The key to financial freedom is passive income or cash flow so that you don’t have to work, right? Well, managing rental real estate isn’t truly passive, so a hiring a property manager to do that work on your behalf is enticing. But are the benefits worth the cost?
We have 12 rental properties, and 5 of those are self-managed. While I’ve mentioned the benefits of a property manager, I wanted to run through the reasons we don’t have a property manager on all of our properties. It comes down to time management and cash flow.
THE DETAILS ON SELF-MANAGED HOUSES
The very first property we bought was in Kentucky, while we lived in Virginia, so we needed a manager on that one. But then we bought two houses in Virginia. They were right next door to each other, and I worked about 10 minutes away. Without kids, I had the time and flexibilities to manage them. Plus, both houses had active leases on them when we took possession. Without having the immediate need and learning curve of finding a new tenant, it was easy to manage the rent collection and any minor issues that came up on the houses. A property manager would have cost us $105 each month on each of these houses. Even now that we don’t live near them, the houses are newer and we know they don’t have any major issues, and the tenants keep renewing their lease, so it’s [relatively] easy to manage from afar. There are some maintenance hiccups – like the flooring debacle – but mostly I just collect the rent electronically. One house is routinely late on the rent, so I have to manage that property more than the norm, but it’s all via electronic communication and doesn’t require me to be on site.
Our third purchase in Virginia was of a vacant 2 bedroom house. Still, no kids meant that I could manage listing and showing the property to prospective tenants. This was the first time that we had to figure out the tenant search process, but we were able to show it to a couple and have it rented the first weekend it was listed. Again, the house requires very little attention, and I just collect rent. Even when the house had to be turned over, the tenant leaving put us in contact with a friend of their family’s, and that’s been who’s living there for several years.
Our last two that are self-managed are the two that we have with a partner. I handle the rent collection and paperwork. When we have an issue, we’re more likely to call a handyman than do the work ourselves anymore, but again, phone calls and emails aren’t that difficult. We just had a handyman go out to look at two broken doors and to replace a missing fence panel. While I was there over the summer, I had secured the railing that was loose, but I didn’t want to do any of the other work. It also helps that we have a partner, so the cost of any work to be done is only half for us.
For the past year, we took over management of a property that had been with our property manager in Virginia. We knew the tenants from a previous house of ours, and we felt that our management of that house from afar would be easy as compared to the $120/mo we were saving by self-managing. We didn’t have any issues we couldn’t manage during the year. However, they’re now purchasing a home. We’re obviously not there to manage showings, so we gave this property back to our property manager. She listed the house and showed it for us. It’ll cost us $300 for the listing and 10% of the monthly rent for her management ($135). For the last 11 months, it has been rented at $1200. That means that we’ve had an extra $1620 worth of income for the year than we would have ($120 for 11 months, and the $300 listing fee).
For our Kentucky houses, we are very hands off. We don’t weigh in on costs less than $200, and we don’t get any updates regarding rent payments or tenant searches. Sometimes it’s too hands-off for me. For instance, I don’t even get a copy of the executed leases until I ask for it, and I don’t get a copy of any receipts (I just get a summary of charges taken out of our proceeds). It has been hard on me psychologically, but I’ve learned to let it go over the past few years.
For our Virginia houses, we’re more hands on, and sometimes it’s too much. We still discuss all the details when an issue arises, so it’s just saving me the time of calling and coordinating contractors, which is rarely necessary. Then there are times that I even handle ordering and contractors; for instance, I just handled replacing the hot water heater and refrigerator at one of our houses. All of our tenants pay rent electronically, so that’s not even on our property manager’s radar (she used to collect rent and then deposit it in a joint account we gave her access to). Since she’s not responsible for rent collection, it’s then on me to let her know if someone hasn’t paid, and she handles the follow-up communication.
However, our Virginia property manager has been worth her weight in gold because she has handled multiple lease defaults for us (with one actually leading to an eviction), which involves going to the court house to file the motion and then showing up for the hearing(s). We had one tenant who had to be served multiple notices, but she eventually left on terms mutually agreed upon. We had another tenant vacate a house because his kids were attending a school out of the address’s district (and blamed us for that.. I don’t know!), but we took him to court to require payment of past due rent from before he vacated. Then we had a true eviction, where the tenant stopped paying rent and had to be taken to court multiple times. The judge ruled in our favor and told her to vacate the premises, which involved police officers escorting them out of the house. We have been very lucky that the houses we manage haven’t ventured into the realm of taking them to court (although one in close), and that our property manager has been able to handle everything on our behalf for these instances.
We can get caught up in the “we’re paying for nothing to happen” mentality with our property managers. Each month, we pay out $720 for property management. In Virginia, our property manager doesn’t even collect rent, so most months there’s no action from her for the houses. In Kentucky, the property manager collects rent, holds it, and pays out our share the next month. It can be hard to see that total number that we’re paying, but for those months that involve a lot of coordination in receiving quotes, going to court, or meeting contractors, it’s nice that we don’t have to deal with it.
