For those of you interested in becoming landlords, I thought I’d share some progress and problems from our latest rental property adventures. It’s not all roses and monthly checks, but rental property can be very worthwhile if you have the stomach for it.
Four Units For the Price of Three
When we purchased our latest property, we tried to imagine it as buy three units get one free. The fourth unit was unfinished and about as livable as a bomb shelter.We got a deal on the property, but it needed lots of work to achieve full potential.
The property came with two buildings, each divided into two apartments. There were three finished apartments that were rented when we took ownership. Now, we are working to make that fourth unit a nice two bedroom apartment.
If you can imagine a 760 sq ft open space with cement walls, a dirty half bath, and no duct work whatsoever, that’s our place! It needs everything; walls, flooring, a functional bathroom, closets, lighting, windows, doors, a whole kitchen with appliances. It’s a huge project. We are two weeks into an estimated six week time line. (I’m betting closer to 12 weeks, but we’ll see). It’s expensive and overwhelming, but should be a money maker very soon.
Is Squirrely a Word?
The other hurdle to cash flow is that the building utilities were not divided. This was OK for the previous landlord who paid all utilities and apparently cared little about profit. In order to have separate apartments where the tenants can put utilities in their names, we have to get building permits and new meters from the electric and gas companies. Electric went smoothly. Gas is being a real pain.
We’ve chosen a general contractor who didn’t submit the cheapest bid, but is definitely the most organized and most likely to finish somewhere in the estimated time frame. I am always amazed at how unreliable some tradespeople are.
Just last week, our contractor was having trouble getting the plumber to show up. His exact words,
“He’s a bit squirrely, so we have to grab him when we can.”
I’d love to ask for a replacement, but I’m afraid they are all the same way. If I was young and business minded, I would start my own plumbing or electric company and make a reputation of being on time and reliable. I think a company like that could charge whatever they wanted and still have tons of jobs lined up because it sucks dealing with “squirrely” people.
Added to the mix, two of the holdover tenants from before we bought the building have moved out or given notice. This means we will have one unit out of four rented for the next month or two. It feels like we are bleeding money right now!
Glad About Losing Tenants?
The silver lining is that the pre-existing tenants had terrible leases, at least from a landlord standpoint. They didn’t pay any utilities, were all month to month, and had nowhere near a functional deposit. Two of the tenants had no deposit at all. By having those tenants leave of their own accord, it makes it easy to rent to new people who agree to our terms.
Booming Rental Market
The other really exciting thing is that rentals in our area are in high demand. There was an article in our local paper just a couple of weeks ago about how there were very few rental units in the under $800 range, while the demand for those type places is very high. We plan on asking $750 for the three older units and $800-$900 for the newer one. When they are available, they should rent quickly.
Once we finish our current project and spruce up the other units a bit, we should be able to count on at least $3,000 in rent every month. Our expected expenses look like this.
- Mortgage: $749
- HELOC loan to cover renovations: $300
- Property Taxes/Insurance: $188
- Water/Trash Bill: Approx $200
- Property Management: $300
Expected Rents: $3050
Total Monthly Cash Flow: $1313
Yes, there might be some potential vacancies, but with the current rental market in our area, things look promising. I spoke with our property manager this week who told me she could probably have a vacant apartment rented within 7 days.
Why Not Just Invest in Stocks?
We could have put our down payment of $37,000 into the stock market. That would have been easy, and at 8%, it should be worth about $372,000 in 30 years. With this rental, there are many variables, but let’s assume we make at least $12,000 per year on average. That gives us $360,000 in profit, plus someone else paid our mortgage and we own this property outright. It could keep funding our retirement. We could sell it or leave it to our daughter. It might be worth half a million by then.
Why I Love Real Estate
This is why I love real estate. There are so many choices, and we can start making money pretty quickly instead of waiting 30 years. There is the possibility that the rental market could crash or we get a bad tenant who wrecks the place, but I don’t see it as any more risky than buying stocks. I also like that I can see my investment as I drive home every day.
That doesn’t mean I don’t have second thoughts whenever I have to write a check to the contractor or spend what seems like a mint at Home Depot. Like with most long term investments, it’s important to keep your eyes on the big picture. I’m trying not to get too bogged down with day to day ups and downs, although don’t fault me if I get a few more gray hairs before this project is over!
Have you ever done a major renovation on a house? Do you have good luck with finding reliable service people?