A New Landlords Look Back – 1 Year of Apartment Ownership

It has been one year (± a couple of weeks) since we became landlords.  You can read the original post here.  The goal a year ago and the goal today is to make money.  So how did we do?

TLDR; we broke even.

I am a bit disappointed in the results, Shae is more positive, and we both feel that the investment is in a much better position now than when we originally bought.

There were two deciding factors in the lackluster first year performance.

1. Large Periods of Vacancies

Vacancies kill your cashflow.  The building has 4 units, so there are 48 rent checks to collect in a year.  Sounds easy right?!  We collected 34/48.  At an average rental rate of $560, the uncollected rent due to either vacancy or squatters cost us $7,840 in lost revenues.

While the late, but paid with late fee might seem like a nice bonus to the bottom line, the amount of stress induced comes no where close to the monetary benefit of collecting an additional late fee (usually in the range of $25-50).  In almost all cases, a late payment preceded a no payment and no payment means eviction.

Which brings me to the next bit.  We had such high vacancies because we turned over 3/4 units.  Two of those tenants we asked/insisted that they leave after they failed to pay and had fallen behind so far that it would take a miracle to catch up.  Believe me, I take no satisfaction in kicking out a tenant.  It is a major headache.  You have to serve notice, usually to someone who is angry, then make sure that you have a copy of that notice notarized so the courts won’t throw your case out, then you have to hope that it doesn’t go to court and incur more expenses.  It all takes time.  Lots and lots of time where you are wondering if your place is getting trashed and destroyed.  The onus to play by the legal rules is squarely on the landlord.

Could this have been avoided?  Yes, Yes, and YES!  I fully blame the previous property manager for not doing proper screening of tenants before signing leases.  We have a very simple screening process, tools, and minimum requirements.  It takes maybe an hour or two to go through the entire process of checking credit history, searching for past evictions, doing background checks, and verifying employment income.  If a prospective tenant has a past eviction (or two or three as might be the case), DO NOT RENT TO THEM.  If a prospective tenant has a crap credit score, and I am talking about well below 600, DO NOT RENT TO THEM.  This is not rocket science folks.  A teensy bit of work upfront can save you mountains of headache later.

While I make it sound like all doom and gloom, we did have one tenant leave of their own accord.  They did everything right and we were sad to see them go.  So being a landlord isn’t all horror stories.

2. Expensive Capital Improvements

We spent around $12,000 in capital improvements and repairs in the past twelve months.  Some of that we had planned for and were expecting when we bought the building, such as the $1500 back stairs replacement and the $600 in vinyl repair work.  Other expenditures caught us off guard like the $900 chain link fence we erected to slow down the flow of trespassers using our property as a shortcut and the $3,200 furnace/AC replacement that we thought we could kick down the road a few more years.

Each of those three apartment turnovers cost us approximately $2,000.  It wasn’t that we did anything terribly fancy renovation wise, they were just so run down and beaten up that in order to attract a decent tenant we had to spend a large amount of money just to get them presentable.  We’ve laid about 1500 sqft of click lock laminate flooring, spread about 20 gallons of paint, and hung up more mini blinds and closet doors than I’d care to thing about.

Slowing down the turnovers were the long overdue maintenance items that needed to be addressed in different apartments, such as leaky washer outlet boxes, dryer vents that terminated in bad places, and ancient garbage disposals that needed to come out.

I anticipate that moving forward, apartment turnovers will require a fraction of the labor and money because we have ‘a’ screening process in place and many of the longstanding defects have been corrected.

Wrapping Up

A few more numbers and observations to put a wrap on this roundup.  The tenants paid off about $2,000 worth of equity by making mortgage payments for us.  That 2k is factored into our $0 profit/loss for the first twelve months, so really we are at about -$2,000 liquidity.  In the next 12 months, the amount of equity earned will accelerate to $2,300.  Hurray for a fixed rate mortgage!  We managed to increase monthly rental income for the building entirety by at least $95.  That translates to an additional $1,140/year in revenue.  In capital improvements, we still have 3 x $3,200 HVAC replacements lurking in the woods.  We’ll take care of those as they become issues.  We also have about $2,500 in concrete work that needs to be done probably in 2018.  I put in the paperwork to appeal the property tax assessment value.  If things go my way, and I am confident that they will, our 2019 (and onwards) property tax payment will be almost $500 less.

