m not sure moving would be good for business. If they do move in the future, I don’t think it would be before we pay off the building. The rent from this property is as much as two or three residential rentals, so I still think it will be a great long term investment.

Real Estate Investing Isn’t For the Faint Of Heart

If the thought of having to shell out $10,000 or more for a repair makes you break out in a cold sweat, you probably should not be a landlord. Most repairs are not that bad, but if a few big things happen at once, it’s easy to negate a year’s profits.

Before even thinking about buying any sort of rental, I’d make sure to have enough of a liquid fund to cover the cost of the most expensive repair that would be likely for that property. Also make sure you can cover the mortgage without going into debt if you have a vacancy.

Day to day management is another thing to figure out before you buy. I have no problem with the commercial property because we know the tenant well, and I’m there at least once a week to see what needs to be done. Since I can’t say that for the residential rental, we use property management.

Even with the expensive year, we are still hoping to add another property or two over time. I don’t have a relationship with a good realtor at the moment, and they can be hard to find. Hopefully, it will all come together when the time is right.

What’s the most expensive repair your property could need? Do you have enough saved for it?

 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

31 comments

  1. I’m really not keen on real estate investing when I hear about all the horror stories and the number of issues that can arise. Perhaps one day as a diversification strategy, but certainly not anytime soon.

    My biggest repair was a burst water pipe. Fortunately we got to it before it did too much damage, but it was still pretty expensive to fix.

    • I hate water repairs. It can get bad really fast. We had a water heater leak in our old house that we discovered right before we left for a vacation. If we hadn’t noticed, it would have been a swamp when we got home.

  2. Capex is a reality when you hold property 🙂

    Our house is in pretty good shape, but in the next 10 years it will probably need a new boiler and new siding. I’ll probably do the boiler work myself (so only $3k or so for the actual appliance), but I’ll hire the siding out. There’s also a layer of siding under the current layer… which it would be responsible to remove at the same time. Oh the joys of 120 year old houses!

    • I love the idea of a historic home, but that is the reason we don’t have one! The office building is bad enough. It was built in the 20’s and certainly has it’s character as well as quirks.

  3. A property that can be paid off by rents in 6 years is pretty solid, in spite of repairs. Even if it takes an extra year with the repair, that is still a double digits return!

    • I would not have touched it if it wasn’t my old practice as the tenant. Unless something goes really wrong, it should all work out as planned. I hope so anyway.

  4. Sounds like things are going well, albeit with the loss on the commercial property. We’d love to get into real estate, but it’s just not in the cards for us right now with our lack of time. But, if you’re wanting to out more in the near future then it looks like you’re enjoying it. 🙂

    • I love owning things you can see. Stocks are kind of like fairy land to me. I like having them as well, but real estate seems more real and it’s right away money if you do it right.

  5. Repairs is one of the things that scares me most with real estate investing. It is one of the most annoying things to me about home ownership. The problem I have is that there are some things, like appliances that you know will have to be replaced and then there are surprises like toilets or leaks that lead to holes in the ceiling that you weren’t counting on. It is definitely not for the faint of heart and I don’t quite have the stomach to handle it just yet.

  6. Yeah I might not have the heart to be a landlord! I think being a freelancer is stressful enough. 🙂 that’s great you’re willing to take chances like that though. Most landlords of some kind seem to do pretty well!

    • I think real estate is less stressful than freelancing. People always need a place to live and there is only so much available. You’re bound to find a renter if your place is not a crackhead den.

  7. Negative $18,000 is scary, but you’re right. That doesn’t mean that it wasn’t a good investment. Hopefully future years won’t be as harsh for your budget.

  8. Real estate can be really tricky but it sounds like you’re doing everything right, even with the negative number of commercial real estate. You didn’t go in blind and had the cash to cover the expense. And as expensive as it was – it should last for many, many years too. And I have to assume also increase the value of the property too.

  9. Repairs scare me in my own house so I don’t know how I’d feel about one in an investment property. I would like to be a landlord one day but have too much money tied up in student loan payments and investing right now. I enjoy investing and have had some success with it so I’m just focusing on that for now. Having it hot in the exam room can be tough, especially because the patients are always fogging up the phoropter!

  10. $18k is pretty rough, but I’m surprised it wasn’t more to be honest. But that’s because I’ve had some serious price shock browsing Angie’s List seeing that people are paying $30-$40k for a bathroom renovation :0

  11. My husband is in the real estate business and we plan to buy a rental residential property after our debt is paid. He’s pretty handy so we’re going to try our hand at being landlords so it’s good to learn from others experiences.

  12. Sometimes, major expenses are part of the game. Since you replaced the entire unit, it is a capital improvement (depreciate), not a repair (expense).

    It should be a better building now, and st some point, cash flow like a madman. Take off the principle portion of the payment, then compare cash flows.

    • That’s why I’m not sad about the repair/improvement. It will save us a ton in taxes and this building will cash flow like a madman in a few years barring something crazy happening.

  13. I don’t own any rental property yet and I will have to admit that it scares me a little. Real estate comes with its ups and downs, but from what I’ve read/heard from owners is that they usually come out on top… with major headaches, but on top. It looks as if you had some headaches, but are doing pretty good.

  14. When I owned a home, I had to replace the water heater, and it was not much 1200 I believe. If you can take a hit now, and be more efficient going forwards you will make back the expense with utility cost savings. Good Luck.

  15. I too own rental properties (houses) and I feel you pain in having to put out big bucks to over hall the heating and cooling.

    Last year I had to fix a roof and put new flooring in one of my properties, after a long term tenant left. It really hit me hard in the pocket book I’m grateful for credit cards. Without access to quick credit it would have been much more difficult.

    Despite these sporadic challenges, and the rare need to evict someone, for long term wealth generation real estate is the most accessible and secure way to go.

    Like Will Rogers said, “Invest in land, they’re not making anymore of it.”

  16. I don’t own rental property but have really been thinking about it. It would have to be long distance since I live in NYC and the properties don’t cash flow. So that’s another complication. I think your commercial property deal will eventually feel like a great deal…especially when you’re done with payments and own it outright. That will be a wonderful feeling.

    • I think buying outside your area is not a bad idea if you can find a good property manager. I have friends who have done that and it’s worked pretty well.

  17. I love reading these update, seeing as we’re gearing up to become landlords. I’ve been told maintenance costs are killer, just like with your own home, and this totally reinforces that. But with that being said, I totally get what you’re doing with the commercial property. If I could, I would do the same thing to. Thanks for the udpate!

  18. My grandfather was one of the brave souls who decided to invest in real estate. So far it has worked out for him. He is very good at managing the properties and taking care of all the needs of his tenants. I have been thinking about going into this business myself but, I don’t know if it is something that I could handle.

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