After over a year and a half of being a landlord I’ve decided it would be helpful to take some time to reflect back on a few of the good the bad and the ugly moments that my partner and I have experienced so far. It has most definitely been an interesting ride with plenty of ups and downs along the way but all in all it has been one big learning experience that we’ll be able to continue to build the business on. Something I feel that is true about being a first-time landlord is that most problems are one-time fixes. I say that not because you won’t ever have to fix that same problem again, you absolutely will. Once you’ve dealt with the issue though you now know who to go to and how much it will cost the next time it does come up. You don’t have to go through trial and error (read time and money) determining how to or who will handle it anymore, it’s in your playbook and you can systematize it.
The Bad
Inherited problem tenants
On our first purchase the previous owner had been checked out by the time we went under contract and became very lax with his screening process. Being that we deal primarily in student housing we knew immature tenants were going to come with the territory which is why we planned on and currently do require security deposits at lease signing and parental guarantor on all leases. Our problem now was that by the time we closed the previous owner had already signed leases for 4 out of the 6 units to whoever came first, no screening process at all. We ended up having to evict the tenants in one of the units that the landlord gave a lease to incurring court fees, but it gave us the opportunity to do a light renovation and re-rent the unit at a higher price. While we were under contract for our second deal we made it a point to the seller that we had to have final approval on any tenants that he was going to give a lease to for the following year.
Lesson Learned: If you’re under contract negotiate with the seller to allow you to run the leasing process to fill vacancies and place the tenants you want.
“Long Shot” Maintenance Issues
Like most wide-eyed, first-time investors about to close their first acquisition you have a grasp of what can go wrong but optimism plays its biased role and you under represent the chances of it happening in your head. You think those big cap ex items all happening at once are a long shot. Well, sometimes life comes at you fast and thank God we allocated a reserve fund to deal with unexpected issues. Within the first four months we had two major high dollar maintenance issues. First there was a piping issue where the sewage was backed up and not properly flowing through the pipes. We had to have a company come dig up the sidewalk and repair the pipe that the problem was originating from. Second, we had a water tank breakdown and those are never cheap to replace. If it wasn’t for the capital set aside, we would have been reaching into our pockets to resolve this.
Lesson Learned: Whatever can go wrong will go wrong. Always make sure you go into a new acquisition with funds set aside to cover any unexpected problems. As a rule of thumb, when we determine the amount of equity we will need to close we allocate an additional 6 months worth of mortgage payments to a separate reserve fund for this purpose.
The Good
That's not to say this year was all bad, there were plenty of victories that made it a success. Due to COVID-19 and the uncertainty it brought, especially to college campuses because of the possibility of classes not returning in the fall, having significant vacancy was a serious concern during the leasing season last year. Suffice to say though through a more hands on marketing/leasing process and learning how to create very professional looking virtual tours we were able to lease up 100% of our units for the 2020-2021 academic year. Besides for the unit we had to evict and the time that unit was being turned over we had a 100% rent collection rate. We were also able to carry out one of the biggest components of our business plan which was to take all of the utilities out of our name and require the tenants to be responsible for paying their own utilities. Since every dollar saved in expenses drops to the bottom line our NOI has drastically increased. As well, when rates were cut in March, we were able to take advantage and refinance out of the existing 5.25% rate on our first deal to the same rate of 3.7% that we were about to close our second deal with.
I continue to expect new additional problems to arise and look forward to finding ways to solve and systematize those solutions to make the business as efficient as possible as we scale to larger and larger projects.
