Tiki Torches and Tenants

As some of you may know, my wife and I have over the last few years bought a house, lived in it a year, and then moved out and bought the next one.  We now own three properties (see update below) , one duplex and two single family homes.  One of the homes we live in, and the other two are rentals.

Often when reading blogs you hear only about the good, tenants paying on time, minor maintenance and boom…collect the cash.  All passive income right?

This month we have a couple of good ones to share.

Part 1: Tiki Torches

A few weeks ago we get a call from our old next door neighbor.  He tells us he woke up to a  a crackling sound in the back yard.  Low and behold our tenants had a party in the backyard complete with tiki torches.

Afterwards the party moved up the street to a local watering hole leaving the tiki torches lit.  Well of course one of the torches fell over catching the wooden fence (wood floats don’t you know?…like a duck) on fire.  Luckily our neighbor was able to put the fire out, and then put it out a second time when the embers lit back up. Without him being there, we might have been talking one or two houses that caught on fire and potential injury or loss of life.

Damage was a planter and a couple of sections of fence.  Repairs to the fence ran $1,472 which will be passed on to our renters.

They aren’t dummies, combined this young couple makes something like $170K-$180K/year….well except they didn’t think about putting their tiki torches out before they went to the bars….so maybe we can call them dummies with regard to tiki torches.

Part 2: Tenants

About the same time as our tiki torch incident, I get a call from a realtor doing a tenant background check.  But self….weren’t all of our tenants under contract for a year or more….and the ones that we were being ask about were under contract until May of 2017….and they signed a lease extension in October….self, why would I be getting a call from a realtor?

When I was growing up, never once in my wildest dreams would I have terminated a lease early, at least not one that I could pay.  Its not that or tenants lost a job or anything, nope, something they liked better came up….squirrel….

Look, we decided not to keep our tenants in an adversarial rental situation, we settled on an extra months rent to terminate the lease. (probably should have held out for two)  At least to their credit, up until then they had been low maintenance tenants, paid on time and did fully serve our their first lease.  When they did end up moving out, the place was in good shape.

Don’t underestimate a renters ability to do odd things.  Even when you think you have them under a long term lease.

The Result

OK..  Because we had tenants who were moving out, we thought it might be a good time to assess the market conditions of our duplex.  Right now within a block of the duplex there were 10 or 12 houses that had been scrapped and replaced with high end condos.  The market in the area is red hot.

So we put our duplex on the market.  Low and behold, in the first week we had 3 offers, one in cash.  We chose the cash offer and got just a couple of thousand dollars under list.

We actually had a really nice appreciation on the property since we bought it in 2013 (about +100K on a $280K purchase price).  I doubt we can get that kind of run in the next few years and we thought it would be wise to sell and book some profits.

Update…last week we completed the sale of our duplex…and that will be reflected in our next monthly net worth update.

Oh…and the property game continues.  we have a new house under contract.

 

 

 

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Rental Income 2016-04

Gross Revenue : +$5,629

Duplex Unit#1: $1,375.

Duplex Unit#2: $2,640…a funny thing happened on the way to the forum.

Well, we thought our downstairs tenants had re-upped their lease thru the spring of 2017.  Found out they thought otherwise when a real estate agent called me for a tenant verification. The lease said they were under contract until May of 2017, it is clear today’s youth thinks differently than my generation about the importance of someones word and a signed contract.  Never once would I have even thought about ending a contract that I could pay early just on a whim (in this case these guys wanted to live with their buddy on a lake).

You can hold a tenants feet to the fire, I mean we could have enforced the contract, but do you really want to go a year with an adversarial relationship with your tenant?  Not really.  So we settled on letting them out early if they paid a fee of a months rent to cancel the contract.  So instead of the normal $1,320, we ended up getting twice that this month, but will have nothing coming in next month.  More detail on this later.

House: $1,614 – This reflects a half months rent, (tenant moved in mid month in March.  They paid first March in full and the April is then a partial month.), plus a $250 non refundable pet deposit.  Next month we will be back to regular payments of $2,200/month

Expenses : -$4,152

Duplex: -$2,177

This breaks down to $2,167 for our mortgage, and $10 for Office Supplies and Gas (mowing).  The water and trash bill didn’t hit in April.  (we will likely have two water bills next month)

House: -$1,976

Our House payment was $1,976 split between a first and second mortgage.

