Usually when you hear a story from a landlord, it is a horror story. The tenants trashed the apartment, smeared unmentionable substances on the walls, and caused thousands of dollars worth of damage and countless nights of lost sleep.
The truth is that those stories are the exception. The ‘boring’ stories don’t get told, or retold. We just had an apartment turn over and it was a complete pleasure. I know, all you sadists out there are disappointed.
This was the first tenant that we screened and put in. Total turnover cost was about $125 and included zero days of vacancy (we had another tenant lined up to go in as soon as the previous one was out). Most of the turnover cost was finishing up little things that we didn’t do last time such as replacing the wonky thermostat, switching all the lightbulbs to LEDs, and rehanging a utility door.
Here is a picture before I did anything at all. They left it in great shape. 😀
In comparison, this was what it looked like from two tenants ago (previous landlord).
The verdict is still out on the laminate floors durability. They seem to be holding up but time will tell. At least we don’t have to steam clean during turnovers now!
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.
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.
We bought a new furnace and air conditioner! As a bit of background, our 1905 house has a working furnace, but the AC is from 1984 and has never worked during our residency.
“Finally!” was the reaction that family members gave us when we told them the news. Then we informed them it wasn’t for our house but instead for a tenant’s apartment. Haha, silly goose you should know us better than that. 😛
The units that we were replacing were original to the 1975 building.
You can usually decode the age of a unit by its model number. This Friedrich furnace, # GDA080NDB, starts with GDA. G = 1970s, D = Year 4, and A = January. So the manufacture date for this particular furnace was January of 1974, or more simply put, it was 43 years old.
The outside AC condenser was also original equipment.
Why Not Repair?
About a week and a half ago I got a call from the tenant saying that the AC wasn’t putting out cold air. I ran through a quick troubleshooting list and found no easy fixes. The thermostat was set to “cool”, the air handler blower was working and pushing air through the ductwork, the outside condenser had power and the fan was spinning, and the compressor was running. It was almost certainly a refrigerant leak. I knew that the former tenant who had lived there for seven years had rarely or never used the AC. This was likely a long term issue that had not just sprung up since the last season.
I called out an HVAC professional to give me an opinion and prices. These older AC systems use a refrigerant called R22, a nice ozone destroying cocktail that is being phased out of production in favor of a more environmentally friendly R410A. R22 and R410A are not compatible. As such, R22 refrigerant prices have skyrocketed. It is simple supply and demand. There are still a lot of old R22 systems that have working compressors, capacitors, and coils. They just need a top off of refrigerant.
The HVAC technician gave me a quote of $100/pound of R22 refrigerant. I asked how many pounds would be needed and he said “A lot”. At a minimum, I would guess five pounds to charge the system. That’s at least $500 right off the bat, plus you have to factor in the labor and the cost of fixing any leaks in the refrigerant lines. That is assuming that the leaks are in the lines and not somewhere in the condenser or the coil, both things that are not serviceable.
Repairing the system would have cost around $1,000 and at the end of the day, you still have equipment from the 1970s. So what does it cost to replace?
Replacement costs are going to vary WIDELY depending on what equipment you select, but more so on who you select to do the work. While replacing a gas furnace for another gas furnace is probably in the realm for an experienced DIYer, AC systems are definitely something that you are going to want a licensed and experienced person to come do for you.
I got a few bids from smaller mom and pop shops and individuals who work for bigger shops but also do moonlight work. While big companies are convenient with their dedicated salesmen, 24/7 phone hours, and flashy new trucks, you are also paying a surcharge on every job for dedicated salesmen, 24/7 phone hours, and flashy new trucks. The smaller the company, the smaller the overhead.
In the end, I found an individual who moonlights on the weekends. He had all of the expertise, but none of the heavy overhead. For the equipment, I selected the no bells and whistles, simplest models of Goodman furnace, condenser, and coil. Goodman gets crapped on a lot and there is no shortage of hate for it on the internet. Personally, I believe that all of the different brands are within a few percentage of quality to one another. The biggest separator in how long something lasts is how well it is installed. For example, if I installed a top of the line Trane or Carrier model AC system, it probably would last a quarter of the time as the most basic Goodman installed by a professional.
Another common misconception that consumers may run into is believing that they must buy the most efficient furnace or AC unit to save money.
First off, we don’t pay the utilities for the apartments, so there isn’t much to be saved by spending more on a flashier unit. Secondly, assuming that we did pay for the utilities, the payback time of a more efficient unit might be longer than the actual lifespan of the unit. Thirdly, the more bells and whistles on a unit means more things that can break. Service calls and parts can quickly erase any money saved by the higher efficiency.
Finally, simply upgrading from any 1970s unit to a basic 2017 unit will likely be a HUGE increase in efficiency. If I had to guess, the original AC equipment when it was installed was probably around a 6 or 7 SEER unit. After decades of use, it had probably degraded to a 4-5 SEER efficiency. By contrast, the new ‘least efficient’ unit that we installed is a 13 SEER unit. Likewise, the original furnace was probably a 65% efficiency unit when it was installed. It too had probably degraded and was operating in the 50-60% range. The one we just installed was a ‘least efficient’ 80% model.
While the big equipment gets a lot of attention, the quality and longevity of a new install can be greatly affected by the refrigerant lines that connect up the inside and outside.
Known as a line set, these two copper pipes carry the R410a between the outside condenser and inside evaporator coil. I chose to replace the old lines for three reasons.
They were undersized for the new equipment
They might have leaks in them
Residual R22 contaminants and oil might be lurking inside them that could poison the new system
Unlike the water supply pipes in your house that might also be copper, these refrigerant lines need to be brazed together. Brazing is a high temperature method of connecting copper pipe. In terms of heat, there is Soldering < Brazing < Welding. Brazed joints can withstand the 400 PSI of pressure that is put on refrigerant lines.