Sometimes it’s worth paying for peace of mind and relaxation, knowing someone else is handling your problems for you, but you need to choose where that balance is for you. Do you want to manage it yourself to know your money is being spent fully at your own discretion; do you want to have a manager while maintaining a lot of the decision making; or do you want to be fully hands off with a management company who you can trust to handle your property with your best interests at the forefront? It’s all a balance of how much you think that’s worth compared to your time spent and knowledge on managing rentals.
Buying a new car is exciting! It’s shiny and clean, and it’s all yours. Well, after a couple of vehicle purchases, Mr. ODA and I learned a few things. And in the end, we’ve decided that buying a “pre-owned” (used…) vehicle is a more practical decision. So while I understand that this approach isn’t for everyone, maybe I can break this down in a way to get you on board.
Whether you’re buying the vehicle new, buying it used, or leasing it, you’re going to have basically the same costs of ownership after the initial purchase. You’ll need to pay for the registration, insurance, and taxes on any of these options. In all cases, you’re going to have to purchase fuel to make the car work. Unless you’re purposefully looking for a new vehicle after a short amount of time and ignoring maintenance, there will be maintenance costs (e.g., oil change, new tires, other fluids). However, the cost of those maintenance activities will depend on the vehicle.
In some states, you also have a personal property tax that may be an up-front tax on the vehicle, or could be an annual tax based on the vehicle’s value. Examples – In Georgia, there’s a one-time Title Ad Valorem Tax that is 6.6% of the fair market value of the vehicle at the time of purchase. In Virginia, there’s an annual personal property tax. Make note of this – the tax is directly related to the value of your vehicle. The more expensive and new the vehicle, the more you’re going to pay to Virginia in taxes – every year. At least each year that passes, the value of the car decreases, and therefore your tax owed decreases.
I’ve brushed on depreciation with the mention of a car’s value; that was the biggest determining factor for our move towards purchasing pre-owned vehicles. Depreciation is the loss of value over time. A very literal definition from dictionary.com says, “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”
While the value of a car decreases each year, it’s not a linear amount of value that’s lost each year. According to Edmunds, a car loses about 20% of its value in the first year. That means that if you spent $30,000 on the car, you probably can only sell if for about $24,000 after one year. Depreciation slows down after that first year, but the value continues to decline.
No matter the vehicle, you lose the most value as soon as you drive it off the lot. This is where purchasing a pre-owned vehicle is beneficial; someone else endured that largest loss of value.
You can look into Certified Pre-Owned (CPO) Vehicles, versus just a used vehicle, to give you peace of mind. According to cars.com, a car can only be labeled as CPO after a dealer has certified to the manufacturer that the car passed a multipoint inspection, which can encompass 150 or more items, and repairs have been completed as needed. A CPO vehicle comes with a free car history report, which will show you all the maintenance activities performed, as well as any accidents. A CPO vehicle may even come with a warranty and be in better condition than a non-CPO car. They are supposed to have been reconditioned to like-new condition, and they come with additional benefits that may not be provided on other used cars. But, CPO cars will cost you a bit more on average than a “regular” used car due to this due-diligence and other benefits.
RISKS OF PURCHASING A USED VEHICLE OVER A NEW
When buying a used vehicle, you have to weigh the cost against what you’re receiving (as you would with any purchase, really). Even when buying a new car, there’s no guarantee that it will work perfectly, but you’ll be covered by warranties and (hopefully) a reputable dealership. With a used car, you are taking on a risk that there are issues caused by the previous owner, including not knowing how the car was maintained. Was it owned by someone who followed the user manual, maintaining the right fluids and putting the right gasoline in it? What was their driving style – was it hard starts, stops, and turns with aggression, or was it a gentle, defensive driver that owned it? Was it owned by someone who knew they were getting rid of it in 1-3 years, so no maintenance was necessary in their mind and it wasn’t driven with care?
The question you ask yourself is whether you’re willing to take on this risk of how the car was treated for the cost you’re paying, and what that initial loss of value really means to you.
CPO vehicles began with luxury vehicle lines, but they’re more widely available now. If a luxury vehicle is something you’re interested in, there are some things to keep in mind. Not only does a luxury vehicle cost more up front, the maintenance, and possibly the fuel, will cost more as well. These are recurring costs that you should be considering when taking on the responsibility of a new vehicle.
An Audi was my dream car. I could not wait for it to be my time to make that purchase. Then I started hearing stories about how my friends’ Audis were in the shop. Not only were they costing them for having to be in the shop more than my car, but the maintenance itself was more expensive! I was used to paying $19.99 for an oil change on my Honda Civic in Albany, NY. The thought of paying $75 or more for an oil change because it’s an Audi was gut wrenching to me. Then there’s tires. I paid about $400 to put four new tires on my Chevy Equinox. Tires on an Audi? Double. I didn’t look into the cost of insurance, but usually it ends up being more to insure these sportier vehicles.