 

Monthly Free Cash Flow : $1,477

Duplex: $1,838 – Satisfied…well sort of, out tenant moves out in May, and we will look to do something else.  (stay tuned)

House: -$362 – expected but not yet satisfied…next month we will have a full month rent, and hopefully we can get some traction.

 

(disclaimer: I am pulling the data out of our Quicken system. I may on occasion make category revisions, therefore the month by month updates may not tie exactly to the year to date or year end totals.)

Rental Income 2016-03

Gross Revenue : +$4,895

Duplex Unit#1: $1,375.

Duplex Unit#2: $1,320

House: $2,200 – Finally!!!….Our tenants moved in mid month.  They paid first month up front, so next months rent will only be a half month.  But still, we are getting money in the door.

Expenses : -$4,831

Duplex: -$2,374

This breaks down to $2,167 in mortgages, and $207 for water and trash.  We had 2 water payments hit this month, $101, and $106.  (Just the luck of the draw in terms of how the calendar hit.)

If you notice, our escrow readjusted (happens annually) and raised our monthly payment from $1,886 to $2,167 or +281.

House: -$2,457

Our House payment was $1,976 split between a first and second mortgage. If you notice, our escrow readjusted (happens annually) and raised our monthly payment from $1,512 to $1,976 or +464.

A note, I know this seems like a huge increase and it was, but about $300/m of the increase is due to the payback of an escrow shortage.  When we bought this house, it had been totally redone.  The property taxes went way up and left a shortage in the escrow account.  Instead of paying for the escrow shortage up front, we decided to let the monthly payment go up for a year.

The reality is this $300/m or $3,600/yr was really property tax from 2015 when my wife and I lived there and I  would expect a $300/m decrease in 2017.

During the month we spent, $120 to clean up the yard and get it ready for the new tenants, $160 to fix a gate and $15 more on cleaning supplies.

On a side note, those magic erase sponges are fantastic.  We were able to use them to clean up some white trim around our windows and doors.  Because they worked so well, we didn’t have to repaint the trim saving a ton of time (and money).

We also spent $186 on electric, water and trash during the month.  These expenses go away in the future as the tenant will be paying for them going forward.

 

Monthly Profit : $64

Duplex: $321  – Satisfied…but holy cow that increase in property taxes hurts.

House: -$257 – not satisfied…yet

Overall we are getting there, next month will be tight because we only get a half month rent out of our house.  I would expect things to really kick in during May.

Since I began these updates the cash flow has been mediocre to poor.  A lot of things have happened, we had a lot of expenses that were incurred as we moved out of the house and got it ready to rent.  To be fair we would have had the exact same expenses had we been getting it ready to sell.

I sort of discount the $300/M that we are paying back to the escrow account, it really is not a rental expense per say, rather the increased escrow is a property tax expense we incurred while we lived there that is now being paid by our tenants.

Most bloggers don’t mention this, by the time you clean up the property, make small repairs, paint, have property taxes readjusted etc, that it seems to take a year or so before a property starts to make money.

It gets better, rents typically go up a little each year, the property taxes have had their initial jump, any major repairs have been completed etc.  You have changed the locks, fixed the paint colors etc.

Also don’t forget, the way the properties are leveraged (the types of loans on the property) play a huge part in the cash flow.  For instance we have PMI on the duplex (approx $60/Month), and have a second mortgage on the house.  ($220/Month).  Those expenses will go away as we pay down the loans.

But its not just cash flow….

We put down total cash of about $63K to buy the duplex (2013), $57.8K+$4K in repairs (foundation, fence, minor plumbing etc)  …$4,500 of the $63K was stupid tax.

On the house we invested $19.8K (2014) of cash to close.

Conservatively we have about $110K in unrealized price appreciation between the two properties (after closing costs) if we chose to sell. About $60K from the duplex, and $50K from the house.  So 132% ROI since 2013.

Our rentals are in trendy areas of Dallas (Lower Greenville and the Bishop Arts district).  These are booming neighborhoods with a ton of development .  I think they will continue to appreciate.  The duplex is a likely target for developers, there are probably 10 or 15 high end (350-550K/unit) condo/town home developments within a 6-8 block radius of our place.  To the right developer, the property might be worth an additional $30-50K or so above what we are calling the conservative number.

