It’s been a while since I started my series chronicling my quest to purchase, renovate, and fully occupy my newest rental property. When last I wrote, I had just closed on the property. The past two months have been a slog through renovations, evictions, and a number of other annoying (but necessary) issues to address.
It all began a few months ago when I sent my home inspector into the property for the inspection. As always, my inspector spent an hour or so with me on the phone going over the report and discussing his general impression of the property. One of the first things he told me was, “this is a great property, but my advice is to throw your numbers away for the first few months and clean house. You have a bad tenant here.”
Little did I know just how prescient that advice would end up being.
Basically, in the four bedroom unit of the duplex where this tenant was living, there were three adults, four children, and about twenty people’s worth of stuff. The very first thing my property manager did when we took over the property was schedule an inspection. When she called me that day to report on what she had found, it started with the words “It’s bad.”
Even though the tenant had a week’s notice that the inspection was going to occur, my property manager still found half-eaten dishes of food on the floor in the closets, evidence of rodent infestation, and random, half-disassembled appliances in the bedrooms. The closets had long-since been filled up, and the entire unit was filled with garbage and clutter. There were countless holes in the drywall throughout the property. The children were living in deplorable conditions, and there were multiple adults not on the lease coming and going.
Even bearing all of this in mind, this is still far from a nightmare scenario. Remember that when you purchase property, someone else’s problem can often become your advantage. You just need the emotional and financial resources to overcome the issues. My property manager and I agreed that it would be best to notify the tenant that her month-to-month lease was not being renewed, and that she would need to move out within 45 days.
The choice to remove the tenant wasn’t one that I took lightly, particularly with children living in the property. Since there was already significant damage to the property, the tenant was likely aware that they would not be receiving any of their security deposit back. I didn’t want to get into an extended eviction fight, so I instructed my property manager to present the tenant with an offer.
I informed the tenant that if they paid their last month’s rent on time, if they left the property in a timely fashion, and if it was at least clear of trash and debris, that I would refund the entire security deposit without holding the existing damage against them. This was a gamble, since I didn’t know exactly how much it would cost to repair the damage, but I believed that it would be less expensive to repair the damage than it would be to deal with a vengeful tenant living rent-free in the property.
Unfortunately, though the tenant originally seemed to agree to the offer, the first of the month came and went, and she did not pay her rent. I was forced to start an eviction process, which went fairly quickly since the tenant never bothered to show up in court. Within about four weeks, I had obtained a judgment against the tenant, and scheduled the county’s bailiff to come to the property for the actual eviction.
When the bailiff and my clean-out crew arrived, they found that the tenant had left the property the day before. She also didn’t bother to clean out any of her garbage. As a final “screw you,” they also left the toilet full of human waste.
To some, the post-move-out pictures may seem terrible. The truth is that compared to some evictions, this one is actually very mild. It’s not good by any stretch of the imagination, but all of the copper and fixtures were still in place, and the human waste was confined to the toilet, so it could always be worse.
When I closed on the property, one of the units was already vacant, and it was in pretty nice shape, all things considered. Still, that unit needed paint and carpet throughout, some stairs replaced, and a variety of miscellaneous repairs. Needless to say, the second unit’s repairs were far more extensive. All of this is a long-winded way of saying that I blew my repair budget for the property pretty significantly. I had budgeted about $7,000 for all repairs to make the property ready and get it fully occupied. You can compare that budget with this list of all the actual costs I incurred.
|Water Submeters (Purchase and Install)||$587.68|
|Light fixture replacements||$600.00|
|Smoke and Carbon Monoxide Detectors||$420.00|
|Miscellaneous Electrical Repairs||$210.00|
|Kitchen Flooring Replacement||$1,076.26|
|Paint and Drywall||$3,785.00|
|Miscellaneous Mechanical Fixes||$45.00|
As you can see, I spent more than double my anticipated repair budget for the property to get both units completely ready for tenants.
Then there was the matter of the rodent problem. To no one’s surprise, the evicted tenant’s hygiene habits led to a huge rodent infestation, which I had to battle for about a month. Since I had rented the other unit to a young family, it was especially important that I address the issue right away. The tenants were very patient about the rodent problem, and I addressed their other small concerns right away, which helped smooth any hard feelings.
A Cautionary Tale?
So, is this property a failed investment? Not quite. Sure, I spent about $9,000 more than I expected on the repairs, but I also purchased the property for over $10,000 below fair market value, and that was the as-is value. In the end, even after these unanticipated repairs, I estimate that the property is still worth about $10,000 more than my cost to buy and renovate it. What’s more, as the property’s amenities and cleanliness have improved, so has the fair market rent. I purchased the place anticipating $650 per unit in rents, and instead the property is renting for $750 per unit, with all utilities paid by the tenant.
A Tale of Triumph
One of the other items I wanted to share in this series of posts what one can get for a modest price in the midwest. You may recall that the purchase price on this property was $77,500. The repair costs were $15,908.24. So, for roughly $93,400 in a city in Ohio, you can buy and renovate two four-bedroom units. You can replace every inch of carpet and repaint every interior wall. You can replace two stoves, power wash the exterior, and perform countless other small fixes. You can then rent those two units for $750 each. Since I financed the property, my all-in cash expense after down payment, closing costs, and rehab was $39,266.
After allowing for mortgage, repair budget, vacancy, taxes, insurance, property management, lawn care, and a healthy allowance for tenant placement fees, this property will yield $474 in safe monthly income every month, theoretically forever.
Here are some pictures of the property post-renovation. To those familiar with “extreme rehab”-type shows, this kind of rehab doesn’t have the same “flash.” That’s because this isn’t a luxury property. It is a clean, safe, and appealing property to working-class families in this neighborhood, which is what I have always aimed for.
Even though it required a ton more up-front cash than I had hoped for, this property is still my new favorite. We will increase our monthly retirement income by almost 50% in a single $39K investment. As long as we keep our reserves full, we can even count on that income in times of vacancy, because it’s built into the budget.
I’m really excited to finally have this property fully occupied and operational. It has been a long, long road to get it there, with a lot of lessons learned.
I hope that this series has given you some insight into the reality of investing in property from start to finish. There’s so much great property out there, and I can’t wait to move on to the next purchase. Was this series interesting to you? Does it fuel your desire to invest in real estate? Let me know in the comments!