I made it 12 months as a first-time homeowner and landlord! Huzzah!
Location, Location, Location
You know that old real estate adage “location is key”?
It’s true. It’s so true.
Less than a mile from me there is a huge park with its very own conservatory, rose garden, and lagoon. It’s a beautiful place to stroll around in both winter and the summer. The houses there are immaculately kept historical houses that command a very high price when selling.
A mile in the other direction is a bluff overlooking the river. The houses there are sprawling mansions built by former river boat captains and other town notables. The houses in the neighborhood behind those bluff houses, while not quite so sizable, are still wonderful examples of turn of the 19th century architecture. It’s a very in-demand neighborhood and it will cost you a pretty penny to get a property there.
In between those two neighborhoods you have my house. A beautiful Neo-Georgian Revival style house built by a talented carpenter and his sons in 1910. The woodwork is incredible and the craftsmanship would be hard to beat in this day and age. She’s a solid house for being 108 years old.
And yet, if I were to put it on the market, I would be lucky to get a fraction of the price as houses in the other neighborhoods around me, just because of where I’m at.
It’s not the greatest of neighborhoods. There have been multiple instances of law enforcement being called in the year I’ve lived here. Recently, a guy decided to shoot up the house directly behind me. My property and people were fine, but the property manager of the house behind me has some drywall patching and window replacing to do.
(sidenote: my Reolink security cameras caught the whole incident and the cops were very impressed with the quality of the video. you could even see the puff of dirt fly up from where a bullet missed the house and hit the ground instead.)
This location has made it tough to find quality tenants. I was lucky enough to inherit two tenants when I bought the place, so it took me a while to figure out just how difficult it would be to get good tenants. The tenant I managed to find in December paid his rent for two months, and then abandoned the lease for a new job. I’m out one months rent, and more while I attempt to fill it. At least this time cleanup was minimal.
Last time I looked for a tenant I papered the internet with the listing. Facebook got a lot of interest, but the quality of the applicants was very low. I do not have the listing up on Facebook this time around so interest has been low, but better quality.
If I’m struggling to find people to pay rent, finances can’t be doing so hot, right? Well.… they’re not as great as they could be but they’re not terrible. I’m not making buckets of money like I thought I would, but I’m not really losing money either.
If you recall, I paid $85k for the house, and rents were $600, $500, and $385.
After a year, I’ve paid off 2% of the mortgage and I now owe $75,762.73 on the property. Rents are now at $575, $625, and $500. I brought the rent down $25 for my good tenant as he will be the “lead tenant” in the house when I move out. He’s an awesome guy and has always paid his rent not only on time, but a few days early. Unit #2 is the one bedroom. I raised the rent $125 when I kicked the first guy out to $625 which worked for a few months. My unit, the studio, was going for $385 a month when I moved in, but I raised that to $500 based on comps from the neighborhood.
I’m happy I found someone to take over the studio! This will definitely help ease my anxiety. He seems like a really nice guy too.
I should be set financially based off those numbers, but that is not the case. I’ve been taking up space in the property so no rental income from me. The other unit needs a solid tenant. And there’s also all the repairs I’ve had to do to the property: things like attempting to paint the outside, replacing the front porch and turning over the after my gross former tenant moved out. Let’s take a closer look at the numbers:
So down about $7k. Not great.
But wait, this doesn’t include the housing costs I saved myself by living here. I would’ve lived in a house or apartment that cost at least $1k a month, so I’ve got an extra $12k to add to the line. That leaves me up about $5k for my first year. I wish I could’ve done better but that’s what it is.
After the shooting happened next door, I just wanted out. I didn’t want to have to care about this drafty pile of wood in a dodgy neighborhood. But it doesn’t look good to sell a house after only a year, so I’ll keep it at least another year. The numbers also don’t make sense and I don’t want to be out that much money.
I am going to find a property manager, though. Hopefully not living in the house, dealing with the day-to-day stress, and having someone else collect the rent and find tenants will make this an easier process.
I also have at least one more major repair. The back stairs and deck were not built to code and won’t pass inspection anymore. The whole kit and caboodle are getting replaced this spring. It will cost at least $10k to get that replaced. I’m having the same guy who did my front porch last year do the project. He does great work and charges a reasonable price. I say starts at $10k, because neither he nor I know how the deck was attached to the house and he could find rot that needs addressed.
