Net Income on Our Duplex Last Year… Negative $7,400!!

Net Income on Our Duplex Last Year... Negative $7,400!!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
Ordinary Income/Expense
Income
Refund15.000.0015.00
Security Deposit Forfeited0.00800.00800.00
Late Charge100.0025.00125.00
Reimbursed Expenses986.660.00986.66
Total Rent
Rental6,985.008,613.0015,598.00
Total Total Rent6,985.008,613.0015,598.00
Total Income8,086.669,438.0017,524.66
Gross Profit8,086.669,438.0017,524.66
Expense
Property Repairs & Maintenance8,292.623,831.0012,123.62
Management Fee633.50869.301,502.80
Lease Commission Exp750.000.00750.00
Utilities
Water664.440.00664.44
Sewer885.180.00885.18
Total Utilities1,549.620.001,549.62
Total Expense11,225.744,700.3015,926.04
Net Ordinary Income-3,139.084,737.701,598.62
Other Income/Expense
Other Income
Owner Contributions4,300.003,301.497,601.49
Total Other Income4,300.003,301.497,601.49
Other Expense
Owner's Profits0.000.009,200.11
Total Other Expense0.000.009,200.11
Net Other Income4,300.003,301.49-1,598.62
Net Income1,160.928,039.190.00

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.

 

The plans

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!!

— Jim

18 thoughts on “Net Income on Our Duplex Last Year… Negative $7,400!!”

  1. Richard Engelhardt

    Ah – young Jedi – I see the unmentioned name of Obi-Wan in there! 😀 😀 … LOL!

    First off – thank you for all the kind words & the fact that you lumped me up there with Bob Kawasaki ( I know – I differ him/agree with him just enough to fudge his name) will add some strut to my step today!
    Anyhow _ i’m going to go back over your figures with a fine tooth comb.
    I do have to caution you though, you can’t look at a real estate investment as a short term type of thing.
    You have to view it in the proper perspective – the whole enchilada.

    Short term losses are what spook a lot away from REI. I look at it the same way as my once upon a time (actually twice ) parachuting experience. About 25 of us showed up at 8 am on a Sunday to learn how to parachute. We practiced our push off from the plane and our PLF’s (parachute landing fall) and smoked cigarettes on break and laughed and had a good time. Around lunch, the instructor told us to have a good lunch, be back in an hour – and – we’d go over all the stuff you need to know when things go wrong!!!
    LOL! Maybe a dozen returned from lunch 😀 .
    With REI it’s the same. You have to consider the whole birth to death of the property and it’s ancillary benefits. As you mentioned – you live in Panama & your rental unit is in Ohio. That’s a potential big time write off when you visit your rental.
    The other thing is – yes – you spent $5k – but – you have to depreciate it over ten years, so, that $5k becomes only $500. Or thereabouts.
    One beauty of REI is there are few hard and fast rules.
    My only real hard and fast – practice – is to pay off the property ASAP. That way, you become the “bank” and you are “borrowing” the money from yourself.
    We’ll talk more on this next time we get together and try to drink all the beer in Ohio 😉 .

  2. Sorry about your negative year🥴. We’ve owned many properties over the years, which we managed ourselves. Obviously no one takes care of them the way you would. We actually sometimes offered to pay a few hundred dollars to a tenant if they left (with no damage or garbage) because it was cheaper and faster than going through eviction process. Their incentive was $ and no eviction on their record. Although it bites, the result is you turn the property faster and cheaper. If they already have bad credit that’s all on your property management company🤨
    We had a management company for a property we own in Cleveland because we live out of state. Just fired them in December for incompetence. Wondering if it’s the same one🤔. Initials are HH 😂. Even with hassles rental properties have been good for us, tax incentives also help. We’ve had some great tenants and some not so great, but we’ve enjoyed helping people over the years as well.
    Don’t beat yourself up. Maybe a trusted friend who is handy (or knows a good handyman) is a better alternative than a management company 🤷‍♀️ The rental companies really seem to look out for themselves, and we also found they were funneling repairs to an affiliate company who was overcharging for everything 🤯
    At least the loss and depreciation will offset some of the great profits from the market 👍
    Good luck on getting a new tenant quickly.

    1. Haha, different initials on the property management company, but now I’ll be doing some digging to find out who yours was! 😉

      I’ve heard of landlords paying for tenants to leave. Glad to hear from someone firsthand that’s done that successfully. That sounds like a very smart move to use when needed.

      You’re right about the tax benefits – that outweighs some of the aggravation sometimes… and can actually be really helpful in years like this! 🙂

  3. I love your honesty in posting this, many people only like to brag about their success stories! We own rental properties and for the most part have been a positive experience, we just went through an eviction and you would not believe the state they left the place. It cost $7.5k just to make the place ready to rent again. It’s appreciated $30k so decided to sell to recoup some losses and roll the profits into a higher value property. I love the tax advantages and the mortgage pay down of real estate, but it definitely comes with challenges. It also helps to own several so that they balance out across a portfolio over time. Don’t be disheartened you are not alone!!!

