All Forum Posts by: J. B.

I am a small-time landlord myself, but I have a relative who is a tenant in a very large apartment complex.  The complex is relatively new, being only a few years old.  The circuit breakers throughout this very large complex have had known ongoing problems, and the management company has only been replacing individual circuit breakers when they act up.

My relative was out of town, and the circuit breaker failed relative to the electrical outlet that powers their refrigerator.  Is the property management responsible for the replacement cost of all spoiled food considering the management knew of the problems with the troublesome circuit breakers, but they were only replacing them at the time of each individual failure?  My relative's unit has had a couple of the circuit breakers replaced already.

Quote from @Colleen F.:

@J. B.  you are where you are.  Moving forward  from my viewpoint I see three things to do. Keep the remaining cost down, minimize the cost of your debt, and maximize your rental income.  My suggetions:  First, monitor every penny going out and don't let this guy do the exterior. Get bids from companies that do the exterior work for a living only on what NEEDS to be done then you aren't paying his overhead on anything done.  Cut the cord, get the punchlist ready, no more paying people to write in a notebook. It's done.  Second, minimize the debt.  Can you refinance the personal loan with equity and what is that cost? Third, do you want to live in this house and rent your own? What is the timeline for that? If it is near term you probably want to short term rent this property.  If not and you want to do long term get the best quality tenant you can and screen them well probably with a different PM. I did not catch your location but some things location may have an impact. 

Hi, Colleen,

I'm in touch with the contractor to get control of things with them and find out what I've "paid for" that they haven't completed yet. 

I would be open to living in this rental property.  However, my own home is larger, and I am earning $900 monthly by renting out one floor of my home as a separate residence.  It covers half of my mortgage.  I doubt that I would be able to rent out my own floor of my current home separately.  I'd have to ask the current tenant to leave and then rent out the entire structure as one lease.  The current tenant has really made it their home, though. 

The thought also crossed my mind that I could sell my own home and move into this rental property. My own home has increased in value 150% on its own in the last decade, and I have 30% LTV. But if I chose to rent out my entire home, it would definitely be positive rental cash flow.

I have not accepted the personal loan yet. I have been approved, but I applied for it as a precaution. All of my debt regarding this remodel is: $100,000 HELOC locked in at 2.75% for three years (variable rate thereafter); and about $60,000 on credit cards at 0% interest for about 18-24 months on average.

I plan to pay down the equity line that's locked in at 2.75% as much as I can pay it down.  And then as the credit card 0% deals start expiring, I can pay off those balances, if any, with the equity line that I've paid down.

Honestly, if I was to move into this rental after all of this nice work, I would not want a tenant in it first, not even briefly.  It's my belief that after spending so much, if I were to live in it, I deserve to live in it from the point that it's fresh, brand-new, and free from the wear and tear of a tenant for even a moment.  If I do choose to rent it out, though, then that's what it would stay as:  A rental.

Quote from @Richard F.:

Quote from @J. B.:

So at this very moment right now, I can stop the big stuff now, just make the place livable like a previous poster on here said, and hopefully avoid reaching 200 grand and just get a tenant in there and paying the highest rent I can possibly get. Then just find a less costly way of replacing all the exterior siding, painting exterior, and replacing the rotted fascia when I must.  I can then work my tail off over the next maybe five years and plow money into paying down this extra debt in that time, and things will be more normal-- and I'll be a bit wiser to boot.

That will likely be another mistake...whenever you only partially update an older property, you will never attract the top of the rental market, which is what you not only want, but need. No different than just doing the kitchen now, and in a couple years we'll do the bathrooms. The property does not look "whole", and it affects the rent amount and the quality of tenant you are likely to end up with. It sounds like your exterior is pretty tired looking...so you want to cut corners on curb appeal after spending buckets of money on the interior? As they say, you only get one opportunity to make a First Impression.

I get where you're coming from.  What would you propose?  Would you just have this existing contractor finish all the work (but, of course, with a firm limit on what can be spent and not a penny more)?  Or simply find an exterior siding company and see if they can do the work for less money?

