Make sure you have a very large reserve fund for landlording?

Question

Well its been a rough year as a landlord for me so far. Even worse than the year Hurricane Ike caused its damage. To date since January first of this year I have spent an average of $1475 a month for repairs and vacancies on four SFHs which totals $10,325 for the year so far. Vacancy costs only contributed to $964 of that total and the rest has been repairs. Each of these homes was completely rehabbed before becoming a rental as to reduce future repair problems. The average rehab cost was about 20k. The point being that even though everything that could maybe even consider breaking was replaced when I bought the house there are still stupid repairs that are not the tenants fault. The main point that I want to drive home is if you want to be a landlord you had better have a very large reserve fund. I use to believe that about 5k per house was a good rule of thumb but that is being tested right now. Every month like clockwork there is a repair to do and it just won't stop. I have never seen anything like it. Last year from September to December I spent 9k on repairs and vacancies. Much of that was my fault because I let a bad tenant slip through the screening process and I paid for it with a destroyed house. In eight years that was the one bad tenant. In those eight years though there were a couple of years that I did not have one dollar spent on repairs and vacancies so it has not all been bad.

After eight years of landlording with four homes this is what I have learned for me:
- leveraged SFHs really do not cashflow for personal spending. Cashflow goes right back into repairs and vacancies...all of it
- Appreciation and mortgage pay down are really the only way money is made landlording SFHs...and appreciation has been negligible the last five years.
-Paid for SFH are not worth the headache and risk as your ROI is low and all your equity is at risk
- Constant sacrificing to save money to buy homes is not worth it. Investment vehicles such as IRAs may not earn much but its much less sacrifice and headaches.
- If you keep sacrificing year after year to acquire more property then what have you really done. If you have to wait 20 years to see a good return on your homes then you may as well of used the IRA and freed up your valuable time. Also, SFH are actually diminished returns over time.

Well all that is only my opinion but for me I'm done with landlording, its just not worth it. I recommend buying homes with instant equity so that even in a down market you can sell and come out ahead. I use to believe Dave Ramsey gave good getting out of debt advice and terrible investment advice. I have become a believer in his investment advice recently. My plan now is to sell my homes once we have a solid market and use the gains to pay off my primary residence. Some may disagree with me and I'm glad it has worked for you. This is just my experience.

Adam K. · Answer

Keep your head up Wade. It sounds like you are due for a smooth year next year! This is just the way it goes sometimes whether its your rentals, your home or your car. I've had years where I spent zero dollars on my car other than inspection and oil changes and others where its in the shop 4 or 5 times at $500+ per time. The key with that is not to give up and sell the car you just fixed up! And I think its even more true for homes which have much longer lives than cars. I am currently rehabbing my first buy and hold investment property and I feel discouraged all the time at the amount of money and work, but I still believe it will be a sound investment in the long term. Keeping my fingers crossed that I will find good tenants.

Mike H. · Answer

One thing I would add though is that I think you're in that no man's land right now at 4 homes. I would probably agree with you that most of your cash flow is probably only going to cover your repairs and probably provide some money in your pocket (or reserves). I think your repairs for this year are well beyond the mean and would bet that you won't see those numbers every year. That being said, I think there is a noticeable jump in repairs once you get to that 10 mark and even moreso at 15 or 20. Thats when you really start seeing the historical averages come into play and the ability to leverage the cash flow to cover any repairs. I'm at roughly 7k per month in profits (before repairs and vacancies). And I'm guessing I typically spend about $500 to 600 a month on the typical repairs. And then I have about 3 or 4 big repairs (HVAC is the big one - either furnace or A/C, water heater, etc) a year. This year, I'm on pace to have about 8 months total vacancy for the year which would be an outstanding year for me. But you can see how much easier it is to absorb these types of hits. I'm sure I'm going to run into a bad year where I have 5 or 6 or even 7 big repairs. But at the end of the day, even if I have to replace a furnace every month at 2k, I'm still making an overall profit for the month. And thats where I believe the proof lies that you will make money in landlording overall - not just on the appreciation and principal paydown. My guess would be you might have had a really bad year this year. But that if you were to look at a 5 year period, I bet you will average a lot more than you think. With only 4 houses, you may very well end up with a couple of years with zero repairs and zero vacancy. And when you do, you'll wish you had owned 50 houses because of the all profits you'll be bringing in. I think those down times do make it tough to be a landlord. But over the long haul, you're going to make money. One other thing I'd be interested in knowing though. What types of homes do you have in terms of age. And what types of areas are they in? I'm just shocked at the amount of repairs you're running into right now. I understand if you had a major trashing and that schewed your numbers. But what kind of fixes are you doing that are running up the numbers so much? Could it be that you need to find a handyman at a lesser rate than say a plumber who will charge an arm and a leg?

