The importance of reserves when househacking!

[Kyle Curtin]

Hi everyone! I just wanted to share one of my learning experiences from purchasing my first 3 family househack in Leominster, Massachusetts back in December of 2021.

I purchased my property that was built well before 1900 and in pretty great structural condition. It has 2 units that use heating oil and one on electric heat. One big learning lesson that I was fortunate enough to be able to take away very early on in my investing career was how crucial having reserves is and how valuable not over leveraging yourself on your pre approval value may be.

Especially being an investment focused agent myself, I have always heard investors stress how important having adequate reserves is, and certainly made sure to follow their advice for my own 1st property that was given from collectively decades of investing experience. However, I came to personally realize the true value of this about 2 weeks after I closed on the property….

So my property is on a main Street in Leominster, so I began to wonder if I could convert my very old oil units to gas at some point in the near future because I didn’t have an active gas line in the basement. I called my zip code’s gas provider during due diligence (National Grid) and found out that there was indeed a gas main in the street and that if my application was approved, they will cover the first 100ft of gas line from the street to my property and install meters outside for FREE. I quickly grabbed a tape measure and discovered my basement was about 50ft at most to the center of the street. My very exciting plan was to wait until the spring (about 3 months) and fill out the paperwork to hopefully get a “free” gas line (so I think) installed as well as individual meters on my property, and then use the Mass Save Heat loan program to fund the conversion of these 2 units using a 0% interest loan over 5+ years and retain my cash liquidity for other costs while having cheaper fuel costs, and the reliance of brand new heating systems. Perfect.

WELL, One cold Sunday night (why wouldn’t it be LOL) I went down into my basement and found both (2) of my oil tanks slowly leaking from the bottom from rotting from the inside out over the decades. During my due diligence period, I knew these tanks were very old, along with my oil fired furnace and my tenants oil fired boiler, but nothing was leaking and everything worked as expected. My mentality was that these tanks were there for easily 30+ years and old but still standing strong, and what is another 3 months until I can convert them?

Well, to keep a long story short, I got a quote for $5400 to replace both tanks and the oil lines with brand new ones, and ended up taking it. From asking other local investors, this quote was really good and the work turned out amazing. I also was having that company service the units for the season because there was no history on when the last time they were done. They go into my unit and basically tell me they really recommend replacing the unit because it’s leaking oil as well, has primitive safeties, the ductwork wasn’t even screwed together and there was a crack in the heat exchanger and to make sure I had new CO detectors… I knew the unit was very old and did not look the best by any means and kept a mental note that it would probably need to be replaced in the near future but it was still pretty operational so I wasn’t too worried.

I figured I would get their quote and get a few more quotes from other companies because it needed to be replaced but had a little bit of time because the heat still worked fine and none of my brand new CO detectors have gone off ever and have been tested several times since closing. I walk into the house one day and it was very cold and noticed whenever the unit would prepare to kick the fan on, there was a very loud humming noise and I would have no airflow through the registers.

The fan motor to disperse the hot air fried on me, and that was another $550….

At this point I am using Mass Save not to convert to gas, but to replace my oil fired unit with another one because the quote I got was for $6250.

A little over a month after buying this property, I have paid another $5950 in cash, and took out a 0% interest loan for the other $6250 over 5 years in unexpected but necessary expenses…

Please don’t take this as me complaining, because I am not. In an optimistic mentality, I discovered the following in my journey so far:

•This leak was caught VERY early and resolved before there wasn’t a MUCH bigger problem.

•I learned how to deal with a crisis situation and stay calm and make sure the tenants are well taken care of.

•I found out how to coordinate with a contractor and get quotes and what goes into it.

•I found a phenomenal oil contractor that I will likely use for a long time and recommend to anyone in my area.

•I learned how to use the Mass Save program to successfully use a 0% Heat loan to turn a $6k+ expense into a $93/month expense without a cost to borrow the bank’s money and keep my liquidity for the next project.

•And lastly, how to keep calm when things are hitting the fan and remember the long term vision for the future.

Call me crazy, but in my mind, I may have spent a fair amount of money on elements that were totally unexpected right after acquisition, but with all of the hands on education and lessons that I just got, I am very ROI positive for the future and am blessed that I learned them on a small property like mine.

If there is anything takeaway from my story, it is to always have reserves at the ready when buying a property, especially a multifamily because you never know when unexpected expenses will come up, and you don’t want to be left naked when the tide goes out!

[Dave G.]

@Kyle Curtin You are spot on. Reserves do not get enough attention on BP. So many investors are getting leveraged to the hilt and miscalculating expenses and net income (if any) and risk finding themselves in an unsustainable situation. This exact situation happened to me in the early 90s, long before BP or the internet. I was a young investor and bought 3ea properties with nothing down on any of them. One had an assumable w/o qual FHA loan, the 2nd an assumable w/o qual VA loan and the 3rd the owner owned the property free and clear and I hand wrote the note on an 8.5"x 11" sheet of paper into my offer (and he accepted! From a 23 year-old!).

Anyway, after all my acquisition success getting 3 properties with nothing down, I rented them out and quickly started experiencing how properties need maintenance and things break. I was a young realtor barely making enough to pay my own mortgage. I had no reserves whatsoever to fix these rentals. When something broke, it went on a credit card and they were adding up. It seemed like the 3 of them took turns each month with stuff breaking. Fast forward ~18 months, I had to dump all 3 properties because I couldn't keep up with things. And obviously this was more than just a reserves problem, they were negative cashflow essentially. Years later, I got back into RE investment and the lesson of reserves was a key requirement as I began to build a resilient portfolio. 

I learned the hard way. A warning to aggressive, eager BP'ers, do not make the same mistake!