The problem with the contractor -- and what's added much to the overall cost -- is that I'm paying their hourly wage for every little trip to the home improvement store to go pick up tools or consumable supplies that they don't already possess, which means their driving time, their fuel, their time spent standing in line, until $150 in supplies also means another $150 in "labor."  And I'm sure that has happened many times throughout the project, and that's just one example.  It's incredible that they are able to profit simply by not being prepared.  I've also paid thousands in "selections management" labor costs, some of which involves the selections manager clicking around on the Internet, looking at hardware and materials that are not my preference and which I declined and ended up telling them my own materials choices instead.

This far over budget, and not even everything in the scope of work has been accomplished or even started.  I've expressed my wish to the contractor to get control of the budget and explain to me in their own words why we're so far over.  Part of their responsibility is to make sure that doesn't happen.  If I have them complete the necessary work still in a cost-plus contract in order to get this place rented, is it common for a customer and a contractor to agree on a price and set an absolute limit?  Or would that pretty much mean an entirely different contract?

Appreciate the valuable comments and helping me think through this.  Just as a general follow-up and explanation for my decisions:

I agree I made some missteps.  Of course, so did the tenant who failed on their end, so did the property manager who I was paying and who didn't hold up their responsibilities, and I think the contractor has gotten off track as well even though they know my budget and part of what I'm paying them for is to make sure we stay on it.  All my actions were with good intentions, and based on the information I had, I made what I thought were excellent decisions.

When the tenant moved out, I had a house where I could honestly say that every surface needed work.  Nothing looked good.  It was a dump.  It needed new doors, baseboards, and casings throughout (chunks were missing from many of them); new flooring; new subfloor in a good portion of the kitchen; some rot repair in the walls in the kitchen; replacement of the tired kitchen cabinets (the largest of which was totally rotted) and bathroom vanities; wall repair and fresh paint throughout; remodel of the poorly designed master bath which was a very unsightly room to begin with and not functional and a huge deterrent to decent tenants; rot repair and new furnishings in the main bathroom.  I ripped out the living room fireplace, two pantries, and all the kitchen cabinetry myself, which really opened things up.  Now the kitchen space is much larger. 

Since such a wide variety of work needed to be done, I reached out to a general contractor.  I was so impressed with the even lower initial bid (well under 100 grand) that I added more items to the list, such as removing popcorn ceilings throughout and replacing rotted fascia on the exterior.  That is how we got to a higher bid of $110,000, which I was totally fine with.

That meant $100,000 debt at 2.75% and contributing $10,000 cash. I planned to pay the debt off in three years by contributing my own money and part of the increased rental income. After that, I'd have a nicely renovated single-family home to rent out for the amount I should be getting for such a property instead of always being forced to rent to less-than-desirable people for 30% lower rent than I otherwise would have. And to top it all off, once the reno debt was paid off, I'd enjoy one mortgage payment at a great rate, no other debt for this property, and I'd have just as much equity and hopefully more from the new repairs and upgrades.

At the beginning of the contractor's work, I was mostly selecting and acquiring the various materials, fixtures, etc., for the whole project.  When we got to about $60,000 in billings, I did express concern regarding the budget.  I am paying them to keep tabs on the budget, too, after all.  We discussed, and I was told the budget would not be a problem.

The electrical issue was unavoidable since we couldn't proceed with work until it was corrected.  And it needed to be fixed, truly.  It's a serious matter.

Anyway, with electrical done and most of the materials acquired, it finally came time to start doing the intended work.  Of course, the labor added up fast when I'm paying for the labor of the workers, cleanup people, their time and fuel for material runs, their time and fuel for hauling things away, the labor of the project manager and selections person, plus our nasty sales tax and the 20% markup.  When invoices are coming in at 20 grand a pop, it's easy for a matter of a couple of weeks to drastically change the circumstances. 

So at this very moment right now, I can stop the big stuff now, just make the place livable like a previous poster on here said, and hopefully avoid reaching 200 grand and just get a tenant in there and paying the highest rent I can possibly get. Then just find a less costly way of replacing all the exterior siding, painting exterior, and replacing the rotted fascia when I must.  I can then work my tail off over the next maybe five years and plow money into paying down this extra debt in that time, and things will be more normal-- and I'll be a bit wiser to boot.

