Roller coasters are fun.
They go up and down. They are unpredictable.
Yet these very same qualities I enjoy about roller coasters are the qualities that make rental properties less enjoyable.
The cash flow on my Memphis rental property investment has been a roller coaster of a ride.
Up Then Down
This property was featured in the article The Perfect Year on a Rental Property Investment – Looking at 1 Year of My Memphis Rental.
2015 was a great year. One tenant with only $150 in repairs. Positive cash flow of $4,199. Wow.
Then the tenant moved out. Tenant turnover is expensive – no rent while it is vacant, a list of repairs to get it ready, and a placement fee from the property management company. It didn’t go that well and cost roughly $2,400, as covered in Tenant Turnover From Thousands of Miles Away.
But in March 2016 the future looked bright. I made plenty of minor improvements while the property was empty, hopefully to avoid future maintenance calls. The new tenant signed a two year lease at 2.5% higher rent the first year and 5% higher the second year.
I thought the roller coaster was going to swing back up.
Stuck in Maintenance Hell
The last 10 months have not gone as planned – it has been one minor expense after another.
Major expenses are one thing. A new roof, HVAC, or water heater is going to really hurt. You need the good years to bank some cash and pay for these major expenses that will one day arrive.
The new tenant calls every month with something else she wants fixed and the property management company takes care of it. Everyone’s happy right?
It is common to have a property management agreement where the owner isn’t contacted for small expenses. Anything under $300 the management company will not contact the owner and use their discretion. Hopefully that discretion takes into account what the owner would want.
The frequency of this tenants calls and the rubber-stamped repairs by the property management company is a horrible combination. My bucket has sprung a leak.
Over the 10 months this tenant has been in the property, there is an average of $225 a month in expenses! I won’t go through the list of repairs, some are valid, others aren’t. Only one of the repairs did they contact me first as it was over the discretionary threshold.
What Went Wrong?
Three things: the property management, the tenant, and me.
The property management company has to balance the interests of the tenant and the owner to keep everyone happy. I do not believe they have been working in my best interest.
The tenant is not self-reliant. They are not approaching the rental with an owner-like mentality, closer to a hotel-like mentality.
I haven’t been proactive in managing my manager. It took 10 months of this for me to finally say “enough is enough”. After 3 or 4 months I should have done something, but I was busy getting married. Even after that I was in denial or lazy.
My first goal is to try to make the property management company act in my own best interest.
You would think this could be accomplished with a couple phone calls, but unfortunately this property is managed by a big company. There isn’t one person like I have for my Atlanta property. There is a system and a process.
I don’t have a ton of leverage to make sure my voice is heard in this system. But there are people who can help. The rehab / turnkey company I purchased the property through refers a lot of business to this property management company. They want to keep that relationship in good standing.
One level higher, the national turnkey marketer I purchased from does even more business in Memphis. They want to keep that relationship in good standing.
It is great I have these people in my corner, but it takes some action on my part to call on them. Their voices are louder than mine.
Ultimately I’m likely to move on from this property management arrangement, but I think jumping ship now places the blame entirely outside of myself.
I need to pay attention and use my resources to get my voice heard. I need to play the politics game. I need to learn how to manage my manager otherwise this is likely to repeat itself.
The Big Picture
I don’t live off the cash flow from my investments, so this doesn’t hurt as bad as it might for other investors.
I view cash flow as necessary to keep you in the game long enough to reap the benefits of the other components of rental property return (like appreciation). The 10% cash-on-cash return goal is simply a margin of safety for when things go wrong.
Luckily those other components offset this bad run of luck in cash flow. In the past six months, Zillow shows appreciation of $4k, more than making up for these issues.
If you have the right mindset and the ability to see past short-term issues with rental properties, in the long run it will all work out.
How do you handle the roller coaster ups and downs of rental properties? Or if you don’t have properties yet, what scares you the most about this?