I hope he doesn’t find anything. The more money I have to pay to replace the deck, the shorter my financial runway after I quit my job. However, getting a $10k bill has lit a fire under my butt. I’m even more determined to work hard and make it now.
This house is the biggest liability I have.…. but also my biggest asset. Wish me luck with this property in the next 12 months!
Thanks for reading! Landlords, any recommendations for me? If so, sound off in the comments below!
Team CF says
I really love this place, it looks so cool! Too bad the neighborhood is not the best, and you are not making a lot of money (yet). That being said, when taking into consideration that you are living there too, it’s not that bad at all!
Up to year nr 2. Best of luck Gwen!
Owen @ PlanEasy.ca says
The house looks amazing! It’s really too bad about the neighborhood. Stories like this are what keep me from becoming a landlord. I’d love to diversify a bit and buy 1–2 rental properties but I’m not sure I’d enjoy these types of struggles.
Hopefully it all works out over the next year and you can sell it for a tidy profit!
Good luck getting great tenants! We just bought our second property. They are in blue collar neighborhoods. Not pretty, but not dangerous. It can still be a challenge to get people to come out and look at them because of the reputation. Hopefully you’re using a background and credit check system. I don’t know what I’d do without mine. I use Cozy.co. We have great tenants in the first building and are about to list the second.
Also, are you taking the principal part of your mortgage payment out of your expenses? I always find that that brightens up my income statement significantly!
It really is a very pretty house. I hope the neighborhood improves!
Are you considering painting the new porch railings? I imagine you probably don’t need the extra expense, but maybe before you eventually sell it’d be good for the curb appeal.
I can definitely feel the frustration coming through in the way you describe it, but from the outside it seems like you’ve got a good chance of things improving. Once you’ve got the stairs and deck fixed, hopefully your average expenses will come way down as you stop having to do major improvements so frequently. Combine that with eventually finding some good, long-term tenants and I bet you’ll start seeing much better cash flow. Plus, the headache of being involved in the day-to-day will make life better. I’m optimistic for you!
steve poling says
If there was a shooting at a neighbor’s house, odds are there’s some reason for that. Probably a tenant with a side-hustle in recreational pharmaceuticals who needs to move to another neighborhood. Meet with the nearest neighborhood association and have a heart-to-heart with their crime person. Do all the neighborhood infrastructure things to deter crime. e.g. street lights and closed-circuit cameras.
Do not let these events color your impression of the neighborhood’s quality. You are responsible for creating your little corner of the world. You can be proactive to make the neighborhood better. Better neighborhoods command improved real estate prices. The more you can improve the neighborhood the more you’ll improve your bottom line.
This probably is not something you can do with a manager while you’re living in elsewhere.
That is a beautiful house! I really love the color. It reminds me of the houses on the other side of the town where I live. I always liked to jog through there, back when I had time to jog, and marvel at the architecture. Homes just aren’t made like that anymore.
Is there any hope for a revival of the area around your home? They are doing a lot of that around here–trying to chase out the riff raff. If so, maybe you could wait it out for the property value to go up?
Mrs. Picky Pincher says
Aw man, I’m sorry about all of the nonsense that came with landlording. I have zero advice to offer, other than, “Damn that sucks.” I hope you have an easier time with your second year of home ownership.
Lady Dividend says
You’re making decent rent and have been able to increase rents which is amazing. Probably the previous owners didn’t do much upkeep and you’re actually keeping things updated. It would be a good idea to hire a property manager if you suspect there may be more work to be done.
Finance Stoic says
This is a beautiful house.
What neighborhood is this, roughly?
If I wanted to get the rents you are getting in my location, I would have to spend a minimum $400,000.
With financing, your cash on cash return, once stabilized, ought to be quite good?
Gwen [Fiery Millennials] says
Hi FS this house is in Iowa. It’s an excellent investment in the right neighborhood!
You could also factor in the write-offs all those expenses will help you with come tax time. As a landlord, I would definitely set up your LLC and take advantage of the liability protection and pass through income benefits. Your accountant will also save you lots on taxes with depreciation. So even though you show a net loss, the end result after write offs and depreciation make it a bit easier to stomach.
Also try to use as many business credit cards as possible to gain bonus points while paying for those repairs. It’s a nice consolation to get that bonus load of points when you have to drop big coin.