I had to truly take the time to consider how much I wanted this vehicle – was it something I needed and would accept the increased ownership costs, or was I ready to let go of this dream?
KEYS TO THE PURCHASING PROCESS
Don’t talk to the salesman in terms of monthly payment. I had quite the experience holding strong to my “what is the total cost of the vehicle” question and not talking about the cost in terms of monthly payment. I don’t want anything buried in my monthly payment. I repeated “don’t worry about what I want to pay month to month or how much I can afford in terms of a monthly payment.” I wanted to buy the car for $17,000. He wouldn’t say yes or no. He kept offering us a different monthly payment, and then we’d sit there, do the math, and say, “nope, that comes to $17,500.” You’d think after the first, or second, time we did this, he’d catch on that we’re not playing his antics and would be verifying the principal of the loan. We were there for hours. Hours. I got it though.
Know what price you want for any trade-in vehicles. When you trade in a vehicle to the dealership, you’re eliminating the hassle of selling it yourself (e.g., how do you market your car, how do you let someone test drive your car, how do you negotiate to get what you want?), but you’re probably not getting top dollar for it either. We’ve traded in two vehicles.The first was straight forward. The second had a fair market value of maybe $6,500 in fair/good condition (e.g., broken antennae, scuffs in the trunk from our travels and house work, a broken door arm rest from where the dog would stand on it to look out the window). Even though the car’s cosmetic issues were factored into the fair market value cost, it’s hard to say we would have been able to get $6,500 selling it personally. When the dealership offered me $5,000, I accepted it. The vehicle looked good, but it was those small details that would add up to any private buyer with a fine tooth comb, and I didn’t think I had a leg to stand on to negotiate over a few hundred dollars with the dealership.
OUR RECENT USED CAR PURCHASE EXPERIENCE
We found our used vehicle through cars.com. There are several online search tools you can use, as well as just showing up to a dealership. My search parameters were fluid: I’m willing to pay for the right value, versus “I have $20,000 to spend, what can I get?” I wanted a van, probably a Pacifica, with relatively low miles (I’m talking about averaging less than 12,000 miles per year), and somewhere around $20k. The Pacifica is set up where the base model has all the features I’d want, so I didn’t have to do a lot more manipulating of features (Chrysler has a lower tiered minivan with less features, versus 6 or more levels within the ‘Pacifica’ itself). The biggest deal breaker for me was leather seats – in that we did not want leather seats. I’d trade off the slightly more effort in cleaning the seats for not feeling extra cold or extra hot when we get in the car (and I have car seat mats under my kids’ car seats that protect the fabric anyway).
The dealership that had the van that best hit our search parameters was just over an hour away. We weren’t able to get there until near closing time, so I rushed through the review of the vehicle. In the future, I plan to do the following better:
Check all doors open and close correctly, without rattle, several times. Drive the car somewhere else, and open and close all the doors again.
If you have removable and/or movable seats, move them. Spend the time figuring it out. I couldn’t figure it out, so I just gave up and said “it’ll be fine.” They’re not fine. I didn’t know it because I didn’t know how it was supposed to work, but after using it a few times, I figured out that one works right, and the other gets the job done, but isn’t ‘right.’
Look for dirt. Don’t assume that a dealer’s deep clean is deep by any means. The car was dirty, but I put faith in their final ‘detailing’ process. They didn’t even wipe the dirt off the driver’s side arm rest or the back wall of the trunk. But they cleaned an obvious orange stain on the carpet.
Drive it on the highway. I get nervous about taking the car too far from its ‘home’ before it’s mine. Do it. See how the car operates at highway speed for more than a mile. Two kids at the dealership, COVID precautions, and it being near closing time meant I rushed myself. There’s a rattle that I should have noticed, but I didn’t drive the van more than a few miles up the road.
I negotiated a buff out of scrapes (maybe as far as gouges) on one of the panels of the van. They said they would ‘attempt’ it, but they weren’t making any promises because the paint was gone. But they did it! The panel looked brand new, and I’m so glad I got something right!
The average cost of a 2017 Pacifica was around $21,000 on these websites (the sites themselves give you a lot of data to see this type of information). The one we went to see was listed just below $18k, so I knew it wasn’t going to be in mint condition. The question is always: what is your tolerance and is the as-is product worth that value to you? It was to me.
We were about to trek all over for two months with a lot of our stuff (like an entire crib and mattress), two kids, and a dog. I wanted the van. During my test drive of the van, I noted quite a few scratches (possibly in the realm of gouges) on one of the door panels. I really didn’t know what I could or couldn’t ask for, so I countered their offer with $17,000, buffing the door panel, and detailing the vehicle. They accepted! I was happy with the imperfections against the price and was now the proud owner of a 3 year old van.
I’m 7 months in to owning the van, and I love it. I got its first oil change a couple of months ago, and the mechanic said the car is in excellent condition and then was surprised when I said I bought it used. We have put the van to the test with all our travel and house work. I hauled 12 sheets of drywall, a bath tub, a toilet, and a vanity with its counter.