Serge S. · Answer

Wade Guy Sorry to hear about your experience. I too feel your pain as its been a rough year for me as well. I had to replace 8 air conditioners in a 32 unit building and another 4 in SFRs. I also have let the wrong tenant slip screening and have paid for that. Sometimes I feel just like you but a few things put me back to reality. I have been landlording as long as you and I would provide the following counter to your points: - Much of your repair expense will be a function of your house which predicates the tenants you have. An old home in a marginal neighborhood will produce marginal tenants. I've learned you simply cannot make money in these situations. Where are your homes? - Expenses congregate back to 50% over time. Except for mutlitfamily where its usually 60% or more. - In parts of the US the equity has been fantastic. Homes bought 09-11 are up 100-150% in AZ for example. Statistics won't show this but but if you know how to buy properties at wholesale the equity growth combined with principle paydown where leveraged is significant. You say you have had these homes 8 years so sounds like you purchased the boom years. I don't know many landlords enjoying the experience of owning a home purchased in 2005. It all boils down to having the ability to buy right. The right home, the right price, etc. Make a mistake here and nothing will bail you out. I would ask yourself if you purchased right.

Jeff S. · Answer

Just for fun, go back over your entire ownership (tax returns) and see if expenses exceed 50%. If so, are your rents too low or are you just prepaying expenses that won't come up in the future. One year I spent 20k after spending very little for 13 yrs. It took a while to average out but it did. Don't know about Texas. My best profit is inflation over the long-term in a desirable city.

Manuel Gonzalez · Answer

Yea land lording is not easy but in my experience a great pm makes a big difference wouldn't say I'm a slumlord but I think its easier and profitable to rent to the lower middle class initial house price is lower rent is decent and in my case my houses are hardly ever vacant one leaves aunother comes in I just ask for them to report any water leak no matter how small put glass doors in showers so no water leaks out and monthly or bi monthly drop of decent a/c filters or I personally install them any thing else is just part of the game I have noticed that when it rains it pours some years are good and then the repairs come in last year I had to replace two roofs but I'm good till the next 30 years land lording has been good to me its not a get rich fast thing just a stepping stone for something bigger down the road good luck wade

Patrick G. · Answer

Wade, Thank you for posting your story. It helps solidfy in my mind, that I am doing the right thing for my family by taking it slow and more closesly following Dave Ramsey's investment advice. (I should note, that I am not following it to a Tee)

Sam B. · Answer

Wade Guy, thanks for posting. As others mentioned above, I think it's important for everyone to read these threads and keep things in perspective. My question, over the eight years of landlording, how do your expenses average out?

Patrick L. · Answer

I always install panel based surge protectors. Something like this: http://www.homedepot.com/p/Eaton-Complete-Home-Surge-Protection-CHSPT2MICRO/202800798#customer_reviews

Dawn Anastasi · Answer

Wade Guy sorry to hear about your experiences. Not everything you have said above holds true for everyone however. I have 7 single-family homes and have not had nearly what you have had. It is true that you have to have money set aside for repairs and vacancies, but not ALL cash flow goes right back into the house. Sounds like you just have had some bad luck. Perhaps it makes sense to sell off your portfolio and do something more enjoyable with the money? Landlording is not for everyone.

Patrick L. · Answer

This is how most investments fail. People run their numbers by subtracting their mortgage, taxes and insurance from the rent and say look at this great return I'm getting. Sometimes I'll have a property that needs $0 in repairs for the year, other years the same property could be $10k. So far in July I've replaced 3 water heaters, an entire roof, a flat roof over a porch, an A/C system, a dishwasher, a refrigerator, plus the normal service calls for smaller items (faucets, a/c service calls, leaking pipes, etc). You will have expenses with real estate, if you budget properly when making the investment you will still make money.