What can you expect after owning a rental property for 1 year?

We created this blog post as a follow on piece to the blog post titled: You bought your first rental now what should you expect?

The first thing you will understand after your first year of owning rental property is whether or not real estate investing is your path to future wealth and security.  We say this because real estate will test your mental toughness in the beginning.  In your first year when you only have one or two properties any repair, issue or vacancy is magnified and thus likely to cause more stress. At some level we believe the business is testing to see if you’re a true believer.

The following are just a few examples of tests we encountered in our first year (many years ago):

Our first tenant moved in and paid rent like clock work for 3 months and then never paid again.  We were rookies and desperate to get some cash to help pay for the mortgage so we listen to the excuses to our detriment. When all was said and done we lost 4 months rent plus had to pay the eviction cost and make ready costs after they were removed by the sheriff.  If your first tenant is late please evict them as soon as it is legal and learn from our mistake.  We estimate this mistake cost us an extra $2,000 in lost rent and expenses simply because we didn’t start the eviction process soon enough.

Our second rental property acquired in the first year was a duplex with two houses on a single lot.  We went the extra mile with this duplex and added a privacy fence between them and created their own separate yards, etc.  The front unit and larger of the two rented very fast while the second house only had access from the alley.  This was not ideal but it had its own garage and thus was still a very nice place to rent.  After the unit was complete the tenant in the front unit said they had a friend that is looking for a place and they would love them to be their neighbor.  We didn’t have any other leads at the time so we processed the application and approved the tenant and we moved them in.

The fun started almost immediately.  With in the first 3 to 4 weeks the friends were fighting and arguing over the littlest things.  It had gotten so bad that the police had been called out a couple of times.  What can a new investor do with this mess?  Unlike our first tenant at least both of these tenants kept paying rent but it was clear at least one of them was going to have to move.  So we offered them both $100 to move quietly which neither of them took.  When that didn’t work we simply notified both tenants that if the issues didn’t stop immediately that we would evict both tenants for violating their lease terms. This worked and things quieted down. The front tenant ended up moving on their own about 3 months later. 

During the first year we also suffered from a couple of unplanned expenses. Remember we were rookies at this time so we didn’t understand the importance of budgeting repair costs every month because you will have surprises so keep reserves.  We had a Tree root issue with the sewer line ($3,000), we had to trim back a very mature tree because our insurance required it after their drive buy inspection ($1,250), we needed to replace the springs on the garage door ($400), we had a roof leak after a severe storm ($2,500), etc.  Stuff like this happens and as you encounter them once you can plan for them.  For example, now we know to plan on trimming any tree that is even close to hanging over the roof.  We just budget the expense and do it quickly during the make ready process.

Another area where you will uncover some surprises is when you add up first year rent, expenses and profit/loss.  After owning a fair amount of property for many years now we have come to see the first year and more specifically the first 3-6 months as the seasoning process.  This is when you will take an asset and turn it into a functioning income producer and to do so you will need to pay the price upfront.  So don’t be surprised if your first year net income is much lower than you expected because your expenses are much higher.  In our experience many of these seasoning expenses are one time things and will not need to be repeated. Thus year two should more closely match your expectations. 

At the end of the first year you will have been tested many times.  We see three possible outcomes:

You may decide that real estate investing is some big con that can not be done profitably. You may convince yourself that real estate investing doesn’t work today for various reasons.  If this happens you will likely sell your property quickly and you will take a loss due to all the selling costs.  If this happens to you we can already here your stories (excuses) to your friends. They will go something like this, “Yeah we tried Real Estate Investing and it is just a big con, you know we had this and that happen to us and we got out quick, boy were we lucky to get out”.

The second option is similar to the first except you never sell and for that matter you never buy another property again.  On some level we see this outcome as the worst of all outcomes.  At least in the first option you make a decision and execute on it.  In this option you decide to do nothing which is almost cowardly.  In our opinion you are either in or out of the real estate investing market.  However, we are confident that in 10 years you will be amazed at how much wealth you created by those first year purchases.  You may even tell your friends after 10 years of holding the property how much of a real estate guru you are and they should follow your lead.  Funny how the longer you hold real estate the better it looks.

That leads to the final option.  You will see any year one challenges as just small speed bumps.  You will continue to execute on your plan and refine your investment options.  As your experience level increases you will find bigger and better deals.  With this option you will always be looking for the next real estate deal and you will be setting your family up for a tremendous future of security and wealth.

Good Investing

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