Here is a picture of the new evaporator coil hooked up to the new line set.
There is really nothing DIY about this except maybe the condensate drain in the lower left corner.
Here is the old equipment waiting for scrappers to come and recycle all of the metal.
The new furnace is quite a bit shorter than the old one, so the difference in height needs to be made up with some transition ductwork called a plenum.
The inside of the furnace is dead simple.
The three black cylinders along the bottom are the burners. The two white electrical cables on the left that go to the cigarette looking thing is the hot surface ignitor (circled in purple). There is no pilot light to worry about, the hot surface ignitor just gets cherry red hot and lights the gas when it needs to. The other replaceable part is the flame sensor (circled in yellow) on the right side just above the burner.
Here is a picture of the AC system getting leak tested.
These outside condensers come pre-charged with refrigerant, but it is only enough to cover 12′ worth of copper lines. If your lines are longer than 12′ (hint, they probably are) you’ll have to top it off. Any HVAC pro worth their salt will fine tune the system anyway.
It took about 16 hours of work to replace all the components. The total cost, including labor, was about $3200 with the equipment being priced near or at cost. The nice thing about Goodman, is that you can actually see prices online. We saved $200 in labor by doing both the furnace and AC at the same time.
With any luck we’ll have no trouble out of this equipment for at least 10 years, hopefully 20. It is more environmentally friendly, reduces utility bills, and is quieter.
Now we have four more to do and you can guess which one will be done last. 🙂
Shae and I have kicked around the idea of buying investment real estate for several years. Today, we finally pulled the trigger. In all truthfulness, the moment came several months ago when we submitted a bid on an apartment building. It has just taken until today to finalize all of the legalese. Buying real estate isn’t for the faint of heart!
So what is so special about real estate as an investment tool. In one simple word, ‘leverage’. Putting someone else’s money to work for yourself is relatively easy in the world of real estate. Mortgages are advertised by virtually every bank, credit union, and even insurance salesmen! Right now, we are living in an almost unprecedented environment of cheap borrowing. The prime mortgage rate for a 30 year fixed rate loan is hovering around 3.5%. In fact, that is the rate we secured. I remember when I was a kid and you could have a savings account earn more than that.
We have talked together for years about what type of property we would want, why that would best achieve our goals, and how we would want to operate it. For us, residential housing, aka apartments, with a buy and hold strategy was a natural fit. Earlier this year, we got serious again about getting out of the armchair and into the field. We ran numbers on dozens of different properties for sale. I adapted a simple back-of-the-napkin model from BiggerPockets.com and used that to get a better idea of how different properties sized up to one another. Eventually, we started to get a feel for our local market. There were some abysmal numbers out there, a lot of mediocre ones, and some that seemed too good to be true. We started calling realtors and visiting places in person. Sometimes the numbers lined up with what we saw in person. For example, one place had an amazing rate of return on paper, but in person it was obvious that it was a high turnover, hard to collect rent type of place. When the tenants have smashed holes in the drywall, you run the other way as fast as your legs can carry you!
Eventually, we spotted an attractive looking quadplex that ticked off all our checkboxes. It had a simple geometry, was purpose built for apartments, good neighborhood, and was taken care of by a respectable owner. The ask price was 170k. We offered 151k. Other buyers put in bids, counteroffers ensued, and we eventually won with an offer of 156k. Below you can see our napkin investment math.
Monthly Rent through Total Expenses are on a monthly basis. The CAP RATE, or capitalization rate, would be the investments rate of return. Leverage is what makes the work worth it though. CASH-on-CASH is the rate of return that we are forecasting for the profit, cashflow/year divided by the cash to close. In essence, we made an investment of 45k dollars and expect to make 6k a year in profit. Of course, only time will tell how well it actually performs, but at some point you just have to jump in and start swimming. The other huge benefit of real estate is depreciation, but I’ll get into that closer to tax season.
The end of the year is quickly approaching and thanks to the usual seasonal ailments, I have some time to write. I thought I would change the tune for the start of 2014 by talking not about how I am scrimping, but how I am earning a few extra bucks each month.
This kind of income is often referred to as “Beer Money”. Urban dictionary defines the term pretty well.
1. Extra money for non-essential payments,
available for spending on luxuries, hobbies,
or a fresh pint of your favorite draft.
2. Also known as discretionary income.
There are probably millions of different ways to make some beer money. For instance, Shae fills out surveys on the internet when she feels like it in exchange for gift cards. The hourly wage could probably be measured in cents, but she can do however much or little work as she wants.
I on the other hand prefer to capitalize on work that I am already doing. As part of my software business, I am signed up with an affiliate link program where I earn a %7 commission on all digital media sales from a particular vendor for a 24 hour period after a person clicks on one of my links. What the heck did I just say?
Let’s use an example to help clarify:
One of the apps that I sell is Stock + Pro, for Mac, and it currently retails for $9.99. The normal store link would look something like this:
Then I earn 7% of any purchases that person makes even if they don’t buy my apps. So if they did use the second link and bought my stock app then I would make an additional 70¢ on that sale. That may not seem like much, but remember, once it is set up, I don’t have to do any work at all!
The affiliate program gives me nice reports so I can monitor how many link clicks, items purchased, commission earned, and total cost of the items purchased has been.
As you can see, in the month of December, there were around 3,200 clicks on links. About 23% of those clicks resulted in a purchase (could have been a free download as well). The combined value of all of those purchases was about $1,600 and at 7% commission rate, I earned roughly $115.
Now $100 a month isn’t going to let you quit your day job, but it will build up in a bank account, pay for a nice vacation each year, or cover some hobby expenses.
What do you do to earn “Beer Money”? What does that money go towards?