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.