How My Burst Pipes May Turn Into a 40+% CoC Return!

[Christopher Erwin]

Re-Post from my BP Blog --> My recent tenant mishap led to burst pipes and thousands of $$ in plumbing, carpet, paint & cleaning. Worth it? 100% IMO...read on for why! 

All feedback is welcomed and encouraged.

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Read Time = 5 min

BURST PIPES

Turning Bad Into Good.

When I acquired my Omaha duplex in May 2017, my rents were ~30% under market. I therefore set a strategy with my property mgmt to let my two tenant leases go month-to-month in October, and see if one of the tenants rolled off.

In mid December my downstairs tenant gave 30 days notice, and scheduled a walk-though and key turnover for mid January. Unbeknownst to my mgmt, the unit was prematurely vacated in late December, and the furnace was “accidentally” shut off during the move-out.

• LESSON: Double confirm the tenant move out date. Vacant dwellings pose a variety of risks (vandalism, fire, water leaks, etc)

During the next few days Omaha temps dipped to -20. With no heat nor running water in the unit, the water in the pipes cooled drastically, causing the water to expand and severely increase pressure inside the pipes. They soon burst.

I woke up on Jan 4th to an email from my property mgmt that an emergency tech had been dispatched. Fortunately, my tenant upstairs heard water running and immediately called it in, and my property mgmt emergency protocol kicked in.

First, the tech shut off the water main to stop the water flow, and then a plumber assessed the damage…

The water meter to the unit froze and cracked. After removing the meter, the plumber temporarily turned on the water to assess leak sources. In the kitchen, water leaked from behind the sink, through electrical outlets, from cabinets and from the ceiling. The flowing water spread throughout the entire apartment, damaging all carpet and pad.

Oy.

In short order, mgmt placed commercial fans throughout the unit to dry the carpet / pad and prevent mold and rot while the plumber got to work. Numerous wall sections had to be cut to access the broken pipes, and then the broken pipe sections were cut out and rebuilt. My kitchen faucet also had to be replaced.

My final plumbing bill was $2,022.61. Labor was $1,633.50 (81%), and parts were $389.11 (19%). The work was completed within four days of the incident.

• LESSON: Keep sufficient funds in your mgmt’s dedicated account for your property. Mine ran low and I had to make an emergency deposit to keep the work on schedule. Best to be proactive here vs reactive.

A few days later, we had all the carpet, tack strips and pad hauled away. It was not salvageable, and with plans to place a new tenant and raise rents, it was time for new carpet anyway. Total cost: $472.37

My mgmt then got an estimate for new interior paint, as there was some water damage to the walls, but we also knew a fresh coat of paint would go a long way in helping to place a premium tenant at higher rents. We made sure to consolidate turnover and reno work with the water damage repair, as every additional day of vacancy reduces my annual CoC return.

• LESSON: Prudent owners will pay a premium for a trustworthy crew that can work fast…better to spend a few hundred dollars more if it can prevent a month of vacancy, which could result in thousands of lost income.

I shared the paint estimate with my Omaha mentors, one of whom owns a painting business. He beat the bid and had his team repaint the entire unit interior: walls, ceiling, doors, trim and closets. They did fantastic work and finished in under a couple days. Total cost: $2,000. For size reference, my downstairs unit is 1,076 sq ft, and is a 3 BR / 1 BA.

• LESSON: Since my chosen paint vendor was my contact, I paid him direct and avoided the 10% project mgr fee by my mgmt. I have no problem paying fees since it saves me time (and time is $), but I appreciated this carve out.

Shortly after painting we had the new carpet and pad installed (813 sq ft). We ensured to have the paint work done prior to installation of new carpet to prevent premature wear and tear. Total cost: $1,156.74. On a sq ft basis, wicker carpet was $0.83, 3/8 6lb pad was $0.21 and installation was $0.31.

Now that the reno work was done, it was time to prep the unit for marketing. My mgmt had the place “construction cleaned” ($280) and professionally photographed ($60). My peer Omaha investors specifically called out the quality of the “vacuum lines” in my listing photos ;)

• LESSON: High quality photos are worth every penny, as they’ll help your for-rent listings drive more tenant leads, and conversions to unit tours and applications. Overall, more prospects in less time (remember, vacancy costs?!). Get a professional camera or hire someone. It’s the same reason why Airbnb used to provide free photography services…it’s good for business ;)

The last thing to assess prior to listing was the new monthly rent. My mgmt and I decided that while the place could rent for $950+, it could take a few months to find a willing tenant with the appropriate credit profile. We listed at $895. Due the smart pricing and great timing (spring!), the prospect funnel metrics are strong. To date, 190+ leads, 80+ pre-qualified, 45+ viewings.

• LESSON: Another consideration we had in pricing was reno payback period. The paint, carpet, cleaning and photography costs came out to ~$4,000, or the unit turnover costs to support raised rents (excl the water damage). With the new rent at a ~$200 monthly premium ($895 vs $700), the payback period was 20 months. Keeping it under two years was a gut check my mgmt and investor peers used. Another POV is the CoC return. The $4,000 one-time spend will bring in an additional $2,400 of annual rental income, or a 60% annual CoC return. Of course, there are more costs here. 2.5 months of vacancy = $1,750 ($700 x 2.5) of lost income, my mgmt charges ¾ of 1st months rent as a placement fee, or $672 ($895 x 0.75), I’ve paid the utility bills for the past couple months ($200) and some miscellaneous listing costs. Adding in these costs makes the CoC return = 36% ($2,400 / $6,700). Still a good investment for my target return threshold.

The unit remains un-rented, but I expect it to be filled in the next couple weeks (nudge nudge Wistar mgmt!). Smartly, mgmt has not rushed to rent it to the first set of applicants, as upholding credit standards and other tenant criteria can prevent a lot of future headache and costs that can far outweigh the pain of short term vacancies.

The wildcard upside?

My insurance claim.

I notified my provider, Berkshire Hathaway Homestate, immediately after the incident. That whole process is a separate post, and includes filing the claim, coordinating with the adjustor and my mgmt, providing the adjustor receipts and documentation, catching that my claim reward accidentally excluded a material part of the plumbing repair, receiving two separate claim checks, depositing them without realizing they required endorsements by my mortgage servicer, having the checks rejected by my bank while incurring fees, having the insurance company re-issue the checks directly to my loan servicer, finally depositing the checks this past weekend…and while I write this I’m realizing I may have coverage for lost rental income to follow up on!

Total insurance payout: $6,663 ($7,663 less my $1,000 deductible). NOTE: this is nearly the exact sum of all my repair and tenant turnover costs!!

• LESSON: I used short term pain to pursue long term opportunity. Burst pipes and filing a claim was a pain in the a*s, but the timing was actually fortuitous. We remained positive and took advantage…because what other options really exist?!

Here’s to getting a new (and great) tenant in ASAP!!

#realestate #realestateinvesting #renovation #insurance #leadership #positivity #investing #inspiration