STORIES WE’VE HEARD
“I’m looking for a new car because I just made my last payment on this car.” What? You WANT to always have a car payment? Is your car broken or not functioning well? Is it worth purchasing another brand new vehicle, paying the loan for 5 years, and then repeating the cycle? In my opinion, it is not. Try relishing in your newfound $300, $500, $700 each month that you don’t have to pay towards a car. Enjoy the car that you know you can rely on. You’re still paying all the maintenance costs on a vehicle, so you’re not really saving anything, unless you’ve planned it so that you drive so little that your tires last you those 5 years. Another variation: “We get a new car every three years, but it’s ok because we pay it off early so we own it outright.”
“I’m going to lease so I can get a new car every 3 years.” Why do you need a new car every three years? The dealer is loving the fact that they can count on you to rent the car from them for the car’s three most expensive years of ownership, only to give it back to them and do it all over again, and again. Is your goal to keep up with the Joneses or to make solid financial decisions?
LONG TERM COST OF OWNERSHIP
Manufacturers have reputations, based on years of empirical evidence, dictating how long their vehicles usually last and how well they hold their value in the resale market (e.g., Toyota is known for retaining value well). If you can avoid the early stages of a car’s life by buying something a few years old, keep it for many years, maintain it well, and choose a brand that has a strong track record for resale and “car life,” then you can hit the trifecta of a smart purchase.
Mr. ODA is still driving his first adult car. A Nissan. While it was bought new, he has kept it for 11 years thus far and it still runs strong. Each year he owns it, the original purchase price compared to the depreciation to date lowers the average annual cost of his ownership. Since 11 year old cars are depreciating at a very slow rate, if he keeps it maintained, he can save a lot of money compared to the other option of ‘upgrading’ to a newer car that would inherently cost him more money to own each year. Had he bought it 3 years later, it’s possible he could’ve purchased for half the price and still would have owned it for 8+ years while cutting 5 digits off the total cost of ownership. In hindsight, and with our view looking forward, that 3 years of owning it “new” isn’t worth $10,000+.
The main point here is to be aware of the immediate depreciation of a brand new vehicle’s value. Allowing someone else to take that large value decrease by driving it off the lot can save you money, while still getting a fairly new vehicle. Through Certified Pre-Owned programs, you may even still be covered under vehicle warranties as if you purchased a new vehicle. Or, you can pay still a little less, accept a bit more risk, and get a used car that hasn’t gone through the CPO process. When making the decision on whether to lease, buy new, or buy CPO/used, be sure you’re well informed and weigh all the factors against how this purchase will affect your money, both in terms of cash flow and net worth.
This one has been pretty easy, but we did have an interesting issue arise with the first tenant.
This is our largest house at 4 bedrooms and 1.5 bathrooms, and 1281 square feet. It’s a cape cod style house, so the upstairs has slanted ceilings, the half bath is not anything to write home about, and the HVAC struggles to work up there. The carpet on the stairs could really be replaced (but it hurts me to spend money on stairs because they’re soooo expensive compared to carpeting a room!). But the house has a huge fenced-in yard with a nice deck that’s a great selling point.
The kitchen was renovated at some point, so that’s held up well – and lets face it, who doesn’t choose baby pink knobs for their new kitchen cabinetry? But the plumbing and roof have been painful.
I’ve already told many of the stories about this house through other teaching posts, so bear with me if things sound familiar.
The house is in Richmond, VA, and the purchase was very simple. We offered $109,000, and the seller countered with 112,500 and 2,000 in seller subsidy (i.e., closing costs), which we accepted. It was listed on June 22 at $119k, and we offered on June 25, so I’m actually surprised we got the contract agreed to so quickly.
Quick note here: after reviewing real estate contracts in NY, KY, and VA, Virginia wins. Sure there are several states that I haven’t ventured into, and this is an extremely small sample size. The paperwork is simple yet thorough, all while being in plain language. So if you’re needing a template to work off of, look up Virginia’s purchase agreement.
We settled on a 30 year conventional loan at 5.05%. We received a $200 lender credit since we closed on several properties in a short period of time. This is the house that we refinanced and received an appraisal of $168,000! We had already started with equity in the house because it appraised at $114,000 at closing.
Interestingly, we couldn’t insure the house through the company that we had gone with because they have a 5 rental limit. Our agent was able to quote us through another company though, so our process appeared seamless. However, the quote was much higher than we anticipated. We went through a friend to insure it, but shortly after closing (literally a week), we were able to find an even cheaper option – that was awkward.
Not a category that usually gets mentioned. I discussed the neighborhood of the one house we sold already, which was because I didn’t realize it was in a higher-than-average crime area that tenants honed in on. But this neighborhood is worth mentioning.
