I haven’t talked about my recent property investment too much, so I thought I’d share a brief background on the investment I made last year and then highlight a few things I wasn’t aware of going in that I wanted to pass on. Overall, it’s been a net neutral venture financially, but next year is on track to be much better (I’ll explain more on that). But there were certainly some surprises along the way.
I have a friend from years back that bounces ideas off me now and then, and was also part of my investment club from back in the day. Well, he was investing in college real estate and had been very successful over the years and we’d always talked about partnering up next time something new came around so he could mentor me and I could take some of the administrative burden to help him out for a mutually beneficial relationship. So far, it has worked out the way we planned with that aspect. It’s the financials that have been impacted by a few unforeseen events. We bought 3 houses (5 units) at a college a few hours from our homes and kept the old property manager on from the prior seller. The units were all rented for the year we bought and we had leases signed for 4 of the 5 units for the following year (now 2012). Here’s where the surprises popped up:
Surprises as a New Landlord
Plan on Spending Some Time in Court – Something my partner and I were a bit complacent about was the amount of tenant damage that was going on. While we’d walked through a couple times during the school year, it was tough to get a gauge on what the condition of the property was when the tenants first moved in (we bought during the school year, so no baseline) and what it would take to bring the properties back up to snuff for the next tenants next year. So, we ended up spending thousands on each unit to replace carpets, fix holes in walls, and many other things. While the tenants security deposits covered some of it, we’re going to have to go after them in court for the excess since nobody’s volunteering to pay up per our deposit reconciliation letter. Ironically, some of the tenants had the gall to demand their entire deposit back after they trashed the residence.
Refi or Buy a Personal Property First! – When rates dropped through the floor this summer, I pulled the trigger on yet another refi for my primary residence. What I wasn’t aware of was what a hassle I’d get from the banks for being a landlord. They make all kinds of crazy assumptions if you’re an owner of less than 2 years, like there will be no rental income for 2 straight years (even though I show signed leases and incoming rent checks in my bank statements) and as a partner, they wanted to assume I had 100% of the liability for the properties, even though we had an operating agreement showing me as a partial owner. So, it took a lot of explaining and a strong personal balance sheet to win them over, whereas in the past, a refi would have been cake.
Everything’s More Expensive Than Planned – Just about every expense we estimated going in ended up costing more. While insurance and the mortgage were largely predictable, getting legal expenses settled for setting up operating agreements was expensive, as were all the repairs required over the summer turnover period. Buying older properties has resulted in a lot of unexpected expenses as well – many leaks, damaged walls/ceilings, replacement of water heaters and more. We did budget a few thousand per property, but ended up spending several thousand each. Thankfully, we’re still cash flow positive and haven’t had to put more money in since the properties were showing so favorable on paper initially. But the returns haven’t been as positive as initially projected.
The Insurance Company Timing – Here’s one we certainly didn’t expect. While we had to have an insurance policy in place prior to closing, as luck would have it, the insurance company didn’t send an inspector out until AFTER closing, so even though our own hired inspector pointed out some deficiencies, we didn’t mandate that they were all repaired since the properties were being sold as-is. Well, once the insurance company delivered their demands (they were to cancel within 30 days if we didn’t remediate), that was another several thousand dollars out of pocket. We had to immediately repair things like cracked sidewalks, decking and windows that we thought were fine from a safety standpoint ourselves, but now according to the insurer. What I’d advise if you buy an investment property is to try to get your insurer to do their inspection prior to closing so you could renegotiate a sale price based on necessary repairs.
Your Property Manager Is Key – We don’t let on to him, but our property manager has a lot more leverage than he knows. He’s the one taking the calls at 2AM that someone lost their key or there’s a water leak. He’s also walking through occasionally to check on damages post-parties, chasing down late rents and re-signing tenants for the following year. Given that we’re 2 hours away, we wouldn’t have the time or inclination to be doing these things on our own. What was a surprise is the vast difference between two schools. My partner has several different apartments and houses at another college and it’s very low key and easy to manage. This school seems to be much rowdier and expensive to deal with, hence the lower price we got the properties at I suppose.