Real Estate Investing #4: tenants and projections
October 6, 2014
This month was mostly uneventful.
The rent came in late, which racked up a minimal late fee. Since I rely on the rent to cover the mortgage, I wondered if it’d be worth bumping up the late fee a bit to motivate the renters to pay on time more often. Perhaps on the next lease. Nothing punitive but something more annoying than the equivalent of a monetary flea bite.
They also managed to run afoul of the HOA so that was a fun bit of paperwork to get in the mail. It seemed to be a minor thing so as long as they toe the line, we should be fine there. This reminded me, of course, why I prefer to have the management company deal with the day to day: I just had to send off an email and ask for them to deal with it.
***
Just for kicks, I ran a projection of income and expenses for the rest of the year; I was curious to see what result we could expect after a partial year of rent with regard to cash flow.
Barring any interruptions of rent payment, assuming we retain the same renter this year, and any repair costs that might come up (most will be covered by the supplementary insurance): ~$300
Note: This excluded the actual cost of the purchase (the down payment, the fees and the closing costs) since I assume, for the moment, that will be recouped if and when I sell. Otherwise it’ll likely take about thirty years to break even by rent alone.
Whoever said this rental property thing was a sure moneymaker can bite me. 😉 But I wasn’t looking to get rich overnight – if there was a great way to do that I think we’d all be there – so patience is the name of this game.
Yeah … I know someone who put over 20% down so rent MORE than covers costs every week, but generally I agree on it being a tough haul.
Yeah I considered doing that but decided against it this time, now I’m kind of wondering if I ought to have increased it so that I’d have better cash flow month to month ….
At the risk of being a “Debi Downer”…hold on tight. September/October are “gap months”. That is, with cooler weather, your tenants won’t have air conditioning bills to worry about and it’s not cold enough …yet…for heat bills to come in. You are coming up on the most challenging months with winter heating bills….holiday expenses and busy folks who “forget” to pay their rent. I’ve been a LL for some time and I would stay on top of the tenants with the late rent. I employ the “1-5-10 rule”…rent is due on the 1st….considered late on the 5th and a 5% late fee applies…and on the the 10th I’m at the Courthouse filing for eviction. Looking ahead the winter months are tough for rent and pressures tend to ease a bit middle of January when folks start getting income tax refunds. Then rents slow again for a bit until the “gap months” of April & May hit before AC season kicks in. In a “nutshell” if your tenants are having trouble now paying rent in a timely manner…collecting December’s rent should be a treat….
Any experience-based caution is welcome, not a downer! I had been focused on the summer months and the needed a/c at that point, but of course winter means heating bills as well, on top of the holidays. Keeping a close eye on them!
Apparently this is how to get rich quick:
http://www.topiama.com/r/2792/i-just-sold-my-mcdonalds-that-i-build-and-owned
Perhaps this explains why there are so many McDonald’s …. 😉
Tony the Romanian Landlord — the guy who bought up about a fourth of our neighborhood and turned it into rentals — once remarked that he didn’t expect to make a month-to-month profit or even to break even. His goal was to hang onto the properties while land values appreciated and then sell for a profit on the sale. Basically the renters were there to cover most of the mortgage cost; maintenance and repairs were aside.
In fact, Tony DID sell right at the top of the bubble. He made a ton of money. He was able to buy a much nicer house in a better part of the hood, and, also in a slightly better section, he bought a house on a very nice street, tore it down, built a kind of Eastern European McMansion (an interesting and attractive house, but out of place amongst a tract of 1960s semi-custom ranch houses). This he turned into a nursing home.
Since he and a guy who helped him finance his rental empire own another residential old-folkerie, we figure that guy has been his silent partner, and he or the area’s dominant Realtor advised him to sell when he did. In any event, he did say he never had any expectation of a positive cash flow from the renters: they were there to make it possible for him to buy real estate low and sell it high.
That’s a totally valid investing method. Obviously it worked for Tony anyway 🙂 I am a little skeptical of my ability to time the market but I will have a minimum price point at which I’m willing to sell along the way.
But if you think about it even if you’re netting a whole 300$ a year that means you are making money. Your % equity in the property increases as does hopefully the property value. Are you making a lot of money? probably not on the grand scheme of things but think of it this way, as long as you don’t have the tenants from hell you’ll probably end up in a better financial state on the rental property. The tenants are putting money in the bank for you.
We have the tenants from the front steps of purgatory at the moment so that’s keeping me from being complacent and assuming that that $300 is the minimum for the year. 🙂 It’s just an early projection, we’ll see what happens once we’ve had some vacancies and turnover!
We were hoping to break even with our cottage and found that we were loosing money every year so we cut our losses. Its a good approach seeing how it goes, at the very worst you have all that extra equity that can be used for something.
How much are the management companies in the Bay area charging?
Equity: very true. If nothing else, that should be there to help break even should I need to get us out of the muck.
It varies: 8-10% of rent, some will also take part of the late fees or charge flat fees for placement on top of their monthly.
I am hooked on stories like these. Spouse thinks there’s something wrong with me. Can I ask how taxes play in for you? Perhaps another post?
He should be glad you have the stories to read or you’d be compelled to do it yourself 😉 I’ll be figuring taxes out soon so that’ll be another post, once I have a bit of a handle on it!
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