I might not be the smartest businessman, but I keep thinking that a negative net income in regards to your rental property for the year is not good.
And just over $7,400 in the red makes it so much worse!
Ouch, what the hell happened?!
This duplex was supposed to be another stream of income that would help level out the bumps from rockiness in the stock market over the coming years. Last year though, proved to be a particularly bad year for us on that front.
The good news is that we had a nice bull market to help even things out a little. That’s the whole point of multiple streams of income. When one goes bad (hopefully, only temporarily) the other(s) can help keep the ride a little smoother for you.
But over $7,400 in negative net income for one duplex??! That’s a tough pill to swallow.
So let’s talk today about the good, the bad, and the ugly with this property.
Why we bought this property
Near the end of 2015, I had set out to find a new rental property – the rental property investment chase, so to speak. We already had a rental house at the time, but I wasn’t thrilled with that place and wanted an additional property. On an aside, we ended up selling that first rental house in 2018.
But, I had learned from my mistakes and wanted something in a better neighborhood that would cash-flow a little better. Thanks to the help of my financial mentor and after looking at several properties, we were able to find a place in less than a month.
It was a side-by-side duplex in a nice area in northeast Ohio about 45 minutes south of Cleveland. What’s nice is that I knew the area well – in fact, Lisa and I had lived in that city about 6-7 years earlier. It’s a very nice neighborhood and has quite a number of renters versus buyers.
The duplex was built in 1967 and each side has 2 bedrooms and a bathroom with an upstairs, downstairs, and basement. It’s only about 1,000 square feet with a little more than a quarter-acre of land and each side has its own driveway.
It was in great shape and pretty much rent-ready. One side already had a tenant in it so that was a good start.
Going rent was about $750 (per side) in similar properties around so that would mean about $1,500 in rental income with both sides occupied. I knew that with a duplex, I’d likely have higher turnover than a single-family home, but still – this looked good.
We also caught it at a great time and we were able to get it for $98,000 due to a distressed seller. I put $25k down and the mortgage is at 4.75% for a 30-year fixed. We closed on it at the end of December 2015.
With taxes and insurance, my payment is just over $650. So even with one side empty, the other side can cover the mortgage payment. That still works even after my property management company takes out their cut of 10% of the rent.
Life was good after that. After I made some minor changes and a friend and I replaced a hot water tank, I turned it over to my property management company. They were able to get both sides rented out for between $750-$800 per side. I probably lose a month’s worth of rent on each side almost every year with tenant turnover (that’s just how it is there), but our net income was great for the first few years.
What happened to our net income?
Except for some minor repairs eating into some of our net income (to be expected), this duplex has been a pretty solid investment for us.
So what the @#$% happened last year?
Well, it was definitely a rough one for us…
Cooling the tenants down…
The majority of our problems came from us trying to be too nice. The property management company presented us with a request from one of our tenants to put in ceiling fans. This came in August.
Remember, this is in northeast Ohio – the winters are cold, but the summers can get pretty hot. The duplex doesn’t have central air so I could see how things could get pretty toasty there.
I pondered the request for a little bit and then thought I’d bounce the idea off my financial mentor to get his thoughts. He owns a half a dozen or so rentals and I believe most of them are paid off and just vomiting cash for him. He’s a smart guy when it comes to this stuff.
His response on whether or not to put in ceiling fans:
I’d put in A/C- but that’s just me. [We] tend to go overboard on shit to make our places stand out from other places.
You can get more rent with central air. You also get a better class of people and usually a longer term. Look at it this way.
There’s a lot of places that are more or less the same. You want something that sets you above the rest in the most postive way.
That took me by surprise. But he’s right – he knows the area and you don’t find very many rentals around there with air conditioning. It would be a differentiator for sure.
His ballpark on what it would cost to install it on both sides was $5,400. That’s a big chunk of change, but still an interesting idea. I talked about our options with Lisa:
- Tell the tenants “thanks, but no thanks” and call it a day
- Install ceiling fans on both sides of the duplex to make for some happy tenants
- Go above and beyond and drop some serious dough to install central air on both sides
Lisa leaned toward getting ceiling fans but left it in my hands. I went back and forth on this, but I decided to think long-term. I talked to the property management company about the cost of installing central air throughout as well as the A/C units themselves. Total cost: $5,600. My friend was off by only $200… very impressive!
I pulled the trigger on it and it was done before the month ended…
$5,600 for this long-term property improvement. Will I be able to command a higher rent for it as time goes on? Only time will tell! In the meantime, that’s a nice improvement to depreciate on my taxes.
Pay up, my friend!
The other big ding to our net income for the year on our duplex was a pain-in-the-butt tenant.
Sometimes a tenant stops paying rent. Ah, life as a landlord – so much fun.
My double-edged sword is that I use a property management company. It’s good because I don’t know my tenants so I’m able to keep the relationship strictly business.
However, I have to trust the management company to handle everything… and of course, I pay them to do so!
This past year I had a tenant who suddenly stopped paying rent. I’ve been lucky in that I’ve never had that in over a decade of renting out my properties.
