Am I doing Something Wrong?

Question

Hello fellow landlords! I have 5 rental properties, and all of my tenants have been good so far. My tenants use section 8, so all rents are paid on time and usually have minimal issues.

My questions is, I am becoming frustrated because I have purchased these 5 rentals over the last 3 years, but I have nothing to show for it. I cash flow about $500 per property, so I should be seeing $2,500 profit per month. The problem is, the repairs and maintenance I am making to the properties is eating all of my profits. Every month something breaks and someone needs a new water heater, new stove, new roof, the list goes on and on. Not to mention paying someone for labor. I have made no profit at all in these last 3 years, in fact I often have to pull money from other accounts to pay for the repairs needed.  Am I doing something wrong? Am I too nice of a landlord?

Tim Herman · Answer

@Chris Bergeron when you bought did you factor in vacancy, repairs and capex. The minimum for those costs should be $200-250 per month. Capex, big ticket items fail at different times. This month a roof, next month an appliance, etc. That is why reserves are so important and budgeting for those big tickets items are a must.

Chris Bergeron · Answer

Hey everyone! Thanks for your responses! I wanted to add a few things, I am for sure getting negative cash flow, in fact I sometimes have to pull money out of other accounts just to pay for rental repairs. I should be cash flowing $2,500 a month since January, but I currently have $0 in the rentals account. There are major repairs every single month that I have to pay for. I wonder if I am just having bad luck these last few months, or getting screwed by my contractors? I've had to replace 3 out of 5 roofs this year. Sometimes all 5 rentals need repairs at the same time, making my contractor run all over the place. Is this normal, or am I just having a bad year?

Aigo Pyles · Answer

If you are getting negative cash flow then something is wrong. If it is break even there is something you need to improve on how you handle your cashflow.

Simon W. · Answer

First thing first, how does your income statement look like? Are you allocating them correctly or you just basing it off on your bank statement?

If you are expensing more than the revenue, then something is wrong. Like other BPers CapEx needs to be considered. If you are doing CapEx then cash flow won't look good but that should be appreciating your asset.

Jennifer T. · Answer

The short answer is, "Yes, there is something wrong."  I can't tell what the problem is by your post, but I'll make some guesses.  I have nine rental properties and go months without a maintenance/capex issue.  Much less averaging $2500/month in repairs/capex.  We also DIY most minor/medium repair items.  But I also buy distressed properties and fix them up like new, so I do put a lot of that money in on the front end.  I also buy my properties at a price and ARV comps that make sense.  It sounds like maybe the properties were in mediocre/poor condition when you bought them.  Hopefully that means that, as you are fixing them up, you are increasing their value and thereby increasing your equity.  Even if that isn't a value you can put in the bank right now.

When I am estimating cash flow for a property I am considering purchasing, I include an expense of 18% of the total gross rent for maintenance, capex, and vacancy.  So, if you weren't already including something like that in your monthly cash flow numbers, your expected $500/month net cash per property was already a false expectation.

I also know the approximate lifespan that's left for major items and keep that in mind for what my "all in" cost for a property will be.  For example, I drove by a rental property that was for sale.  On paper, the numbers looked good.  There were a lot of interior photos and, at least from those, the property looked to be in decent shape.  On my drive-by, everything on the exterior looked great, EXCEPT the roof and gutters.  They were bad.  Really bad.  Like the kind of bad that made me suspect there was probably some water intrusion in the attic and walls.  It was priced a bit lower than comps, but not enough to justify a new roof.  Plus this was a lower priced, small house that only rented for $900/month, so a new roof right off the bat would have taken almost 3 years of cash flow.  I thought about making a much lower offer, but didn't bother.

If you aren't doing this already, be very exact in your accounting and do this per property.  It should help you better analyze and pinpoint what is going wrong.  I get the impression you are not doing this and more just "feel" like there should be more money accumulating in your accounts.  But maybe you have had some "income creep" that is unrelated to the rentals so it feels like you aren't making a profit.  I'm sure it's not just that and might not be that at all, but wanted to throw that out also as a potential factor.

Section 8 tenants have a lot of pro's.  But one of the con's is they tend to be harder on rentals.  Plus the annual inspections means you sometimes have to fix things that don't matter.

Stephen Brown · Answer

Simply put, what you project to make doesn't always happen in reality which is why investing is so scary. Keep going though, 3 years is nothing compared to 30!

Am I doing Something Wrong?

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