Quote from @Joseph Beilke:

I have a rental in Baltimore, sounds to me my past tenant moved to your house after doing the same damage to mine. I was not able to do a full on Reno. Could the house use it sure but the ROI wasn't there. I fixed the holes, fix the rot, replaced flooring, added a new fence and deck. Painted inside and out and new appliances. The kitchen got sub par upgrade and repairs. I got new tenants that current pay a little below market, and haven't missed a payment in 4 years, just a few late. I have now replaced the roof and windows. Next year hopefully a new HVAC if I can keep the current one running. I'm into for about 15-20K over the past 4 years. Nothing went on credit.

Sounds like you over improved for the neighborhood and rental rate.  I'd probably take a long look at the numbers, project out how much interest you will be paying over the next few years and talk with a local realtor and see what the house prices are doing in your area.  Here in Palm Coast FL, I'm projecting a 10-15% price correction.  That would put us inline with a 40 year over year 2.5% average going back to 1981.  

If your find the the projected prices in your area are going to depress quickly, but rents are going to rise and if it is as nice as you say. I would set the rent high and find a tenant willing to pay it and take care of it and do my best to max out the ROI, if you can't justify one or get one to pay the amount needed, then Sell and Sell fast. Good Luck Bro!

Hi, Joseph.  

Thanks for that detailed reply covering all those bases!  I guess you could say I did overimprove.  However, I had no idea that the costs would balloon the way they did.  The project manager is supposed to be keeping things within budget, and I have raised it as a concern several times.  But expenses just kept continuing.  For example, the amount of labor cost for selections management (the person helping to choose materials that will function together) was only estimated at few hundred dollars, but it's added up to over six grand since they've been billing me dozens of hours at a time at $50 per hour.  Even after nearly all selections have been made, they're still spending several hours per invoice just to update the job notebook, which I'm told is necessary for documenting and keeping records for the ongoing project.  

With the rotted-out main kitchen cabinet, I just decided to replace them all.  They were 40+ years old and I wanted them to match, obviously.  The cost of the cabinets was actually decent considering they're the bulk of the kitchen renovation.  But the cost to install them has added up to about 50 hours for a relatively small kitchen.  Add in interior painting of the whole house (1,200 square feet) at 70 hours.  All of this at $75 per hour.  The most recent invoice was huge.

I could not tackle these tasks myself because I do work full-time for a living.  But the cost of doing all this was way underestimated from the start.  However, the home's interior and exterior were worn out.  The space around the toilet in the master bathroom was so tight, it was practically unusable.  I think an airplane's bathroom has more room around the commode.  It was making the place undesirable in and of itself.

I'm someone who tries to look at the long-term picture.  I just look forward to the day when the home will be owned free and clear.  And I'm definitely going to watch the place like a hawk(!) from now on, even after I get a new and more reliable property manager.  I will definitely look into what it could potentially sell for.

Quote from @Bill B.:

What state charges $14k in sales tax on $125k in work? ( $25k profit at 20% means $125k in work)

That’s an 11.2% sales tax assuming you were charged zero for labor. But most of the work you suggested should be 50% labor or more. So you’re paying 22% sales tax?

Either you have a bunch of your numbers wrong or you need to head to court. 

Make it livable and sell. This PM should have said DAY 1. This is WAAY outside our scope of expertise. 

Sales tax here is over 10%.  And sales tax is applied to a contractor's labor, materials, everything.  Total billings have been about $150,000 so far, so the numbers for the sales tax do line up.  Not the best locale in which to do a remodel as far as that's concerned.

Quote from @Herman C.:

It’s a little too late now. I don’t know how big the house is and the extend of damage but the price seems high and the construction project wasn’t managed well. Sorry to hear about this.

To answer your question, I would rent it out instead of selling. 

