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.
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.
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.
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?