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
Monthly Expenses
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 investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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Thanks for a great blog and congrats on your financial freedom! I’m sure the struggles are all worth it.
So, I have a 4plex, bought it last November. Its been awesome so far, the maintenance has been reasonable and it’s bringing in good cash flow. When I purchased the place, I purchased it knowing there is deferred maintenance. It is need of repaint on exterior and also, needs to be re-piped (made in 60’s). Basically, I’m struggling with which to do first, I think I’d say neither is 100% failing… but both need to be done.
Any opinions are appreciated, I think I might be leaning re-pipe right now.
I’d probably lean toward re-piping too. Water damage is terribly expensive. Good luck!
I owned four plex for a year and a half and loving it. I bought mine 26k out right
Cash. Worked two jobs for two years and finally getting the fruits of my labor.
America strong came here as an immgrant and pursuing the American dream.
Oh wow, 26k. That’s an unbelievable deal. Really great.
THANK YOU! Reading your blog just confirmed me wanting to buy a 4 plex or two. I have been a handyman/apprentice sense i was 10 years old so i know pretty much everything i need to know about building or repairing a home or apartment building from the ground up, and the property management i can do on my own. the only drawback i have at this point in time is financial but that wont be an issue for much longer! thanks for the educational blogging i enjoyed reading.
BTW- I’m only 19!
Wow, I’m impressed! You’re off to a great start. You can always go with a duplex first and live in one unit while renting out the other one. I know it’s tough to get the finance together when you’re starting out, but maybe you can get a loan/investment from families?
Lesson #5 – Learn how to replace a friggin’ toilet. It’s not that hard, or expensive when you do it yourself ($80 at HD). If you can’t manage at least that, I don’t think you should own rentals (maybe REIT’s would be better?).
Sorry if that sounds rude, but you can save SO much money by doing this stuff yourself.
Learning to replace the toilet is on my todo list!
The real problem is that I don’t have time to maintain the 4 plex, that’s why I hire a property manager.
I do most things myself on my rental home and condo. I repaired the microwave in the rental condo, do I get a point for that? 😉
sorry for the typos, i’m using my new keyboard for my ipad and it takes some getting used to 🙂
In the beginning it is usually always tougher, you just have to stay positive that it will get better.
I’m on Los Angeles. And, YES in real estate, it is location, location, location! I’ve talked about that in one of my articles. I know investors that purchased buildings dirt cheap and on paper it all seemed certain they would have a positive cash flow, however, the properties were in less desirable neighborhoods. Having said that, it attracted on less desirable tenants and in return the landlords had high turnover and the tenants trashed the place! So I’m big on where you buy being very very important if you want to minimize headaches in the long run. I have long turn tenants that LOVE the area and never want to move…lol Also, when I have vacancies, once I advertise, no joke, I get over 50 calls/day. I fill the unit in the first day of showings (again, location is key here)
High demand area, and yes I ask for top dollar (well market rent). Hope that helps you in your future investments 🙂
Glad you liked my articles 🙂
Ouch! Not all hope is lost. I own a few rental properties and I talk about “how to” on my site. If you have the down time, you should check it out. I think that it can help you out a lot. All my properties generate a positive cash flow. A large part is due to me running “numbers” prior to making any purchase. I’ve written an article on that on my site “How to calculate if an income property is profitable to purchase.”
There is a lot that I learned along the way and I must say that it is extremely easy for me to manage all my properties myself. I still have a full time job (I work for the government and benefits are too good and pay is also too good to walk away and I only work 3 days a week) I have a 1 year old son and I manage to add regular content to my site.
I say all that because I want you to know that it gets easier and in the long run it is well worth it. If you have any questions please feel free to contact me 🙂
Btw…I found you on Yakezie
Thanks for your comment. I’m pretty sure the 4plex will finally be in the green this January. The first few months were tough because we had to do some repairs and refill the units.
What part of the country are you in? From what I understand, cash flow is highly dependent on your location.
I already manage another rental house and condo and I really can’t handle the 4 plex management in addition to that. The 4plex has quite a few more issues than the other places. I stopped by your site, great advice on real estate investing.
Thanks for the frank comments about real estate investing. I’m a big fan of Rich Dad and after years of waiting on the sidelines finally have “collected” seven properties in the last two years. Like you, early results are middling, but that said, they are now either breaking even or making positive cash flow. Of course, if I hadn’t been a chicken and jumped in four years ago when I wanted to I’d be far better off, but better late than never. Good luck to you and to the others who are going this route.
Thanks for the comment. I think that’s why people aren’t jumping into real estate more. The early result is quite discouraging, but the longer term pay off looks much better. Great job with 7 properties. That must be some substantial income. I think we’re good with only a few properties. I’ll develop other source of income to keep it diversify.
