Life of a Landlord – Part 1

Frozen Pipe

 

You never really know how residents will react when something goes awry in one of your properties.  This morning, I received a panicked phone call from a resident in one of my duplexes.  A pipe had frozen and there was no water in their unit.

There is not too much to do to fix a frozen pipe except to either try to thaw the pipe or wait for the pipe to thaw.  Obviously once the pipe has thawed, you need to be ready in case there is a pipe burst.  I advised my residents to move a space heater into the basement and call if there is a problem as it warms up.  Well, about two hours after that phone call, I got another phone call: “Hey, uhh, I got a swimming pool in my basement.”

The first thought through my head was: man, that didn’t take long to thaw.  Thought number 2: this is going to cost a TON; thought 3: I’m going to have to run down and fix the pipes this evening…there goes my Friday night call a local plumber and get this taken care of immediately.  I also asked a contractor friend of mine to take 12 gallons of water (six gallons per unit) to the duplex until this got resolved.

I called RotoRooter to see if they handled burst pipes.  Luckily, they do handle these issues and they try to ensure a less than 24-hour turn around.  The pipe burst at about 3pm, RotoRooter was called at about 3.45 and by 5.30pm they were on site working on the pipe.  By 7pm I had received a phone call that the problem had been addressed.

There were three bursts, two in a pipe and one that broke the back side of the water meter.  I now have a new water meter, some new pipe and (hopefully) a happy resident.

Through the course of this, I learned that the water had actually been frozen for a full 24 hours before anyone decided to call me.  No idea why no one decided to call.  I asked what they had been doing for water for the previous 24 hours (figuring they had purchased bottled water).  The reply: Melting snow on the stove.  I told both residents to call as soon as there is a problem like this in the future and not wait 24 hours.

Anyway, for 18 months as a landlord and one issue like this, not too bad.

UFUO #2 – Update 7

Sorry for the long delay between posts.  I’ve been scrambling to get UFUO#2 ready to be shown.  The good thing about the lack of my posts is that the unit was listed, and within one week, I have found some residents.  The residents are extremely happy to be moving in and I am extremely happy to be finished (and renting to excited residents).

Finally the toilet went in.  I had to level the floor under the toilet so it wouldn’t rock off the wax ring (and rot out the subfloor…again).

Energy Efficiency for Landlords – A lighting example

[I don’t have a snappy picture for this post, but please read on]

Why do we invest?  Generally, we invest because we feel that our money is better spent purchasing an asset than spent on a night out.  We want the money we invest in an asset to be worth more at some point in the future.  When we are evaluating different properties to purchase, what is one way to evaluate dissimilar properties?  We can use the cap rate.

Cap rate is calculated by dividing the Net Operating Income (NOI) by the cost of the asset (Value).  Cap rate = NOI / Value.  I won’t go into the specifics here, but this equation is useful to investors.  We can rearrange the Cap Rate equation to determine the value of our asset   If we solve the equation for Value, we get Value = NOI / Cap Rate.  The new equation tells us that there are a two ways to change the value of your asset: 1) An increase in NOI or 2) a decrease in Cap Rate.

For a given property, I generally assume the cap rate remains the same, meaning the only way I can influence the value of an asset is by addressing the NOI.  NOI is simple to increase: Increase rent and/or decrease operating expenses.

To illustrate this point, here is a quick example before we jump into the introduction to Energy Efficiency (EE).

I purchased UFUO #2 for $40,000.  Half the building was rented and rent was $485/month and included the entire water bill as well as trash (water is separately metered).  Trash is $30/month (for both sides) and water runs anywhere from $100 – $140/month.  Let’s say it’s an average of $120/month.  This was a mismanaged investment.  The local trend has been to no longer include water with the rent.  In addition, rent had not been increased for 5 years, the rent was about 30% below local market rates.

Calculating NOI ($485 – $120 – $30 = $335/month) = $4,020/year
Our Cap Rate is then: $4,020 / $40,000 = 10.05%

I immediately increased the rent and shifted the water/sewer bill to the tenants.  Again, assuming the Cap Rate remains the same, the new value is:

NOI(new) = ($515 – $30 = $485/month) = $5,820/yr
If we now calculate for Value, we get Value = $5,820 / 10.05% = $58,000, an increase of 45%.

We’ve reviewed an extreme example of how your NOI affects the value of your building.  Our example above is relatively basic economics (increase rent and decrease operating expenses = higher valuation).  I want to introduce you to how energy efficiency improvements to your buildings can lead to increased valuations.

Suppose you own a building and have common spaces in which you pay all the utilities.  Next suppose that common space has four light fixtures with four T-12 fluorescent light bulbs (called lamps).  Lets further assume those lights are required to be on 24/7.  We can easily calculate how much those lights cost to operate: 4 lamps x 4 fixtures x 40 watts per ballast = 640 watts per hour.  At 24 hours per day, 365 days per year, at a cost of $0.10/kilowatt (inclusive of all taxes, transmission, etc.), we arrive at a total cost of $560/year to operate those lights.

In order to improve the energy efficiency, the old T12’s can be reduced to newer T8 lamps and ballasts.  In addition to reducing the size of the lamp, you are generally able to “delamp”, meaning reduce the total number of lamps present while maintaining the same amount of available light.  Newer T8’s consume between 28 and 32 watts per ballast.  We’ll use the average 30 watts for our calculations.