Rentals aren’t prevalent here. In fact, many of the homes are the original owners. While working on the house when we first purchased it, the neighbor across the street approached me. He as-politely-as-possible threatened me that this is a nice neighborhood, that everyone keeps up their property, and that they don’t want any trouble. I assured him we have good standards as landlords, and we haven’t had any neighbor complaints for any of the tenants we had in our houses.
The location also comes into play for our first tenant.
This house is under a property manager for 10% monthly rent.
As with most of our tenant searches, no one fits perfectly into our requirements. We offset this by a higher security deposit or having another signatory on the lease. We had two prospective tenants – one was a mother/daughter combo (an adult daughter) and both had bankruptcies in the last year; the other was a man and his family that had an eviction 7 years prior. We chose the one with an eviction. His application actually said that he “will also respect the property to the utmost.” Boy did he.
He first requested that the carpet be replaced. It was actually a reasonable request because it wasn’t the best. Here’s the carpet on the second floor. Old, bottom of the line padding; a gorgeous blue; lots of wear spots.
We decided to refinish the wood floors on the first floor because 1) he wasn’t moving in for two weeks, and 2) it would save us in the long run to put that investment into the floors instead of carpeting every few years (and risking someone completely ruining it before its useful life was up). It was $1850 and the company was able to start immediately and get it done before the tenant moved in (granted, it was the day he moved in, but it did get done). And the refinish turned out great!
He asked us for a screen door, but we said that wasn’t a necessity. He asked if he could install one himself. We agreed, as long as it didn’t prohibit our access (e.g., he can’t lock it, give us a key). This later becomes an issue because he locks it after vacating and we need it rekeyed.
This tenant had a few late rent payments and struggled with paying rent on time, but overall he was a good tenant to have. He took care of the property and let us know when he ran into issues (it’s amazing how many people don’t tell us of a problem in a timely fashion).
Just as we did on House 5, we offered this tenant the opportunity to pay rent in two installments each month. His rent was $1150 from August through February. He took the opportunity and we executed an addendum to change the rent to $600 twice a month. Again, it’s an inconvenience to us to collect two rent payments, but it theoretically should save the tenant money if they’re constantly in a position that they owe late fees (if he usually pays $1150+115=1265, then 1200 is a better position).
And then the fun happened!
I was at WORK one day, answered my work phone, and someone on the other end asked to speak to the owner of [this house’s address]. I barely used my work phone for work calls, so to receive a personal call on my work phone was very surprising. I informed her that I was the owner. She then went on to ask me questions about the tenant occupying the residence. I couldn’t answer a single question – hah! I let her know that I really didn’t know who was living there or the status of the home because I have a property manager. She was very nice and understanding, and she called my property manager.
She was with the school system. Apparently, our tenant had moved into the City public school district, but kept his kids in the adjacent county school system. It was April. I thought it was ridiculous that the school system would investigate this with 6 weeks left of school, but technically, he was in the wrong. And get this – he blamed me for it! Our nice tenant turned on us and went crazy. He claimed that he could just walk away from the house …. honestly I don’t remember his reason for it, but somehow he thought he had a case.
Virginia has a wonderful statute that says if the house is vacant for 7 days, the owner takes possession without any court interference. There’s also a statute that says we can’t collect double rent, and we need to be doing our best to rent it out if given notice. We tried to keep communication lines open with the tenant, but he was silent. We had told him that we were willing to release him from his lease obligations if we found another tenant, which we did. He was responsible for May’s rent and late fees, and we would have a new tenant move in June 1. We also informed him that he would be responsible for the leasing fee associated with finding a new tenant, which was basically considered the ‘lease break fee’ and is fairly generous ($300 instead of a standard two-months rent that’s typically seen as the fee). It kept going south from there.
On top of the rent owed, he had several lease breaches – room painting (clarification: rooms are allowed to be painted as long as it’s a neutral color or painted back to a neutral color before vacating), wall patching and painting, house cleaning, mowing, re-keying, and utilities since he turned them off. By mid-June, he still owed us $874.76. We made an arrangement with him that he’d pay a certain amount each pay check, but he failed several times. We finally threatened to take him to court, which would affect his credit score and increase the balance owed since court fees would become his responsibility. Since he had been working to rebuild his credit since his bankruptcy, we thought this would light a fire under him.
We went to court.
Court also added a 6% interest charge on the outstanding balance, which now included the $58 court fee.
It took him over a year to pay the balance. By the time the court judgment arrived, his balance (after paying $50 here and there was $660. The court doesn’t put a timeframe or process on the judgement, but leaves it to the two parties to determine the payment schedule. He didn’t adhere to it well, but we did eventually get the whole balance paid. Mr. ODA also took this opportunity to have fun with calculating interest payments on a declining ‘principal’ balance that isn’t getting payments on a predictable schedule!
TENANTS #2 & #3
These tenants were/are much easier. The second tenant in the house had several large dogs, but we didn’t see any damage to the house. She eventually broke the lease to buy her own house in November 2020; we can’t fault someone for wanting to take advantage of low interest rates! She gave the appropriate amount of notice, but the lease was going to be broken as of 10/31, which isn’t a great time to have a rental come open. She ended up being very gracious with the situation, paid us one month of a lease break fee, and we kept her security deposit.