Thanks for the tips. I’ll have to negotiate with our company. The lease up fee is $200 so that is less than a full leasing fee. A good property management company is hard to find so I guess they can set their price…
Great post! The same lessons are true for starting your own business. On my 3rd business start up now I can tell you that:
– whatever you estimate the expenses are going to be, triple it
– whatever you estimate the time you will spend on the business, triple it
– any revenue estimates that you may have for the first year, toss them in the garbage
A business plan is all theory until you actually start the business. Your story is all to similar to my start up story. 🙂
Heh heh, thanks for the tips. I’ll keep that in mind when I start a new business venture.
Your post is exactly the reason (well, that and the duplex I briefly owned in Texas) why I will never be a long-distance landlord if I can help it. The little things add up so fast if you can’t fix them yourself. And many things are a lot easier to fix than you might realize, so give it a shot. Google knows almost all and gives step-by-step directions in many cases 🙂
I don’t think I can do the long-distance either. When I have more time, I probably would work on some of the easier things. I really have no time at all right now. 🙁
Wow that is awesome you have been working on fixing up the units and renting them out. A lot of work but a good investment! Rental property is definitely not for impatient and lazy folks! -Sydney
Thanks for walking through your story. I’ve been in similar situations, but that is a tough one. I never really read why you had a property manager to start with, but I’m sure it will be worth it going forward.
Thanks for your thought. I don’t have time to manage the 4 plex is the reason. If we can get positive cash flow with the property manager in place, this will almost be a real passive income. I’m striving to generate as much passive income as possible. 🙂
I think you are very close to creating strong positive cashflow. I hope you are taking notes, this could be the genesis of a nice little e-book.
Thanks for the suggestion, I’ll keep that in mind.
When your mortgage gets over, it’s all profit inst’t it? I am new to all this. Is property tax a monthly item?
I pay property tax once a year, but it’s easier to calculate cash flow by looking at it as a monthly item.
Mortgage is 30 years and I doubt we’ll own the investment that long.
Wow, sorry to hear about the rough start! Hopefully that’s it for a while and you can move into the green for next quarter! Thanks for including my plight; still unresolved. arrgh!
It was expected that 2011 wasn’t going to be good. It has better make some money in 2012 though! Sorry about your problem too, that kind of surprise sucks!
I think that at today’s prices, such purchases can be a good long-term investment while providing short-term cash flow as well. However, there are no guarantees and I can totally see how this is not for the faint of heart. Personally, I don’t have the time or patience to be a landlord right now. Fascinated by the idea of it, but not doing it now.
I can see your point of view. I want to have more investment properties to diversify and protect against inflation. It’s not easy though.
It gets better Joe! You can’t fix stuff forever right?!
$2,800 income is greater than $2,600 in expenses right?
Thanks for your comment. I think most of the repairs are done and I’m sure 2012 will be better. We should be able to increase rent a bit as well.
I love these updates. I vacillate between buying rental property and not. My brother owns a lot of property and I know he has fired some property managers over the years.
I am sure the initial outlay is always the greatest and it takes away to hit breakeven. But, you are investing for the future, and just like a stock purchase, you can sometimes see dips you don’t like. Plus you are learning so your next purchase will be even better!
Thanks for your comment. I can’t wait until the property market recovers. It might take 10 years, but I’ll be ready to sell by then. 🙂
This is a really good reminder for anyone wanting to go into property. It can be great to own a tangible investment, but my experiences have taught me that there are always extra expenses, especially early on. Even a brand new property I bought recently had some hidden costs I hadn’t factored in.
Lesson: expect a few bumps for the first 12 months, minimum.
Great to see you aren’t regretting things though, in the long run it will settle down and you won’t even remember those little bumps 🙂
I think the best way to get into investment real estate is to rent your previous home. That way, you know what needs to be fix and reduce the surprises.
I’m hoping 2012 will turn out well for this property.
Hope the investment works out for you. After reading posts like these I’ll be very careful if I ever decide to buy investment real estate.
Your online income can cover those investment real estate surprises. 🙂
Landlording is one thing that has really scared us away from real estate investing. I have so far stuck with REIT. Not that we have the downpayment to buy multiple houses, but that is the goal. I guess we should start learning stuff. I like you honest breakdown. We will make our own mistakes (all of us do) but these posts are a good checklist to be cautious about as total clueless-real-estate-investors. (Did that sound very selfish 🙂 ?)
I like your honest breakdown of your purchase and post-purchase follow-up. Quite a fascinating read actually!
Mrs. RB40 needed the accurate breakdown. 🙂 She is now up to speed on the 4 plex investment and is really hoping the hubby would stop investing for a while.
The leasing rate seems high to me too. At that rate, you could have done it yourself. Do they charge a percentage fee per month for management? I think you are getting dinged because the bulding is so small. Thanks for the link, I appreciate it.
