Actual Results

Have you ever played the game of telephone? Where you pass a secret message around a circle and see how garbled it becomes by the end. Always shocking.

Communication is hard. Or more accurately, communication is hard for the other idiots playing the game. You are perfect right?

Communication in Rental Properties

It is pretty easy keeping an eye on my properties, even though I’m thousands of miles away. During most times there is very little effort required to keep things running smoothly. The property manager handles almost everything and deposits the rent into my bank account each month.

The big exception is tenant turnover.

Tenant turnover is when one tenant moves out and another moves in. Even though I have a property manager to do most of the work, I stay actively involved to make sure things run smoothly.

The Old Tenant

I purchased the property in Memphis during the summer of 2014 and the property management company quickly signed a tenant to a year lease.

After a year, he decided not to sign a new lease and to stay month to month for a while. This automatically increased the rent $100 per month, which was just over 10%. Since there was such a significant increase, I was surprised he stayed an additional 6 months.

He paid on time every month. Only one minor repair the whole time. But all good things come to an end.

In early December I heard from the property management company that the tenant would be moving out at the end of December.

Dag Nab It

Rental property investors want their tenants to stay in the property for a long time, gradually raising the rent along the way. A tenant turnover involves significant expenses that cut into profits.

To make it worse, he would be moving out at the end of December. Who moves during the winter? Perhaps he had his heart set on moving out west for the warmer winters. To be fair, the luxury apartments los angeles are attractive enough to make people consider moving out of their current accommodation in favor of them at any time of the year! Although, now seems like the worst time to find a new tenant.

I knew I would have to keep on top of the property manager to ensure a successful turnover.

The Property Management Company

My Memphis property is managed by a huge company that oversees a thousand plus homes. They are a behemoth with different divisions for rent collection, repairs, and tenant placement.

In contrast, my Atlanta property is managed by a mother and her daughter. It’s a little two person company who handles everything.

I already was a little hesitant about such a huge company, especially since they are expensive. Since this is the first time we have gone through a tenant turnover together, I approached it as a tryout for if we will be working together long term.

The main test is how well they communicate.

Create a Sense of Urgency

Every day that the property sits empty is another day without rent.

This is a bigger deal to the investor than to the property manager. So the goal of the investor is to keep pressure on the property manager to make sure things are getting done.

I averaged two phone calls per week week throughout the process and sent emails as well. Add it all up, I spent roughly 5 hours communicating with the management company.

At the end of December I called to make sure they were planning to get in the property right away after the New Years holiday.

Next were emails going through their damage report and deciding what to fix. Then more calls making sure the various contractors were scheduled to come in (plumber, carpet cleaner, gardener, etc).

Phone calls to understand how and when they would start showing the property. More emails and calls to find out why I wasn’t getting the regular updates I requested.

And then finally it was over. They found a tenant who met all the requirements and moved in on February 25th.

The Overall Cost

There are a lot of minor repairs when a tenant moves out. The standard things are carpet cleaning, so I will get in touch with a professional service like Rug Cleaning Malvern to help get it back looking brand new. Then I need to organise touching up the walls with paint and re-keying the locks.

In addition, my property had several items the tenant paid for from his security deposit. Some damaged sheetrock, a whole bedroom that needed painting, yard that wasn’t maintained, and additional cleaning that was necessary. Luckily the work that needed carrying out was minor. A fellow landlord and friend who also owns properties had a tenant move that had caused quite a lot of damage, so the property was sat empty whilst they repaired everything. Luckily they had the forethought to get landlord insurance which covered a lot of the damage. It has come recommended highly to get a quote today to prevent it from happening to me.

I ended up paying $300 for a few things as well. Since it was winter and the house would be sitting empty, we winterized the pipes. If the pipes froze they might burst and cause water damage, which would be a huge expense. So better safe than sorry.

We also did a pest spray to kill the few bugs and keep more from coming back. And a couple minor things like replacing the side gate latch.

There were also some repairs mentioned in the report that I opted to skip. Things like painting the shed in the backyard and replacing some damaged sheetrock in the garage (but there isn’t a hole for critters to get in).

The out of pocket cost to me was $300, and there is also a tenant placement fee of one month’s rent.

I am also responsible for paying the mortgage, taxes, and insurance even though I wasn’t receiving rent during this time. It took almost 2 months, which is roughly $1100.

The total: $2400. Ouch.

Back to the Good News

Unless there are significant repairs needed, I should still be cash flow positive for this property in 2016.

And there is a two year lease signed, which means 2017 will not have a tenant turnover and generate significant cash flow.

The two year lease is one thing I really like about this property management company.

The first year is leased at $995 a month and the second year at $1020. There is a 2.5% rent increase already worked in! The $995 per month is also almost a 5% increase over the original lease of $950.

The lease is very friendly to the owner – the property management company is very demanding of their tenants. A $1295 security deposit, which they are not shy about using. No pets. No smoking. Month to month after 2 year lease is $1120. The tenant is responsible for appliance fixes. And the tenant pays for minor maintenance under $500!