Hi, Herman,

Well, it's a one-story, 3-bedroom, 2-bath.  The second bathroom was never properly done right from some previous owner anyway, so that had to be redone.  Rot was found in some places in the home even in addition to the rotted kitchen floor.  Electrical work was 25 grand.  Heaters in the home weren't wired properly.  I'm having every electrical outlet and switch replaced.  Seemed prudent after 40+ years.  The actual damage from the tenant was not devastating, but apparently the house needed this work after not being shown much TLC over the past several decades.  I demoed the kitchen and am changing it into an open floor plan with the living and dining areas.  Even the appraiser for the refinance noted that the house hadn't been updated.  So, yes, I am doing things beyond just the basics.  But the house needed improvement in order to get beyond the measly $1,300 rent.

The contractor has billed me 25 grand in profit and overhead charges so far (20% per the contract).  And then about 14 grand has been billed in sales tax so far (greedy state).  So before even getting to the actual costs of materials and labor, I've paid $40,000.

I'm tempted to move into the home myself because it will be so nice and rent out my own home, but I can't at the moment due to an unrelated responsibility that keeps me stuck living in my current home for an undetermined span of time still.

Through all of this, though, the main overarching disappointment and frustration is that this situation is detracting from my personal cash flow and preventing me from contributing my full potential to my retirement funds.  And as a self-employed person, the tax deductions from those contributions are quite immense.

But, of course, I did buy the home with zero money down.  And I am financing this entire remodel on credit, allowing me to avoid liquidating any other assets.  So there is that.  But I know that this whole scenario is not the way things should have been.

Quote from @Theresa Harris:

If you sold it, what would you do with the money? How much would you cash flow if you kept it?  those are the two biggest things.  You have a low interest rate and if the cash flow is good, then I'd rent it BUT I would not hire that PM again

I'll start by replying to the most optimistic response so far.  (That's just a little bit of humor, really.)

If I sold it, I'd use every bit of the money to pay off this equity loan, my credit cards, and the personal loan that all funded the remodel.  Of course, I'd still probably come up short.  But maybe I could break an even zero depending on how much these renovations have increased the value of the home.

If I kept it, my cash flow would be negative at least $800 per month, maybe more, depending on how quickly I want to pay down the additional debt.  I really want to pay the debt down as quickly as possible before the 18-month and 24-month 0% financing and the several-year 2.75% financing come to an end.  And, of course, get rid of the 6.2% personal loan.

Age 40.  Owner of a singe-family rental home

Purchase price 15 years ago:  $200,000 (zero down payment)

Current value: $400,000+

Current mortgage:  20-year fixed with 19 years remaining @ 2.875%

Seeking advice and opinions to help me decide what to do.  I've owned this rental home for 15 years.  I started off renting out on my own and went through a few tenants over a few years.  While every tenant passed the background and income verification, they all had issues at one time or another with late rent, sometimes for several months, the last of which I was in the process of evicting when I took advantage of a technical opportunity to get them out for good.   At that point, I turned it over to a property manager, and they handled things for about the past decade.

Early last year, I refinanced the home into a 20-year mortgage (2.875%) and also took about $30,000 cash out for a personal expense.  Little did I know what was in store a little later on!

The home had a long-term tenant paying $1,300/month, who last year in 2021 ended up claiming a supposed financial hardship due to COVID.  They then moved away after having gone several months without paying rent due to the "COVID" excuse.  When they left, the property manager showed me the home and the place looked like an absolute disaster. 

The tenant had painted the walls without permission, and they painted right over the electrical outlets and allowed the paint to drip down over baseboards.

The tenant had allowed water to leak under the kitchen sink for an extended period of time and totally rotted out the cabinet and the floor beneath.

Every appliance (7 years old) was trashed:  Nearly every handle was ripped off, dishwasher full of something disgusting that rendered it ruined, oven caked with burnt something or other, dryer broken.

Several holes were found in the walls.  Holes in a couple of the doors.

They left so many of their possessions behind, including furniture, I think in total it must have filled a 20-cubic-yard dumpster.

Come to find out later, the tenant moved with their family into a whole new "dream" residence.  I think the COVID excuse was just so they could skip paying rent and pocket the money to help with their moving expenses.