Right after she gave us notice, we had an old tenant reach out to us. They had moved back into town (I’ve mentioned them several times) and asked if we had a 4 bed/2 bath house available. Amazingly, we did. We showed them the house and they signed a lease within a few days.
Since turnover was fast, and I didn’t really know the status of the house, I didn’t get a chance to paint the house. All the rooms had been white except for the one room that I repainted after the first tenant had painted it lime green. The house really needs a whole paint job, and so I offered her an incentive. If she wanted to paint any of the rooms, she could knock $75 off the rent per room. So far she’s painted three rooms.
MAINTENANCE AND REPAIRS
The plumbing in this house has been horrendous. We had the tub snaked as soon as the first tenant moved in ($150). We then had issues with hot water, which required several adjustments to the water flow rates to coincide with the tankless hot water heater ($325). We had the upstairs toilet serviced ($120). Then a year later, we had to service the hot water tank again ($570). Tenants had complained that the upstairs sink drained slowly. We had attempted to snake it and fix it several times, but it never seemed to work. We finally just bit the bullet and replaced the plumbing – from the second floor to the crawl space. That work and the drywall patching cost us $1563.
Then there’s all the roof work. Shingles had flown off during a storm, so we had those replaced ($350). We also had a leak in the flat roof over the laundry room. We had a roof guy come out, and he said the roof hit its life expectancy. He replaced the pitched roof ($4135), and not the flat roof. So we’ve still had issues there that will need to be addressed.
That sounds like a lot of money, but we’ve owned this house for 4 years now with our rent being double the mortgage (slightly better now too with the recent refi). When purchasing properties, any good investor is going to build maintenance and capital expenses into their numbers that determine if it’s a worthy investment. Rent cash flow wins out, and all the rest is just the cost of running our business – not to mention the $60k of appreciation we have on paper in just 4 years. It’s also worth noting that these things took up about 10 days worth of action from us over those 4 years, so most months, we just collect the rent with no other action required from us.
No property is going to be perfect, and this business relies on people, the tenants, to make the business profitable. No path will take a straight line, and being flexible to the ebbs and flows of rental property investing help make it fun too!
This was a mess. I learned my lesson to research each property individually and not to make any assumptions. I also learned my lesson to hold true to our standards and expectations for a renter. We owned this house for a year and a half, but we learned a lot about tenants and the selling process. Hey, every struggle is a learning opportunity for next time, right!?
Mr. ODA showed me House 6 first (5 and 6 closed at the same time, and on my numbering list, this one came second… so try to overlook this awkward numbering!). I researched the area and the house’s history in detail, and I decided that it was worth pursuing. Very shortly after that, he approached me about House 5. The house was in better condition than House 6 and was literally only half a mile away. I assumed it was in the same neighborhood. I was wrong, and that’s where things went downhill fast.
This house was so cheap that we needed an exception approved to get a loan. The purchase price was $60,000, which means a loan with 20% down is $48,000. The cutoff for even approving a loan with our regular lender is typically $50,000. Since we were below that threshold, we were ‘penalized’ by the rate.
I covered the closing snafu in the House 6 post, which also highlights the decision-making on the loan terms. Since this house was below that $50k threshold, our options were: 5.125% witha $200 credit or 5% with no credit. The higher interest rate would cost us an additional $1300 in interest, which isn’t offset by the $200 credit, so we chose the 5% rate. Hindsight: If we had known we would sell it just 18 months later, the credit would’ve been the better choice!
We purchased the house in July 2017. We immediately started aggressively paying towards the mortgage since it was the lowest balance and the highest interest rate.
We rented the house for $775, which far exceeded the 1% Rule.
WORK ON THE HOUSE
We did a lot of work in the yard. Here’s what the house looked like at some point before we owned it. It’s cute!
While it was under contract, the house sat vacant, so there were a lot of overgrown bushes, flowerbeds were filled with debris and no remnants of flowers having lived there, the lawn hadn’t been cut in a long time, and the tree in the front left had been removed at some point, leaving behind a mound of a stump and mulch that also collected debris. It’s a shame, and I kind of wish we had brought this little 2 bed/1 bath house back to life like it was in this picture. But I digress. Although this picture shows that the previous owner took care of the property, and that’s what attracted us to the purchase.
The floors were in immaculate shape, and the kitchen was quaint, but in decent shape. We purchased a new refrigerator before we could list for a tenant.
The bathroom needed a lot of help, but we didn’t want to overhaul it. The medicine cabinet wasn’t working anymore and the glass was cracked, so we wanted to replace it with just a mirror that covered the old medicine cabinet hole. Interestingly, we found a stash of 100s of razors behind it! (Apparently this is a thing from times gone by. You finish your blade and then you shove it behind the medicine cabinet for it to reside in the wall for all eternity.) We had several plumbing issues in the house. The drain pipe for the tub had multiple kinks in it, which caused the water to drain slowly and be more easily clogged. This would have been a major overhaul to get new plumbing installed in a way that was more direct.