As a short term investment, real estate sucks.  We could have easily done better by sticking to index funds.

Long term… only time will tell.

Part 3/4 HVAC Replacement: Selecting Equipment and More Prep

This 4 part series shows some of the decisions and work done to economically upgrade a forced air furnace and ac system.  The goal is to reduce the overall cost while improving the finished quality by taking on some of the smaller jobs as DIY instead of bundling the work with the HVAC contractor.

The primary objective of this project was to replace the nonfunctioning 1984 Sear Kenmore air conditioner with a modern, high efficiency, and most importantly, working, air conditioner.  The natural gas furnace was also showing its age.  The blower had a yellow sticker showing the manufacture date of August 5th, 1994.While the furnace worked and kept the house warm in winter time it wasn’t the most efficient unit.  If I had to guess it was probably a 90% efficient model and it most definitely had an old style PSC blower motor.  PSC motors work in either ON or OFF.  So the air in your ductwork is either blowing at full force or not at all.  The more efficient blower motor is an ECM.  These electronically controlled motors can usually work at at 50% or 100% or some of the fancier ones can run at anything between 0-100%.  Not only do they save on electricity costs but they also improve comfort by constantly circulating and filtering air throughout the house.

The first order of business is in sizing some new equipment.  There are three main pieces of equipment in your standard forced air system, the gas furnace, AC condenser, and the AC evaporator coil.  Furnaces come in three different airflow configurations, upflow, downflow, and horizontal.  In an upflow furnace, the unconditioned air starts at the bottom of the furnace and travels upwards while being heated before exiting out the top.  The AC evaporator coil sits on the conditioned side of the furnace.  So in an upflow furnace, the evaporator coil would sit on top of the furnace.

As for sizing each piece, furnaces are sized by their output BTU, or British Thermal Unit.  Typically, furnaces come in 40k, 60k, 80k, 100k, and 120k BTUs.  AC condensers are sized by tons. One ton is equivalent of 12k BTUs of heat that can be removed from a house in one hour.  Typical tonnages are 1.5, 2, 2.5, 3, 3.5, 4, 4.5, and 5.  Evaporator coils are sized the same or larger than the condenser.  There are a lot of different rules of thumbs for sizing both furnaces and AC systems.  It is important to get the size correct.  You may be tempted just to get a really big system, but that would cause its own set of problems.  HVAC equipment is designed to operate best when it is given enough time to run.  Short cycling, or the process where a furnace or AC kicks on and too quickly reaches its desired temperature and shuts off again can lead to decreased comfort and energy savings.  If a system is sized too small, then the equipment just runs and runs without ever reaching the desired temperature.

The proper way to size equipment is to perform a Manual J calculation.  You’ll need to gather a lot of information about your house.  http://www.loadcalc.net

In my case, I had already gathered bids from three reputable HVAC contractors.  Each of those contractors gave three separate equipment bids for a total of nine different equipment configurations.  I simply threw out the lowest and highest sizing outliers and went with the median.  For my house that ended up being a 100k BTU furnace and a 3.5 ton AC condenser.

Then I went to my preferred HVAC contractor and asked them to provide me with an estimate for both the equipment and labor.  His equipment bid was $1400 more than what I could buy the exact same model numbers for online.  The differences were that his bid

  • Came with a warranty
  • Equipment in stock at local supply house, meaning sooner installation
  • Less hassle for me in scheduling lift gate delivery
  • Cost $1400 more

We chose to order the equipment ourselves.