What’s tough is that my property management company is hit or miss on their communication. I noticed some problems with my statements over a few months…
- November: no rental income from side #1; full rent from side #2
- December: about ⅔ of a month’s rent payment from side #1; full rent from side #2
- January (of this year): no rental income from side #1; full rent from side #2
I finally got a hold of the management company to find out what the heck was going on. Sure enough, the tenants had stopped paying on the one side and the management company was accepting partial payments (a no-no in the rental world!). I immediately squashed the partial payments.
Then they said they were looking at evicting the tenant. I asked about what their story was and why they’re not paying (I’m not some evil tyrant). But the tenants aren’t even trying to pay and are dodging calls… time to get them out of there!
The eviction process has now started, but that cost me about $975 in lost rental income for the last couple of months of the year. That’s going to hurt a lot this year, too, depending on how fast we can get them out of there and get new tenants in. We’ll also have the cost of the attorney and the additional cost of my management company representing me since we’re here in Panama. Ugh.
This should have been started as soon as they missed the first payment. Serves me right – I forgot that you have to keep a close eye and manage your property management company.
Just to add to it, those tenants stopped paying for water and sewer as well. That ended up costing me around $750 for the last couple of months of the year.
Again, having one “good” side of the property being able to cover my mortgage payment makes this a little less painful. However, it’s still not something any rental property owner enjoys.
The usual repairs
The other blow to our net income for the year from our duplex was from repairs. We had some plumbing issues, replaced some carpets, had a furnace repair, had some move-in repairs that needed to be done, and a bunch of other small issues.
In total (and not even counting the install of the central air!), we lost a little over $6,500 to repairs. That’s a very rough hit to the bottom line!
Paying the management company
Nothing unusual on this front, but we spent about $1,500 in property management fees for the year.
Finding an excellent property manager is extremely rare. Finding one that’s considered very good can also be a struggle. I’d rank mine as good – 3 out of 5 stars.
I hate the way that most management company agreements work in general. They usually get paid a monthly percentage of rent received, but they also get paid to replace a tenant. In my case, that replacement fee is one month’s rent.
The incentive to find loyal tenants is not really in the management company’s best interest at all. I’m planning to come up with a more incentivized way of doing things – either with this company or another. I think it should be a win-win agreement with bonuses and such, but I just need to figure out a plan that makes sense.
Once I have something on this, I’ll write about it here, of course.
Net income breakdown
How about this for transparency? Here’s the actual breakdown of numbers we had from the property management company for the year…
|Duplex (Side #1)||Duplex (Side #2)||Total|
|Security Deposit Forfeited||0.00||800.00||800.00|
|Total Total Rent||6,985.00||8,613.00||15,598.00|
|Property Repairs & Maintenance||8,292.62||3,831.00||12,123.62|
|Lease Commission Exp||750.00||0.00||750.00|
|Net Ordinary Income||-3,139.08||4,737.70||1,598.62|
|Total Other Income||4,300.00||3,301.49||7,601.49|
|Total Other Expense||0.00||0.00||9,200.11|
|Net Other Income||4,300.00||3,301.49||-1,598.62|
This was just an import of my actual numbers – hopefully, it’s not too confusing.
If you just look at these numbers from the property management company, we made $1,598.62 for the year. But then we need to account for about -$9,000 for the other side of things: mortgage payments, insurance premiums, and property taxes.
Do a little basic math and that brings the net income for the property to close to -$-7401.38.
Hoofa! What a year! Thank goodness for the stellar stock market year to make me feel a little better about this loss.
Having a negative net income for the year is not something we like on the record, but shit happens.
If you’ve ever owned rental property, I’m sure you already know this. And if you’ve ever considered owning any rental property, be aware that it’s not always a bed of roses.
Regardless, this was one bad year with at least part of it at least sort of planned. The installation of the A/C units was something I decided to roll forward with even though we didn’t need to do so. I’m hoping this investment pays off in the long run.
Other than that, the property’s in a good area and usually attracts solid tenants. The place itself is in very good condition and I got it for a good price with a nice interest rate. Most importantly, it generally cash flows very well.
I doubt that I’ll get any more properties though. A year like this can be extremely frustrating and add a lot of stress to your days. When I look at the part of my portfolio that I have in REITs (real estate investment trusts), I think about the diversity I get from owning so many properties under each share. It’s nice that I don’t have these headaches and still get that hedge against the stock market.
However, owning physical property has its merits, too. Not only do you some nice tax benefits you can’t get from REITs, but you actually own the property along with the equity – appreciation can be your friend over the years. Additionally, you have a physical property that can be lived in if things really go bad. And it can be passed on to heirs if desired.
It was obviously a very rough year for the rental property, but we’ve had a few really good years out of it as well. I do think it’s a solid investment over the long-term so I do plan to keep the property for the foreseeable future.
What do think? Does seeing a loss like this scare the bejesus out of you and make you want to stay away from rental properties completely?
Thanks for reading!!