These days I will walk through a property and I can get a good picture of the number of repairs that needs to be done prior to renting the place out. We will talk in the future about selection of repairs and fixtures for a rental property but for now let’s stick to the details my property.
Unfortunately, at that time, I wasn’t sophisticated enough to figure out the cost of the repairs to the place. I just knew that I would do a lot of work myself and save buckets of cash. Buckets I did save, but I didn’t know to account for things like holding costs, insurance, taxes, and utilities. All of these add up until you start profiting from the property. I was still thinking more like a homeowner than a landlord.
How do I think like a landlord?
Think about the decisions you make when you go to the store to buy a new faucet. Perhaps your kitchen sink broke. First you think about how you might like to upgrade. Do you want a big goose-neck or one of those commercial style sprayers?
“It really must be brushed nickel in color to match the rest of the house,” you say to yourself.
“The style has to match our other fixtures,” your wife says.
“We could really use one of those soap dispensers that comes up from under the sink. Maybe even an automatic one that you can waive your hand under like they have at the airport. Ooh, ooh, how about if we get that same sensor but for the water part itself???!!!”
At no point in there did you discuss cost. Or who would be installing this behemoth. You may not even have a household budget, as I failed to do in those days. So, you purchase the thing and go on your way home. Once it is installed you don’t really think about it much as long as your other bills are being paid, that is. The line item for the purchase of a new faucet goes from being a necessity (new faucet) to an expensive upgrade, but somehow you still justify it as a necessity.
Now look at it from the perspective of a landlord. Cost is on the list. But most importantly is function and durability. A faucet needs to be able to give hot and cold water. It does not need to dispense soap. As long as it has function, then you think about durability. Tenants can be very hard on things so the cheapest faucet is not always the right answer. Cost is probably next. Aesthetics is at the bottom. You do want something that matches the style of the rest of the property, but probably won’t sacrifice much money to get there.
As I said, I was looking at the house rehab as a homeowner, so I put in a lot of things that a homeowner would want. Like a garbage disposal, and a fridge with an ice maker. Notorious first-time landlord mistakes. Remove the disposal and find a way to get rid of the ice maker. Put it in your own home and buy a regular fridge or something. If you don’t, it will cause you headaches; mark my words.
Here are the big ticket items:
- Gutters/Downspouts $873.12
- Plumbing $1,343.92
- Windows $1,224.46
- Kitchen Counter $739.49
- Exterior Painting $1,700.00
- Roofing $5,255.00
- Flooring $3,722.16
- Cement Work $7,682.88
- Miscellaneous $3,868.37
- Total $26,420.40
We estimate that we saved $18,000 in labor by DIY-ing a bunch of stuff. It took us about 4 months to get it up and running. We were able to move in sooner.
At this point, we were into the place for $138,118.38 of which $26,420.40 was our cash investment. Remember that I said we set up our mortgage to pay it off as quickly as possible? The monthly amount ended up being $1,000. Add to that taxes and insurance and we pay $1,519.96 monthly. The really sad part as our area, this particular house gets between $1,100 and $1,300 rent. So, we subsidize it out of our personal income. We have the money to do this, but I wouldn’t recommend it for everyone. Of course, we could refinance. Instead, I took out a line of credit which I have available to purchase other properties. Plusses and Minuses to that of course.
The last appraisal I got was 2 years ago for the line of credit. The value was $168,000 And I suspect the place is worth between $180,000 and $190,000 today. Many, many mistakes made. But it still is a great investment. That is why I love real estate.
I would love to hear what you would have done differently. Let me know in the comments.