Repairs are eating cash flow

[Alana Nevares]

Hi, i had posted few months back, i invest in Cleveland (University heights, Cleveland Heights, Garfield, Euclid). Have 5 properties (1950s). We did inspections, being out of state we work with management companies, so far the experience with them has not been the best, as they don't think about us when deciding on repair costs and service calls are $75 for even checking a door. The worse experience has been Euclid with their inspections. 

After listening to so many podcasts, i can't believe the this is how it is for us. I think one problem is that each property cash flowed 200 to 300 per months and that does not seem enough. Also, perhaps it is the people that rehab their properties the ones that do make profit as they know how they did repairs and do them well. 

Quite frustrated at this point. Filling for taxes soon and hope that at least that part works. 

Should we just sell and walk out, or give it another year. We started a year ago.

thanks

[Don Konipol]

@Alana Nevares

Investors consistently underestimate both repair expense and reserve for depreciation ( in fact they often ignore it). The biggest fallacy in cash flow analysis is that depreciation is a non cash expense and hence should be “added back” to net income to arrive at cash flow. While this may work SHORT TERM, in the long run the allowable depreciation if spread evenly over 30-35 years is a decent approximation of what will have to be spent on replacement to ensure that a property is able to obtain the highest rent and sell for maximum price. What’s so misleading is that you often go a number of years before a big replacement item, like a new roof, is required. So if depreciation is say $3000 per year, you may go 9 years without a replacement expense, and then be required to spend $30,000 the tenth year. That’s why sophisticated investors establish a reserve fund for future replacement expenses.

And, as answer to your original question, no, local housing authorities do not care that you paid too much for your property; they don’t care that you miscalculated the condition of the systems in the property you bought; they don’t care that you leveraged too high and they don’t care that you left yourself without sufficient liquid reserves. What they do care about is that the property meets the minimum standards as required by the local housing regulations for habitability if you’re going to rent it out.

The last five years has been a cluster f of naive, inexperienced, poorly capitalized and unprepared wanna be real estate investors ( feeling fully “empowered” by obtaining information via books, video, on line websites, seminars, etc) buying properties that can’t possibly cash flow positively, especially in the long run when worn systems, such as HVAC systems, roofs, plumbing, electrical will need to be replaced or upgraded. Unfortunately, the people providing this misinformation either have a service to sell and provide an extremely biased model, or more likely are nowhere near the experts they claim to be. ( Much of what’s taught will only work if prices appreciate substantially and consistently). The end result is that prices have been driven up to a point where they bear little relationship to rents. And if the property was purchased with a variable rate mortgage, or with a balloon reset, then the fun may have just begun.