Plus just by paying the payments, we have a monthly reduction of $700/month on the principal owed between the two properties.  And all of that is being paid by the tenants.

If you are thinking about getting into the rental game.  Have additional savings above and beyond the down payment and closing costs that you can use for unanticipated expenses.

So overall I am very pleased with what we have done so far with our properties, we have bought houses that we could live in initially.  Then move on and rent out behind us.

 

(disclaimer: I am pulling the data out of our Quicken system. I may on occasion make category revisions, therefore the month by month updates may not tie exactly to the year to date or year end totals.)

Rental Income 2016-02

Below are our monthly updates.  (disclaimer: I am pulling the data out of our Quicken system. I may on occasion make category revisions, therefore the month by month updates may not tie exactly to the year to date or year end totals.)

Gross Revenue : +$2,695

Duplex Unit#1: $1,375

Duplex Unit#2: $1,320

House: $0 – This property gets a tenant mid March

Expenses : -$3,766

Duplex: -$1,919

This breaks down to $1,885 in mortgages, and $33 in painting supplies.

House: -$1,848

Our House payment was $1,452 split between a first and second mortgage.

During the month we continued to get the house ready for rental, we spent $120 on paint and painting supplies.  We spent $41 on cleaning supplies.  And spent $173 on smoke detectors and other electrical supplies.

Utilities during the month were $62.

Monthly Profit : -$1,072

Duplex: $776  – Satisfied

House: -$1,848 – not satisfied…..continued duh

The property is almost there, it definitely took a lot longer to turn than it should have.  One of the difficulties in buying and then moving every year or so is that it is draining to simultaneously move/unpack in your new house while spending effort to get your last house ready to rent.  Especially as in this case we bought in November right before Thanksgiving and Christmas.  In addition we did some remodeling to our new house and then did some painting and other work on our old house.

The good news is that March, knock on wood, is shaping up to be a lot better and we should hopefully see the earnings/cash flow of these rentals take shape.

Rental Income 2016-01

As I may have mentioned in other posts on my blog, we own a couple of rental properties.

We bought a Duplex in the summer of 2013 and lived in one of the two units for a year.

In the summer of 2014, we bought our second property, lived in it a little over a year and in the fall 2015 bought a third house that we just moved into.  Our second house was rented as of March.

Below are our monthly updates.  (disclaimer: I am pulling the data out of our Quicken system. I may on occasion make category revisions, therefore the month by month updates may not tie exactly to the year to date or year end totals.)

Gross Revenue : +$2,695

Duplex Unit#1: $1,375

Duplex Unit#2: $1,320

House: $0 – This property gets a tenant mid March

Expenses : +$6,619

Duplex: -$2,019

This breaks down to $1,885 in mortgages, and $134 in expenses.

$6.64 in mailing expenses, $21.48 for a new fence latch, $1.02 for a light switch and $104.42 for water/trash.

House: -$4,599

One of the lessons I have learned as a landlord is that it is really expensive to turn a property.  Between the vacancy, the cleanup , repairs etc.  The costs always skyrocket.

Our House mortgage was $1,452 split between a first and second mortgage.

In Jan we spent $300 on a make ready cleaning, that included a generous tip since our housekeeper cleared her schedule to get to our place.

We had some electrical work done $1,125, bought some of the lighting supplies, cans, covers, pendents & bulbs $263.  A new mailbox $70.  A new dryer vent $39.  A couple of new appliances including a dish washer $910 including installation. Towel racks $243, respirators $27 (we did some cleaning and painting).  Utilities $170.

We have a premium property in an up and coming neighborhood, so we spent a fair amount to get the house ready to rent.

Monthly Profit : -$3,924

Duplex: $676  – Satisfied

Rent was paid on time, minor repairs and this profit reflects cash out of profit.  Ie it ignores the pay down of principal, depreciation, tax benefits etc.

House: -$4,599 – not satisfied…..duh

Certainly not a positive month for the house.  But we are looking at some up front expenses, and I think this house will cash flow very nicely in the future.

 

 

 

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