I later learned that the tenant had several unauthorized people living there, and they must have been renting out the garage as well.

As far as repairs over my entire 15-year ownership of this home, I have not really put much money into it.  I painted the interior a couple times and painted the exterior once or twice.  A new roof was put on perhaps six years ago.  Between tenants, I recall replacing carpets and once replacing the vinyl flooring in the kitchen/dining areas.  This was all work done by myself with help and wasn't really a professional, proper job but more to just get by.

So now in 2022, after the property manager shows me the condition of my house, I knew it was time to fix it up and do it right.  I had an absolutely horrible time trying to even get bids to do the work.  I was presented with a bit of about $110,000, which I thought was pretty good.  That gave me confidence to even include some extra work that I thought should be done just for practicality's sake and weren't really 100% necessary.  But the amount of the bid meant that I was willing to spend money on those little extra tasks since the overall bid was reasonable to me.

Well, the work of the contractors has been very good, I must say.  And they are great to work with.  They know how to do a proper job.  However, one problem is that we're now nine months down the road, and the work is still going on.  I'm out about one year of rental income so far.  It's been a long process, but it's nearing the end.

The other problem -- and a big one -- is that the costs of this work are approaching double the initial bid!  I'm almost certain we're going to hit $200,000 in total costs by the time this work is done.  Certain costs were outrageously underestimated on the original bid -- so underestimated that we surpassed that category's budget in the first month.  On some categories, what was estimated to be a few hundred dollars is now several thousand.  And it was an item that should have been estimated much more accurately.  The contractors also found electrical problems, which have ended up costing 20% of the initial bid but was something that was hardly even planned for.  Now the newest surprise is that the exterior of the home needs serious work, and I'm waiting to hear a quote for that.  Obviously the exterior is important and needs to be done right in order to protect the house from the elements, but it's yet another unexpected expense.

To fund this project:  I contributed $10,000 cash.  I took an equity line out on my own residence for $100,000 at 2.75% interest for a few years.  I have funded $45,000 with 0% credit card offers for an 18- to 24-month term.  Now to meet the rest of the expenses, I've taken out a $45,000 personal loan at 6.2%.  I do have about $250,000 in a brokerage account, but I do not desire to liquidate that account.  Retirement fund balances are about $1 million, and obviously I will not be accessing those.

Before this project started, I had zero credit card debt, the one 20-year rental property mortgage at 2.875%, and my own residence's 15-year mortgage at 2.5% with 30% loan to value on my own home.

So in a month or two from now, I will have a beautiful rental property worth 400 grand (hopefully more after all this work!), and I'll probably be able to get $2,000/month rent.  Maybe more? 

What upsets me is that the property manager wasn't doing regular walk-throughs of the property and wasn't protecting my home.  The long-gone tenant will probably never pay anything even though they're being sent to collections.  The timing of this whole thing means that I missed out on being able to take cash out during my refinance in order to fund this renovation and probably choose a 30-year mortgage instead of a 20-year mortgage.  The bid from the contractor was obviously ridiculously low, but I'm so far into the work at this point that I just need to finish it and get the place rented.  I'm also disgusted that the financing situation means that I am carrying so much revolving debt that is obviously going to pull money from my own personal cash flow every month for quite some time into the future.  It's also hard for me to not have feelings of disgust that some new tenant is going to be living in this brand-spanking-newly-renovated home that's nicer than my own and that the money is going to be coming out of my own pocket that allows them to do so.

Honestly, though, this is not likely to break me.  I still have a net worth that is many times over the average net worth for people my age.  I will be able to make payments on this debt; it's just going to reduce the amount that I will be able to save in my retirement accounts until the debt is paid off.

So, in sum:  Should I keep this rental house, get a reputable property manager, and just tough it out until the debt is paid off and one day the tenants over the years have paid for this house in full?  This home is 40+ years old and was never updated before.  I'm hopeful that these updates I'm making will last another 40 to 50 years.  If I chose to sell, it would probably be about 40 grand in seller costs, which seems like a huge waste.  Any input from the more experienced here would be appreciated.