The monthly fee is 8%. Yeah, I’ll check with the property manager.
Ah, yes the joys of real estate. In the end, it will be worth it, but it is a constant effort to manage things just like any other business.
It sounds like you had a quick turnaround filling the place up. I have thought about real estate investing in the future, but I am a long way away. For now, I have a 2 bedroom and rent the second room to a friend. It works well for me for now.
I am hoping to save enough for a down payment on a new home when I move so I can rent out the condo I have now.
That works out really well too. One of my friend had a 4 bedroom house and rented 3 rooms out. I think the way you’re doing it is the best. You know the old condo and neighborhood well and can do many repairs.
I never imagined it would be very easy so thanks for confirming that 🙂
I hope that things improve for you and you’re able to get the cash flow going. It sounds like you’re on the right track now that you have the repairs under control.
Thanks. I am optimistic that 2012 will be a lot better.
This is very interesting. I love reading these reports as well. I am not surprised by your sentiment that being a landlord is not for the faint at heart and that you will do better long term. Thanks for sharing this aspect of your investments too!!!
No problem! Glad you had fun reading this. Hopefully I’ll post the 5 years update with much better news. 🙂
It was just yesterday, that I thought, “I should email Joe to see if he write another post about his 4plex” and then I see the email. Great recap and interesting info. It definitely pays to plan ahead. I am going to save for the down payment and emergency fund so I can jump right in while I’m young. 🙂
Good luck! You can also buy a duplex and live in one while renting the other. I think that’s a good plan if you can find the right one.
I would never be a landlord just for the reasons you mentioned. I always was really skeptical of this business venture. Seems to me that I am right. Joe, I am sure it all will work out for you. But seems that at this point you are having more headache then joy. 🙂
I’ll say blogging is actually easier than real estate investing. 🙂
Wow – i’ve been waiting for this joe after you mentioning issues in other posts. This sounds like it’s pretty rough going for you the last 3 months, but I hope things improve!
I’d really like to get into rental property and am glad that I keep learning about all the risks.
Actually, it hadn’t been that bad. We planned for repairs and set aside $5,000 for that purpose. The vacancy and lease fee ate into that $5,000 quite a bit, but we are only about $500 over budget at this time. Now that all the lease are signed and most of the major repairs are done, I think we’ll see a better cash flow soon.
You’re not scaring me off yet either. However, I’d actually like to purchase a duplex or 4-plex and live in one of the units. I knew someone who did this and they made a decent income. It could be a win-win as long as your tenants didn’t drive you insane. 😉
I think that’s a better idea. The problem is the plexes are always in a weird area. There are not many choices in the nice neighborhood with great school.
You haven’t scared me off yet. I enjoy reading these updates. Even better than learning from one’s own experiences/mistakes, is learning from other people’s experiences.
I agree. I love these posts. As a future real estate investor I find your experience very helpful. Thanks for sharing.
It’s always more painful when it’s your own experience and that’s how I learn best….
Truer words were never spoken. You have to start watching the DIY channels and YOUTUBE. I swear, I have never been more handy in my life! I’ve now put in 2 types of flooring, resurfaced a deck, put in carpeting, walls, etc., all because paying someone else to do it would have been thousands of dollars. If you live close enough to your unit, being handy can help.
Your expenses were not all bad. My mgmt company charges the FULL first month’s rent to fill a vacancy plus 10% every month. Fricken PAINFUL. Worse yet, I’m not getting the rental checks until the 16 of the month with no sign of a late fee. I need to check in with what is going on with that.
Anyway, good luck! Painful now, but better soon.
My excuse is I don’t have time, but the truth is I don’t know how to do those things. I definitely have to step it up if I want to be a land lord in the long term though.
Whoa, your fee is high. I think the property management company keep the check until mid/late month for cash flow. I have that same experience.
LOL Sandy you are so right!!
I youtube’d how to fix a toilet handle and it was so much easier.
Youtube is amazing for that.
I also looked up how to make a ‘walkway’ to stabilize the stones and spent half the day doing that today.
Landlording is much easier with step by step videos. 🙂
PS Joe- is there any way you can avoid having to use the property management company? Or do you think it would be too much work to maintain the property yourself?
There is no way I can manage the 4 plex. I’m already working a full time job, dealing with baby, and managing 2 other places. Those other places are much lower maintenance than the 4 plex, but there are still a few issues here and there.
When I collected the rent money today from my tenant, they showed us that the toilet handle broke! Haha, off to home depot to buy something to fix that with tomorrow!
Collecting the rent is so rewarding though, but I agree, landlording is not for the faint of heart!
Congrats on the tenants!
Congrats to you as well for the tenant. 🙂