The electric in the house was in need of work. We fixed quite a few electric-related-things while we owned it, but re-wiring the house was a major expense that would’ve come due in a few years.
The house was in great condition, had a big lot, was in a located close to the downtown area, and was on several bus routes (I even had a bus driver stop and ask me what the rent was on the house while I was working out front). It seemed like a great investment. We had several showings to qualified individuals….. who then went home, researched the house, and saw that it was in the highest crime area on Trulia’s crime map.
After sitting on the market for 5 weeks, we lowered our standards. There’s a reason you have standards as a landlord – it’s because if you select the right tenant, you’re saving yourself time, money, and headaches in the future. Here’s the email from our property manager. There are multiple red flags, and yet we gave her a chance.
The prospective tenant provided us with an employment verification letter showing that she had just started a new job, her most recent pay stub corroborating the employment verification letter, and wrote a decent introduction in her application. Between it being 5 weeks with no tenant and it now being mid-August (with it harder to rent in the Fall), we overlooked her credit score of FOUR HUNDRED AND FORTY EIGHT (448) and SEVEN (7) accounts sent to collections. I don’t recommend you do this. Oops.
This is the fun part to recount. It’s detailed, but I think it’s interesting.
She moved in August 2017. By December 2017, we already had enough issues that she wasn’t going to be trusted going forward. We’re very flexible landlords, and we’re happy to work with you on any issues as long as they’re communicated up front and timely (meaning, if we have to continuously reach out to you for rent, you’re not in a position to ask for favors).
We had allowed PayPal to be used to pay rent, but every month there was an issue. She either sent it in a way that incurred fees (after being told that she would be responsible for such fees) or it was sent in a manner that caused PayPal to hold the funds and not immediately release them. After December’s rent was late, the late fee wasn’t paid in full, and there were fees taken out by PayPal, we cut her off from electronic payments. Our property manager informed her that going forward, all rent had to be received by her office (either by mail or drop off) before the 5th.
Speaking of flexibilities – we noticed that she needed to send us rent based on each pay check, versus having all the rent money at the beginning of the month. She was paying us a late fee every month. Her rent was $775, and her late fee was $77.50. That meant every month, we were collecting $852.50, which really wasn’t necessary. We offered a change to her lease terms – rent was due on the 1st and 15th. As compensation on our part, rent would be increased to $800, split into two $400 payments. However, if rent was late, the late fee was now 10% of the late payment ($40) or up to $80 if she was late on both installments. She agreed to this, as it saved her money each month and set her up for success by being able to set up a system with each of her paychecks. We didn’t like that our relationship with the tenant had come to us hounding her over money, so we thought this was the best path forward for both sides of the party. Here’s the addendum to her lease.
And yet this didn’t change anything!! The addendum was signed at the end of January 2018. She paid February’s 1st $400 late. Then she didn’t pay February’s 2nd $400, and we had to reach out to her several times before even getting a response… after she also didn’t pay March’s 1st $400.
Our property manager filed unlawful detainer (eviction) with the court, and that got the tenant’s attention. She then had to pay the balance due, as well as the court filing fee, before March 30th (court appearance date) to dismiss the court action. She showed up to court with the cash to pay and then everyone just went home. You can’t evict someone who has paid in full, even if the process of collecting rent was unnecessarily burdensome.
And then came April. There was another story about a medical emergency and a new job on the books. We had agreed to a new one-time schedule for April’s rent payment, and she missed those deadlines and was incommunicado. We sent her another default notice on April 25. Note that this medical emergency was for her “husband.” This is the first that she had implicated herself that someone may be living in the house other than her and her son. She paid her balance owed on May 4th.
On May 8, she was given another eviction warning notice for lack of May rent (the 1st $400) and gave no response to requests for information on when to expect rent. After continued lack of payment after that notice, she was served with another eviction notice. On May 17, she was given 30-days notice to vacate the premises by June 17, 2018 at 5:00 pm. But then she paid in full and on time. We then changed her lease terms to state she was on a month-to-month basis and she would be granted 30 days notice when we (or she) decided to terminate the lease agreement. It was signed on July 16.
Guess what? She didn’t pay September’s rent. At this time, we also addressed her husband.
She was married when she applied, but we didn’t know. Justnow as I was looking back through our files to write this post, I saw that her pay stub she used for employment verification said that she was filing her taxes as married. I hadn’t seen that before. In all our visits to the house, there were always other people there. There was one man that seemed to be around 90% of the time. We overlooked it, but our lease did stipulate that anyone who stayed for more than 2 weeks was required to pass a background check and be on the lease. I strongly suspect that this individual was not going to pass a background check, which is why it was never disclosed to us that she was married and another adult was living there. Our property manager informed her that only she and her son were on the lease, and that if anyone else was living there, they had to be on the lease. She asked if we were referring to her mother-in-law visiting, our property manager said that it appeared to be her husband was living there, and then she ignored us.