  • 100,000 BTU 96% AFUE Upflow Variable Speed Goodman Gas Furnace $1,504
  • 3.5 Ton 16 SEER Goodman Air Conditioner Condenser $1,151
  • 4 to 5 Ton 21″ Width Goodman Cased Evaporator Coil with TXV $536 (this was actually substituted by the factory for an in stock model)
  • A new condensate pump

The total was $3,250.  Saving $1400 in lieu of a warranty seemed like the best option for us.  If you are less risk tolerant then perhaps you would want the peace of mind that a warranty gives.  I figure that if we do have problems with one or more pieces then that $1400 would go a long way to resolving them.

Within a few days I received a phone call from the truck driver telling me he was on his way.  I paid an extra $35 for lift gate service.  All that means is that the semi truck driver will use a little elevator on the back of the truck to get the pallet of equipment down onto the street level. He also had a pallet jack to move it off the street and into our front yard.  That was it, the rest of the work of moving the new equipment would be my responsibility.

Before signing off on the delivery, it is crucial that you inspect all boxes and equipment.  Any damages should be returned immediately.  Both the AC condenser and evaporator coil shipped with a charge from the factory.  The condenser comes pre-charged with refrigerant and the evaporator comes charged with inert nitrogen gas.  The condenser is the most fragile unit, and it is also the heaviest weighing in at around 200 pounds.  If there is any damage it would likely show as either crushed fins or oil pooling at the bottom of the box.

I was a bit surprised that the new equipment had arrived so promptly.  I thought I would have more time to remove the old stuff.  Thankfully, the furnace is fairly easy to remove.  In the process of removing it, I discovered a sizable crack in the secondary heat exchanger.  I guess that is another good reason to replace with new equipment.

Meanwhile, Frugal Boy was enjoying his new toy.

There was a slight size difference between the old evaporator coil and the new one.

With all of the old equipment torn out and the new stuff ready to be installed it was time to call the contractor and let him take it from there.  Once he was finished there were just a few loose ends to tie up.

Part 2/4 HVAC Replacement: Pouring a New Condenser Pad

This 4 part series shows some of the decisions and work done to economically upgrade a forced air furnace and ac system.  The goal is to reduce the overall cost while improving the finished quality by taking on some of the smaller jobs as DIY instead of bundling the work with the HVAC contractor.

Replacing a furnace or an air conditioner is usually the sole realm of licensed contractors, but that one BIG job is composed of many little jobs.  A lot of those little jobs are in the realm of an experienced DIYer.

To save some money on the replacement of our furnace and air conditioner, I did some of those little jobs myself.

Here is a picture of our old AC condenser.

The bush is overgrown and needs to be trimmed back.  That doesn’t take any special skills or training.  Also, the electrical disconnect box is mounted on the condenser itself which is against building codes.  It should be mounted on the house.  If you have done other electrical projects in the past that is certainly a project for an intrepid homeowner.  Physically removing the condenser isn’t difficult once the old refrigerant has been removed.  If you don’t know how to properly remove the refrigerant have a professional come and do it.With the old unit removed and the concrete pad exposed we can make further progress.  This concrete base was too small so I tore it out as well.  You might think that concrete would be hard to remove, but if you can get something under it like a 2×4 it will break up very easily.

I made a new concrete form and did some excavating.

A layer of gravel went in first and some bracing stakes went in around the perimeter.

With Frugal Boys help, I mixed up a bag of concrete at a time in a wheelbarrow I found in the trash.

Using a sacrificial 2×4 as a make shift screed, I leveled off the top of the concrete so it sat flush with the form.

After it had set up a bit, Frugal Boy and Frugal Girl both left their marks.  Make sure you wash off any concrete from skin as it can cause a nasty chemical burn if left on.

While I could have reused the old electrical disconnect box, I bought a newer one and hooked it up.

It isn’t too terribly difficult, but there is a lack of instructions that come with the products.

To finish up the project, I added some hardscaping around the new pad.  The idea is that

  1. It will keep down on vegetation growing too close.
  2. The service man will have a cleaner workspace.  Instead of sitting in mud and tracking that into your house, they can keep clean.