As some of you may know, we invested in a 4-plex earlier this year. Now that it has been 3 months, I thought it’s a good time to go over some numbers.
In short, it has not been a great cash flow vehicle like I imagined. We knew it would take a little time to generate positive cash flow, but when you are shelling out cash for repairs, the reality bites hard.
This 4-plex was a short sale and the previous owner refused to authorize any repairs once the place was listed. The short sale dragged on and on for months and there was only one tenant left when we took over the building. The inspection turned up many things, but it also missed many little yet necessary repairs. Things like the stripped shower valve handle in unit A, shower head in unit D, toilet tank in unit C, non-working garage door, hot water heater, stove, fridge, and more were repaired or replaced over the last 3 months. Of course each repair cost more than I would have liked. I guess here is where being a handy man would help.
Lesson #1 – there are always more repair/maintenance than you’d like.
We kept the property manager since the tenants (I talked to a few before they left) liked the managers. It took a while to fill up all 4 units, but all the units are now rented out! YES!!! Vacancy is really the bane of a landlord’s existence. Each time a new tenant moves in, the property manager takes out a large chunk of the first month’s rent. This is call the leasing fee and they charged us $400 for each unit. This is more expensive than I thought. Usually the leasing fee is 50% of the rent, but they have a minimum. I need to talk to them about this.
Lesson #2 – Leasing fee will take a big bite out of the first month’s rent.
Now that all tenants have moved in and many repairs were done, I am optimistic that we will see a positive cash flow soon.
Rental Income: 818 + 650 + 675 + 695 = $2,838
Management: 8% = $227
Sewer/water/trash/landscape = $250?
Insurance = $100
Mortgage = $1,200
Property tax = $330
Repair and maintenance = $500?
Total monthly expense = $2,600
If we can keep the monthly repair bill under $500, then we should see some positive cash flow soon.
First 3 months
In addition to the smaller repairs mentioned above, we had a couple of big repair items – the roof and the crawlspace. The roof needed demossing, new chimney chases (rusted and water was dripping into the fireplaces), flashing repair, and more. The crawlspace needed new sheeting and some other things. These two big ticket items cost $3,000. We allocated $5,000 for repairs before we purchased the place and were able to pay these off without too much problems.
The total rent collected over 3 months was about $6,500 and all the expenses added up to about $12,000. This means we already burned through our $5,000 repair reserve and the next 3 months better start turning positive. Fortunately, I am still working full time and can cover the extra expenses at the moment. If we didn’t have the repair fund and we had less income, then I might have had to resort to getting a loan to pay for the repairs. P2P lending companies like Prosper.com would be my choice if I need some help.
Lesson #3 – A new landlord better have a big reserve or income stream to cover the expenses.
Well, the last 3 months has been a learning experience and I am not regretting the purchase yet. I still believe real estate investment takes time to pay off and will stick with it for at least a few more years.
An interesting rental property investment post from Darwin’s money – Here is how the ROI on your real estate can crumble AFTER you buy it. At least we have had any problem with our insurance company yet. I’m keeping my fingers crossed.
Krantcents – Are you ready to be a landlord? Some great advices from an experienced landlord.
Lesson #4 – Rental property investment is not for the faint of heart.
Well, I hope I haven’t scared you off real estate investing. Have a great weekend!
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.