We gave her our 30 days notice on October 5 to vacate, meaning she had to be out by November 5. Our property manager reached out to her on October 26 to see if she would be out earlier and set a time for key pick up. The tenant nonchalantly stated she wouldn’t be able to make it out by the 5th and she’ll be out by the 9th. Umm, excuse me, ma’am, but that’s not how this works. We held strong to the 5th and she lost it. Our property manager said that her lease is over on the 5th, and if she was not gone by then, the court fees would be her responsibility for us to get the court and local police department involved for her removal. She got angry and claimed that we didn’t handle the rental well at all, that we couldn’t charge her any court fees, and that she should charge us for not being able to use her tub because it was clogged (guess what on this one? The plumber removed things like a dental floss pick from the drain, immediately making it her fault (and at her cost) for said clog). She then said: “Lets just hope your (sic) as speedy with my deposit as you all were with terminating the lease.” I laughed out loud on this one just now. We should have terminated her lease an entire year before this discussion happened, but we kept working with her! Hysterical! Gosh, and to think this wasn’t our worst eviction process (more to come :)).
A friend-of-a-friend was attempting to purchase a house in the same neighborhood as this house, and they ran into multiple issues causing them to walk away from other deals. Mr. ODA approached him with an opportunity to sell this house, which had similar specs to the one that they were pursuing. The buyer spoke to his wife and father about the deal and agreed to move forward. Of course, this deal was not easy.
The contract was ratified on October 31, 2018. We didn’t close until January 8, 2019. Our typical close time on our purchases is 4 weeks. We’ve done faster, and we may have done a bit longer if the time of month lined up better for our finances, but over 2 months was horrendous. Since our tenant was moving out on 11/5, and the closing was expected to be no later than November 30th, we didn’t pursue finding a tenant.
The appraisal was late being ordered, which was somehow allowable. Then it came in at the beginning of December at $65,000; our contract was for $68,000. We split the difference ($1000 from the buyer, $1000 from the seller, $1000 from the agent who was dual representing).
On December 18, our Realtor finally pushed back on the buyer’s side of the transaction to get things done. But it was Christmas time now. With so many offices closing for the end of the year, we weren’t able to get a closing date until the first week of January. The buyers were signing paperwork from Pennsylvania, which caused more delays because of having to send the paperwork back and forth for everyone’s signatures.
We sold in January 2019 for $67,000, after having purchased it for $60k just 18 months earlier. While this seems like a great deal, it’s not an automatic $7k in our pockets. You need to account for our closing costs from the purchase and sale (about $6,500), loss of rent for two months while trying to close the sale and the 6 weeks of no tenant when we purchased it, utility costs associated with vacant times, and costs to fix things around the house during our ownership. However, during that time, we had a tenant paying our mortgage (covering the loan interest and paying down the principal), and we were collecting more rent than projected because of her continued late payments.
We made the decision not to pursue a 1031 exchange on this house. A 1031 continues to defer the depreciation to the next property, and it allows capital gains to be deferred. Based on current tax law, it can be done infinite times. However, there are extra lawyers and fees that come into play, so it becomes worth it when you have big dollars at stake, and that you have another property to purchase quite quickly after selling the first one.
The appreciation on the house was minimal given that it had only been 18 months since purchase, we had two sets of closing costs to add to the cost basis, and we hadn’t earmarked a place for that money to go upon selling. Plus, the cost of an intermediary would continue to eat into the “profit” versus tax paid, so we just went ahead and planned to pay capital gains taxes on it. Unfortunately, since we had depreciated the structure and the fridge over the prior 18 months, that paper money had to be brought back into the fold when calculating our taxes the following April. That’s several thousands of hidden money that is easy to forget about.
Depreciation is a great tax break when you own the property. The IRS assumes the value of your asset is being reduced by wear and tear and father time. This is true. It’s why if a landlord neglects the property and isn’t active with maintenance, renovations, and other replacements, the property will turn into a trash-heap in time. However, when you sell the property, you show the IRS that it in fact did not do that. If someone is willing to buy my property for more than I bought it for, then it obviously didn’t depreciate to a lesser value. I have to pay the IRS back for the depreciation assumptions that I was allowed to make over the time I owned it, plus pay the tax on the actual profits. Bummer, but logical.
In summary, we bought a cheap house and got a poor tenant. We had a TON of headaches with that tenant. We had to do a few house/yard projects over the ownership life of the property, but nothing worrisome and not already built into our numbers. Somehow, we made it work that eventually the tenant always paid up and then some (late fees). We made mistakes, we learned lessons. We figured out a set of streets to avoid for future purchases, learned how to sell an investment, and learned how to file taxes on an investment property sale. The story is fun to look back on. I’m glad we experienced what we did. But I don’t want to do it again.