Overall Thoughts

I wasn’t too happy with the communication and how long it took to get the tenant in place. But, the end result isn’t too shabby.

I received an extra $600 from the previous tenant in month to month rent. I ended up paying roughly $2400 for the turnover process. $1800 is about what I was expecting for the tenant turnover, so if you include the extra rent, it comes out as on target.

The two year lease makes me very happy. A 5% increase in rent year 1 and 7.5% in year 2 compared to the 2014-2015 lease is awesome. That comes out to roughly $1400 in additional rent over the next two years.

What do you think? Would you be happy with this tenant turnover?

Have you ever made pancakes and discovered you just have just enough syrup left?

Sometimes things work out just right.

It happens in rental property investing too – my Memphis property had an exceptional 2015.

The Property-Year

I like to think in terms of property-years. No, this isn’t a real term, it’s something that makes sense to me and might sound crazy to everyone else.

What is a property-year you ask? It is 1 rental property for 1 year.

I think about things in terms of property-years to better understand randomness. Humans struggle to interpret randomness – it’s just the way we are wired.

We see something happen over and over again and expect it to keep going that way forever. Like expecting good weather in the summer, then being shocked that it rains one day.

We notice a result and make up some cause and effect that just isn’t real. Like a lucky pair of underwear the baseball player wears all playoffs.

We need a way to keep things in perspective and remind ourselves that randomness exists.

The Expected Randomness in a Property-Year

There are any number of expenses that you can encounter for a rental property.

Some are predictably periodic: they happen every X years. You can simply count down until the next time you have to take care of it. An example is insurance, every year I’ll have to pay it, so each month I add a portion to my escrow account.

More difficult to understand are the expenses that will probably occur eventually, you just don’t know when, such as having to call someone from somewhere like Make It Drain Plumbing & Rooter to fix a problem with showers, toilets, pipes, etc. The fact that it doesn’t happen one year doesn’t necessarily make it more likely the next year.

Here are a few:

• 1 in 2 property-years: a tenant moves out
• 1 in 10 property-years: replace the water heater
• 1 in 12 property-years: replace a major appliance like fridge or dishwasher
• 1 in 15 property-years: a major plumbing expense like a broken pipe
• 1 in 20 property-years: replace the roof
• 1 in 30 property-years: replace the garage door opener
• 1 in 50 property-years: evict a non-paying tenant

The accuracy of the numbers isn’t too important, just the concept. This isn’t a complete list of course – there are many more expenses that could crop up unexpectedly. For example, I recently heard about an investor who had to do a removal because it grew too large too close to the house. This can be a worrying problem for those buying property as it can damage the foundation and cause more expense. That is why investors may want to look into tree removal in Augusta, GA services, or wherever their property is, to make sure they are not paying out for damages alongside removal. Tree maintenance, stump grinding and other important aspects of home renovation by eminent Tree Service providers could prove essential.

Another example of the same could be water damage! Oh, I’ve heard the woes of it from one of my friends (who lives in Colorado Springs) when a broken pipe led to a flooded basement! She had to probably get in touch with specialists who deal with Property Damage Restoration Colorado Springs to get it fixed. I would not wish that on my worst enemies!

That said, the property-year view gives me perspective. The perfect year with no expenses isn’t going to happen every time. The bad year can be expected every once in a while, but it won’t be the norm.

Looking at a Perfect Property-Year

Let’s look at my Memphis property for 2015. The tenant stayed in the property the whole year, rent was paid on time, and there were no major expenses.

In fact, it went even better than I could have predicted! When the tenant’s 1 year lease at $975/month was complete, he opted to stay month-to-month at $1075/month rather than signing a new lease. So the rent collected was $600 greater than expected!

With $12,300 in rent collected, here is a complete list of all the expenses for the year:

• Principle paid of $1,049
• Interest paid of $3,951
• Property Management of $1,230 (10% of income)
• Taxes of $1,086
• Insurance of $635
• Repairs of $150 (replaced thermostat)

The principle paid is like a savings account in my name. It just becomes equity that I can access later, so while it is listed as a cash expense above, it actually is neutral.

My taxes also show depreciation of $2,796. This isn’t something I actually had to pay for so it’s not listed as an expense above. The depreciation gave a tax benefit of $1,043 for 2015 (based on my 37.3% marginal tax rate).

Doing some quick math, here are the results for 2015:

• Cash in my pocket: $4,199
• Tax savings: $1,043
• Principle paid down: $1,049

Not to mention Zillow believes the property increased in value $5,000. All told, this property-year was worth $11,291!

Let’s Celebrate!

Just kidding. I know all years won’t be this good and I should save some of that money for future expenses.

Note: In fact, the tenant moved out on December 31 which led to some significant lost income in 2016. The new tenant is now moved in and later on we will take a closer look at how the tenant turnover process went.

But man, that was a good year! It was roughly 50% of my initial investment!!!

Overall, what do you think? Is the property-year a good way of thinking about the randomness and not getting overly excited about a great year?