Owning Rental Property: Year Two
It’s been almost two years since we became landlords. We are not professional real estate investors in any sense of the word, just people, like many of you, who are looking at investments that will build wealth and allow us to be financially independent. Here’s how we did in year two of owning rental property.
Residential Property
The residential property is humming along nicely. We did turn over a tenant, but the property management company had one waiting to move in, so there was no loss of rental income.
There are some things that will need to be done on this property eventually. Some of the windows should be replaced, the furnace is old, and the dishwasher and washer/dryer set are probably from the late 80’s. We are prepared for any of these expenses whenever happen, but so far, so good. I’d say we are on deferred maintenace at this point. Aside from a few minor repairs, we haven’t spent much except for property management, mortgage, and taxes. This rental has netted $4081 for the year. Not enough to retire on, but not bad for such a little house.
Commercial Property
I’m almost hesitant to write about this building because what we are doing probably goes against all investment property rules. Since there is more than one way to skin a cat, I’ll spill the gory details. You gotta take the good with the bad, right?
This property is seller financed, meaning the former owner holds the mortgage. I love this because it meant almost no closing costs, and we got a very good deal. The kicker is that he wanted a 6 year payoff term, so the monthly payment has to be high. In fact, we lose $4.77 each month because the rent does not quite cover the payment.
Repair City
Speaking of deferred maintenance, this building has been on that plan for at least a decade. I actually owned half of it before last year. My former co-owner was of the “don’t fix it unless it’s completely broke” philosophy. I agree to a certain extent, but the cooling system and furnace were ancient.
No one is sure, but we believe the furnace was from the 40’s and used to be coal operated. At some point, it was switched to natural gas. It was a giant hulk of a thing that makes the scary basement furnace in Home Alone look like a kiddie toy.
Cooling was done by 3 evaporative “swamp” coolers, which used to be popular in dry climates. Modern air conditioning systems are generally much more efficient these days. As a result, for several months of the year, part of our office was too hot and part was too cold.
Patients complained. In the winter, staff wore their coats indoors and we had space heaters in the hard to reach places. It’s a wonder we haven’t burned the building down.
We all fried during July and August because you can’t leave exam room doors open due to privacy issues. I love to sweat through my eye exam, how about you?
Anyway, my first item of business was to find a better solution. I also worried that the furnace would completely poop out in the middle of January and force the office to shut down. I got a few estimates for all options, but ultimately decided to bite the bullet and replace everything. We now have a modern, efficient heating/air conditioning system and it works wonderfully!
With a few other repairs plus taxes and insurance, the commercial property comes in at $-18,332 for the year. Yep, 5 figures in the red.
Would You Buy That Property Again?
Despite the horrible return, I would buy the building again. We knew this repair was necessary and had the cash to pay for it. Even though the monthly payment would keep some people awake at night, in just over 5 years, we’ll own it outright.
Yes, we could lose the tenant. The optometry practice has been there since 1941, so I’m not sure moving would be good for business. If they do move in the future, I don’t think it would be before we pay off the building. The rent from this property is as much as two or three residential rentals, so I still think it will be a great long term investment.
Real Estate Investing Isn’t For the Faint Of Heart
If the thought of having to shell out $10,000 or more for a repair makes you break out in a cold sweat, you probably should not be a landlord. Most repairs are not that bad, but if a few big things happen at once, it’s easy to negate a year’s profits.
Before even thinking about buying any sort of rental, I’d make sure to have enough of a liquid fund to cover the cost of the most expensive repair that would be likely for that property. Also make sure you can cover the mortgage without going into debt if you have a vacancy.
Day to day management is another thing to figure out before you buy. I have no problem with the commercial property because we know the tenant well, and I’m there at least once a week to see what needs to be done. Since I can’t say that for the residential rental, we use property management.
Even with the expensive year, we are still hoping to add another property or two over time. I don’t have a relationship with a good realtor at the moment, and they can be hard to find. Hopefully, it will all come together when the time is right.
What’s the most expensive repair your property could need? Do you have enough saved for it?
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My grandfather was one of the brave souls who decided to invest in real estate. So far it has worked out for him. He is very good at managing the properties and taking care of all the needs of his tenants. I have been thinking about going into this business myself but, I don’t know if it is something that I could handle.
I love reading these update, seeing as we’re gearing up to become landlords. I’ve been told maintenance costs are killer, just like with your own home, and this totally reinforces that. But with that being said, I totally get what you’re doing with the commercial property. If I could, I would do the same thing to. Thanks for the udpate!
I don’t own rental property but have really been thinking about it. It would have to be long distance since I live in NYC and the properties don’t cash flow. So that’s another complication. I think your commercial property deal will eventually feel like a great deal…especially when you’re done with payments and own it outright. That will be a wonderful feeling.
I think buying outside your area is not a bad idea if you can find a good property manager. I have friends who have done that and it’s worked pretty well.
I too own rental properties (houses) and I feel you pain in having to put out big bucks to over hall the heating and cooling.
Last year I had to fix a roof and put new flooring in one of my properties, after a long term tenant left. It really hit me hard in the pocket book I’m grateful for credit cards. Without access to quick credit it would have been much more difficult.
Despite these sporadic challenges, and the rare need to evict someone, for long term wealth generation real estate is the most accessible and secure way to go.
Like Will Rogers said, “Invest in land, they’re not making anymore of it.”
When I owned a home, I had to replace the water heater, and it was not much 1200 I believe. If you can take a hit now, and be more efficient going forwards you will make back the expense with utility cost savings. Good Luck.
I don’t own any rental property yet and I will have to admit that it scares me a little. Real estate comes with its ups and downs, but from what I’ve read/heard from owners is that they usually come out on top… with major headaches, but on top. It looks as if you had some headaches, but are doing pretty good.
Sometimes, major expenses are part of the game. Since you replaced the entire unit, it is a capital improvement (depreciate), not a repair (expense).
It should be a better building now, and st some point, cash flow like a madman. Take off the principle portion of the payment, then compare cash flows.
That’s why I’m not sad about the repair/improvement. It will save us a ton in taxes and this building will cash flow like a madman in a few years barring something crazy happening.
My husband is in the real estate business and we plan to buy a rental residential property after our debt is paid. He’s pretty handy so we’re going to try our hand at being landlords so it’s good to learn from others experiences.
Despite the risks, I think real estate is the best way to retire early. Hopefully, it will pay our expenses in a few years.