If we swap the lamps and improve the ballasts and delamp (two T12’s for one T8), our potential savings would be: 640 watts –  (2 lamps x 4 fixtures x 30 watts per ballast) = 400 watts saved per hour.  This is a savings of $350 per year.  Using the Value equation above, we arrive at an increase in the building’s value of $3,480 because of the reduction in operating expenses.  $350/year may not seem like much; at my day job, we have been working with a client and were able to identify $800,000 in energy efficiency measures…imagine what those savings do to the value of your building! (there is approximately 1M square feet under roof)

The last thing to consider when making any improvement to an investment property is the installed cost.  Using some rough numbers, the total cost for the install for our example above should be: 4 x $15 (ballast replacements), 8 x $4 (T8 lamps), 4 x $55 (Electrician’s hourly rate) = $312 installed.  Obviously, markup, electrician’s rates, taxes, etc. will vary slightly, but it is not a significant cost (it really should only take a qualified electrician 30 minutes per fixture, not one hour above).

Within the first year, not only has the investment paid for itself with the electrical savings, but your investment property is now worth more ($3,480 more in our example).  Not all improvements will have a simple payback of less than one year, but most improvements will easily pay for themselves a couple of times over their useful life with the savings from the operating costs.

Check back for additional energy efficiency improvements for your MF investment.

 

UFUO #1

UFUO #1.  This is the house that got everything started.

My Realtor and I were touring quite a few shabby single family homes, basements completely filled from floor to ceiling with trash (coffin shaped things filled with dirt…a little freaky), mushrooms growing from the ceiling, etc.  I was getting a little discouraged.  All the properties in my budget were horrible.  Not only would I have to worry about Dracula, but I’d also have to complete extensive renovations, all on a thread-bare shoe string budget.

The day we were touring the homes, Zillow.com was indicating a new listing a few blocks away.  I convinced my agent to show me the house.  Walking through the house, I was excited.  The house needed work (it still needs some work), but beyond some moldy bread, a stained carpet and a lack of good lighting, the house was mostly intact.  As we were standing in the kitchen, my agent turned to me and said “Liam, I think this is the one.”

I agreed.  We submitted an offer the next day.

As with any deal, there were a few bumps along the road, but as a whole, everything came together perfectly.  The house needed a little work: new switches, new outlets, work to bring the panel box up to code, shut-offs and a new water meter, a REAL good cleaning and a few new lights.  I was able to complete all of the work for under $2,500.  I don’t have many before/after pictures, but what I do have are found below.

Two weeks after closing on the property, I had it rented for $825/month.  It was a pretty good deal.  I texted my brother the picture of the keys about 5 minutes after I picked them up (my parents didn’t know about the house yet).

 

Calculating your Rent

The perennial problem in business is what to charge for your product.  Charge too much and you can’t sell, but charge too little and there is no profit.  How do you know what to charge for a rental?  Fortunately, there are a ton of resources online to help you decide how much to charge.

Just like any other any other product (your real estate is your product), market research will help you determine how much to charge.  Do you charge the maximum the market will bear?  Maybe.  Maybe not.  It’s possible that you may be better served to charge slightly less than the maximum the market will bear to open the property to better renters who may decide to live long term in your rental.

How I spend many nights.

How I spend many nights.

Before I even start ‘market’ research, I use a calculator that I developed to determine what I would have to charge to make the profit I want.  My calculator is a detailed Annual Property Operating Data Sheet (APOD) and is available for you to use.  Disclaimer: I developed this calculator for my own investments.  The calculator will work for you as well, but does not guarantee success; it’s simply another tool to use.  Ultimately, the decision to purchase a property is yours alone.  (see: Resources; Using an APOD <Not online yet>)

After I know how much I must rent the property for, I start my research on the local craigslist to see if my style of house will rent for what I want to charge.  A lot of property owners (myself included)

My next step is to go to rentometer.com and conduct the same search.  This allows me to see roughly how many similar properties are in the area.  Rentometer provides a good barometer for the type of properties that are in high demand.  Is a three bedroom or a four bedroom house in higher demand (aka: which can I charge more for)?  It’s easy to test your hypothesis, simply change the inputs to the search.

Craigslist and Rentometer offer a great springboard to start your search, but how much demand is there for your rental?  How can you be sure there is demand for what you want to purchase?

For this, I also resort to craigslist.  I produce an ad for my property with my desired monthly rent.  I describe the property, how many rooms, pets (or not), size of the yard, what utilities the tenants are responsible for, etc.  The one key bit of information I always include in the listing is that the property will not be available for three months.  This gives me time to purchase the house and make some small renovations.

My experience is that half of the respondents are not serious, one quarter of the respondents do not qualify as good renters, and the remainder may be good tenants.  If I am flooded with responses, I know I’m not charging enough for the property.  If I get no responses, I may be charging too much for my rental.  My non-scientific test for the appropriateness of rent is to get at least five inquiries within the first 24 hours of the post at a certain price point.

Once I have a good feeling for what the market will bear, what I need to charge for rent, and the number of respondents for my craigslist post, I have a pretty good idea what to charge.  I try to keep my properties nice, therefore keeping my rents higher.  Higher rents also tend to indicate the tenant has a job and is able to pay to live in a nicer place.

I do not want to have the highest rent on the market; tenants then start thinking that you owe them something because of the high rent.  I prefer quiet, responsible tenants, and that is worth a few dollars per month.  If rents are too low, the tenants don’t take care of the property, which can lead to costly improvements in the future.

Rent is not a static number.  Always be aware of the changing demands in your local market.  Is a developer building 1,000 new homes?  How about a new high rise?  Is a large local employer leaving the area?  All of these things affect the rent you are able to charge.

Do you use any resources I haven’t mentioned?