Welcome back! In case you haven’t been following the discussion, my first case study has gotten a lot of comments! One commenter, Drew who blogs over at EpicFinances.com, left me a great, well thought-out comment expressing some of his concerns about landlording. I wrote him a big ol’ response but since his comment expressed what a lot of people feel about landlording and real estate, I decided to format it into a post so that others can benefit.
1. What about costs to prepare for the next tenant (repaint / clean / repair / etc)?
Turnover is something that we haven’t experienced yet, though we are about to. One of our tenants is moving out this month so I’m sure I’ll have a post detailing our experience with this. I think the highest cost during turnover is replacing worn out carpet. For that reason, we’ve opted to do laminate in the common areas and carpet in the bedrooms only. We’ve got a decent deposit on all of them so that should cover a lot which isn’t wear and tear.
2. What about your bottom line if your tenant doesn’t pay and holds your property for 2-3 months and decides to trash the place before he leaves?
Texas is a very landlord-friendly state. Here’s a sample schedule for what you could realistically expect regarding evictions:
Rent is due on the first, late on the fourth. Send a 3-day “Notice to Vacate” on the 2nd and they will get it on the 4th.
If they haven’t paid or moved out by the 7th, go to the JP court and get a court date in 2 weeks.
On the 21st, go to court and win (they didn’t pay, you have the lease – you’re going to win). They have 7 days to move out.
On the 28th, if they haven’t left the sheriff shows up with a moving truck.
If you were really good, you would have another tenant lined up the move in within a week.
You have to know the local laws regarding eviction. I know in some parts of the country it’s a lot harder to evict but in Texas we don’t take kindly to that kind of behavior.
3. What about costs if your AC or furnace goes out?
Our strategy from the beginning has always been to sell the house within 5 years, ideally to the tenant, and roll the money into another property. At some point in the future, we’re going to get into apartment complexes and that’s probably what I will end up retiring on. I’ll go into that in another post. So when we bought the house, we looked at it and asked ourselves: what could possibly break in the next 5 years? Then we fixed or replace that. If something goes wrong, we do have some cash reserves to cover it but so far maintenance has been very low.
4. What about legal costs to defend against lawsuits or threat of lawsuits? I have friends who own rentals (lots of them) and they say its only a matter of time..
This has been on my mind more and more lately but really I think legal risk can be significantly reduced through management. You have to consider why you might get sued and most of the time it comes down to mismanagement. Accidents do happen and that’s why we carry a $1M liability policy above the $250k liability policy on the property.
5. (Paraphrasing here) Why not use an LLC to hold your properties and reduce risk?
LLCs might be better in other states but in Texas they are weak. If someone is going to sue you for negligence, they will sue your LLC and also you personally, so there isn’t a lot of point. This is in addition to the other issues with LLCs: you have to use (expensive) commercial financing and commercial insurance.
6. How much do you value your time? I would argue you should subtract (Number of hours) * ( what you time is worth) out of your profits. That includes repairing, showing, leasing, everything.
The amount of time it takes to manage a property is more or less a function of your management style. I spend some time on the phone less than once a month. 2 out of 3 prefer email communication and pay their rent electronically. The other one has taken more time because we’ve had to chase after her for the rent, but she paid for this time with late fees. Management itself can be outsourced if you’re willing to pay for it.
Finding suitable properties and getting them into shape also takes some time but some of this can be outsourced as well. You can spend as little or as much of your time as you want.
I look at our real estate investing as a business: we’re basically self employed property managers, who happen to own the properties we are managing. Framing it this way sets us up to treat it like a business and not just a source of “passive income”.
7. What about costs for screening tenants / gas and wear and tear / misc home depot runs for repairs?
Prospective tenants pay an application fee which pays for their background checks. We do group showings and thus far have only had to do one showing per property to get a tenant. When we have maintenance issues, we hire it out to a local handyman who charges a reasonable rate to take care of little stuff. We try to do as much of the repairs upfront to keep ongoing maintenance low.
Bonus Question: Do you really think that you will get that 25.8% return?
Overall, I think we will probably come pretty close to that return if we sell before anything serious can break. As you mentioned, this return does include managing it ourselves but it doesn’t take that much time if you do it right. Even if something happened and we cut our return in half, it would still be a respectable 12%. I’ll take that any day.
How about the rest of you? Got any burning questions or topics you’d like me to cover in the future?