Owning a 4-plex can be a PITA
Owning a rental property is one of the most popular ways to generate passive income, but it’s not always easy. We purchased a 4-plex through a short sale process in October 2011 and my rental income projection was quite wrong.
I finally finished our 2012 tax return and I can share the details from the 4-plex now. I’ll put it next to my original projection so you can see how wrong I was.
Let’s start with the good news. We actually collected more rent that I projected. I assumed 5% vacancy rate and it’s pretty close to what we had. We also raised the rent so 2013 should be a bit better here.
The insurance came in a bit higher than quoted and I also purchased umbrella insurance for additional protection. It’s not a huge difference from the projection.
Here is where we have a big divergence. I looked at the statements from the previous 2 years and I came up with $11,354. Our actual expense in 2012 was $17,368. The big difference here is the cost of all the repairs. I think the previous owner was losing quite a bit of money every month so they didn’t want to do any repairs. I should have taken this into account and increased the repair estimate accordingly. Actually, I did increased the repair estimate, but just not enough.
The big repair cost in 2012 was the exterior paint ($5,500) and drainage repair ($2,000). This year, we made additional drainage repairs and I just found out that the fireplaces need serious repairs, too. After this, I don’t think there are a lot of big ticket items left, but you never know. At some point, I would like to start updating the interior and increase the rent.
I also underestimated the property management cost. They nickle and dime quite a few things and it adds up.
In short, we had a negative cash flow of $3,614 in 2012. This is actually not too bad in the grand scheme of things because that’s about how much went into the principle. I would call it even money for 2012 although we had negative cash flow. It’s still disappointing because my goal was to have positive cash flow in 2012.
For tax purposes, we also had a mortgage interest deduction of $10,838 and depreciation of $6,595. For 2012, we were able to use a part of this to offset the income from our rental home. Unfortunately, we made too much money in 2012 and are unable to use the rest to offset our active income. We’ll carry forward the rental loss to 2013. I’m pretty sure we will make under $100,000 this year and should be able to use a lot of the offset next April when we file our taxes.
An older property can be a PITA to own and operate. There is always one thing or another going wrong. The thorough property inspection gave us some warning so we knew we had some big repairs pending. The bill seems to always be more than what I think, though. If I had to do it over, I’m not sure if I would have been so enthusiastic about this 4-plex.
Our rental home on the other hand is doing much better. We lived there for 7 years and it is still in good shape. I think renting out your previous home is the way to go. You are familiar with the property and the mortgage had some time to season.
I’m saving the best news for last because there is a silver lining. I checked Zillow.com and the zestimate is up quite a bit.
Zillow isn’t always reliable, but my real estate agent has also been sending me her PIP (property investment profile.) A similar property down the street is pending sale at $359,000 so I don’t think Zillow is far off in this case. We purchased this property for $300,000 so we would come out all right if we decide to get out of it.
*Notice the last sale price of $380,000 in 2005. The previous owner was paying even more mortgage than we had and received less rent. That’s probably why they had to short sell and didn’t repair anything.
Giving it a little more time
I think I need to give the property a little more time to turn around. I’m pretty sure we’ll do better in 2013, but we’ll have to wait and see. The rents are going up and the repair bills should taper off at some point. Two more years sounds like the right time frame. What do you think?
We sold the 4 plex for a small profit in 2014. The 4 plex was become too much of a headache and we decided to invest in a duplex closer to home instead. The duplex is in a better area and tenants are easier to work with.
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.