    1. All about the honesty over here, Rachel! The failures usually pave the way to the successes so I think it’s important to share it all.

      That sucks on your rental house – sorry you got bit on that. It’s such a small percentage of bad apples out there but if you get stuck with one, it can be costly. Glad to hear that the appreciation worked in your favor though!

  4. Hi Jim,
    Yes, being a landlord is not for the faint of heart.(I speak from experience) But I do believe that owning good investment properties has many benefits. That being said, it sounds like you have a good rental property, but I think you might need a new property manager. After the rent was not paid on your property in November, and the grace period had passed (I don’t know what that is in Ohio) your property manager should have legally notified the tenants immediately to pay in full or vacate the property. If the tenants subsequently did not pay, your property manager should have begun eviction proceedings immediately. It sounds harsh, but when you think about it – you’ve met your part of the contract – providing a safe, fully-functioning dwelling, yet the tenants are not performing their part of the contract – to pay their rent in full and on time. It’s your property manager’s responsibility to oversee that contract and do their part to enforce it as much as they are legally allowed. That property manger works for you, and they didn’t do their job. Next time you’re back in the U.S., I’d interview some new property mangers. Finding a good property manager is not always easy, but once you have one, they are worth their weight in gold.

    1. Agree completely, JMac. This process should have been started long ago and I think the only reason it ever did was because of my phone calls. I’ll definitely have to decide whether to get anther company or maybe put this one on notice.

  5. Sorry to hear that. Hopefully, 2020 will be better. We had a tough year too, but that’s mostly from trying to sell. The place was vacant for 6 months until I gave up. It’s rented now so things are looking good this year.

    Property managers… What can I say? They’re good when there are no problems. As soon as there is an issue, they usually suck. I find most of them are over capacity. They take on too many properties and can’t handle problems.

    I think with rentals, you need to go big or go home. If you have 30+ properties, you can hire a dedicated manager who’ll work 100% for your interest. The numbers work out much better then. Being a small time landlord doesn’t work well unless you can DIY a lot of stuff. Just IMO.

    1. I think you’re right on a number of counts – just like a lot of other businesses, as you grow you can do some things much more efficiently and effectively. And yes, finding a really good property manager is like finding a needle in a haystack. This one’s been pretty hit or miss so I’ll need to figure out what to do with them.

  6. Ouch, that’s a rough one Jim. In a way though, it’s not as bad as it seems. Even though you’ve got a bad tenant right now, that AC system is an investment. You’ll be able to charger higher rent and get a better quality tenant soon.

    That said, having negative cash flow like this is unpleasant. And dealing with rotten tenants is unpleasant too. I hope this all gets resolved quickly and the property gets back to kicking-off cash for you.

    Keep your chin up!

    In my view, REITs are a much easier way to generate real estate income. I’ve owned a couple of them for decades, and they’re extremely stable income generators.

    1. Agreed. This is a tough year with the property, but maybe I’ll get a nice refund when my taxes are done, right? 😉 But you’re right – the improvement should hopefully give me an upper leg on future renters so a good chunk of this is an investment more than anything.

      I’m a big fan of REITs as well. You don’t get all the advantages that you get with physically owning property but you also save yourself a lot of headaches, too!

  7. I hope this doesn’t discourage you from real estate. We started with a couple of rentals in 2005 and 2006 and then became more aggressive starting in 2013 adding 8 more rentals net (b/c we sold some) to our portfolio to have 10 rentals currently. Sometimes we have $5,000 turnover costs. We had a mold issue that cost $10,000 on one property. We are currently in the midst of a 4-month and counting vacancy. Stuff happens, but overall and over time, it’s been net profitable. Previous comment pointed out depreciation which is very helpful. Also, don’t forget loan paydown — your profit isn’t only the profit from rent but also that your mortgage is going down. The uptick in principal can be significant, especially if there is some appreciation as well. We have cash-out refinanced a few times in order to buy more property — I call it houses birthing more houses, and it’s another way that real estate pays off even if it’s not cash dollars in your pocket. Hoping this year is a better year!

    1. Excellent points all around, Caroline! I do plan to hang onto the duplex for all the reasons you mentioned, but I think it’s time to either have a sit-down with my PM or replace them completely.

      By the way, nice job on having so many rental properties – that’s fantastic! 🙂

  8. First, thanks for sharing your story. I think your decision to spend that 5k was a wise one, it can be written off as an expense and it can also be attractive to prospective tenants. Have you ever thought about buying a rental property in Panama? I heard that there is a housing boom out there.

    1. Panama’s an interesting place when it comes to housing. It seems like there’s not really a solid way to figure out what places are worth. They started an MLS type of system here a few years ago, but some agents use it and some don’t. Plus a lot of expats might build or buy a place here and then a few years later move back to the U.S. or whichever country they’re from. They put the house up for sale at a high price because they don’t need the money and it just sits – sometimes for years. It throws the numbers off completely.

      I know people who buy rental property here, but it’s something you really need to be careful with. I might consider it at some point down the line, but you really need to know the areas well. It’s also… different here in regards to laws so you need to know what you’re doing.

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