I guess for tenants, it appears you’re doing alright at this point. I’d almost consider opening up to Section 8, but I’ve heard horror stories about how poorly that program is run. Haven’t tried it — hope I don’t have to.
Gwen [Fiery Millennials] says
That is a very fair point! I don’t know how much of an impact the house and projects had on my taxes but it wasn’t insignificant, that’s for sure. I’m looking at a PM who is also an accountant and offers PM strategies based on his accountant experience. It’s an intriguing concept!
Yeah, well, please don’t take too much of my advice on this just yet. Full disclosure, I’m currently digging deeper into the world of LLCs and finding it less attractive by the minute. I think *if set up right*, an LLC can provide protection of your personal assets if the LLC is sued. But the title and mortgage are in your name — which leaves a key in the door for getting sued for your personal assets. Sigh… There is a warranty-deed option to transfer the name to the LLC, but this could lead to the bank calling your loan, meaning you have to pay the balance of the mortgage. Double sigh…
As for tax advantages, there are a few, but it’d take a CPA (your friend?) to decipher the usefulness in each case:
For now, just be sure you have a decent umbrella policy — a $1M policy usually runs $150 to $300 per year.
Angela @ Tread Lightly Retire Early says
Agreed on the tax implications — you can’t look at the whole picture without factoring in write offs, depreciation, etc. There’s a reason though why I don’t dabble in rentals myself even though my husband and I have such a solid background in real estate and construction; we don’t want to have to deal with the headaches. However, most people I know with really large incomes/net worths got there through real estate. Good luck on year two!!
Well. You survived. Both figuratively and literally.
Keep it up, and make the most of the opportunities. And take the lessons learned and internalize them and use them going forward.
I think you’re doing great with the real estate in a rough market, just gotta keep pushing through and work on making your processes more efficient (tenant screening, etc.).
After spending way too much time researching cameras and being unhappy with the standard, expensive 1080p ‘smartcams’, I just went all-in on the same Reolink cameras (TWO kits of 4 1440p outdoor POE cameras + 2 TB NVR). 2–3 cameras will watch over one property, while the other 5–6 cameras will watch over three structures in close enough vicinity to share an NVR. I’m really excited to see this was your choice as well and that it seems to be working out!
Once again I am still not interested in real estate at the current moment and your posts are only solidifying my decision. Proud of you for making it a year, hopefully it will get better when you don’t live there anymore. So close!
The problem with residential real estate is that you get the best cap rates on sketchier nabes/tenants, but then you are stuck with the sketch! I had a rental for a few years that did not meet the 1% rule by any stretch of the imagination but always, always cash flowed positive and had prospective tenants lining up around the block. Fewer vacancies, fewer repairs, less wear and tear made it profitable and less of a headache.
I think the lessons I learned were you have to have money to make money, the 1% rule doesn’t apply if you have a great property and great tenants, and that for me finding a great property that appealed to conscientious folks with steady jobs was far more important than following any kind of rule. It cash flowed positive every year I owned it despite two new water heaters, two new laundry centers, new toilets in every apartment (get Totos) complete exterior painting, yard work, snow removal, new tenants in both sides, and major tree surgery. Rent was never late (I highly recommend using electronic payments) and they kept the place immaculate. And no bullet holes.
More power to you for sticking with this through thick and thin, but it sounds like it’s not making you money and causing you headaches. If your area will gentrify, great, otherwise, no shame in selling at a loss and taking a tasty, lovely tax deduction.
Best of luck.
Erin | Reaching for FI says
Oh my goodness that’s such a gorgeous house and I LOVE that color! Congrats on making it through year 1 (sorry to hear your tenant ditched you after two months though) and here’s hoping year 2 is better!
So how does this compare to the initial $20k budgeted when you purchased? Is this in addition to that?
Thanks for sharing your rental numbers and being brutally honest. I’m interested in rental properties and all other sources tend to only show the positive upside. Rarely do any other sources show a loss. It’s refreshing. Best of luck in year 2!
This is why I kind of struggle with making the leap to buying a duplex or triplex. Multi-family houses in my city are primarily in lower income, higher crime neighborhoods. Multi-family houses in semi-nice neighborhoods sell at a premium because the seller and other buyers are pricing in the rental income cash flow. This makes it very difficult to get a property that meets the 1% rule. The 1% rule itself is a bit irrelevant, since it doesn’t account for the current lower interest rate environment.