Alright, another month and another cash flow report. Rental Property #5 closed in mid-February so I was able to complete my first full month of ownership in March. Adding more income streams to the mix is always fun, and I was very eager to see just how much cash flow seven units would contribute to the bottom line. Right out of the gates, Rental Property #5 was off and running, but unfortunately, some other issues popped up this month. Please see below for more details…
Here’s the report for March:
Rental Property #1: Bay Area
Rental Property #1 continues to perform at an All-Star level. Another month, and some more cash flow coming in! Not much to report here except the fact that my insurance premium went up a few bucks this month. I paid for the entire year, which works out to $27.75/month. The old premium was $23.83/month.
Total cash flow for the month was $447.67.
Rental Property #2: Bay Area
Similar to Rental Property #1, this property also continues to perform at an All-Star level. I must say, I really did luck out with my two local purchases; I only wish I had the opportunity to buy more. Unfortunately, the market just rebounded too quickly, so I was fortunate enough as is to just be able to acquire two units. Similar to Rental Property #1, the insurance premium went up this month (I use the same insurance company for both properties). The new premium is $25.83/month, which is an increase from $21.42/month. Outside of that, there’s nothing more to report.
Total cash flow for the month was $344.76.
Rental Property #3: Chicago
Rental Property #3 is starting to get better. The first floor tenant is still stellar, like always, and continues to pay rent on time without incident. This tenant is a market rate tenant. Her lease is expiring soon, but I hope she elects to stay… Forever! 🙂
The second floor tenant made two payments this month ($188.00), and is starting to catch up on her rent. She still has a positive balance, but she’s definitely making improvements from before. 🙂 She is a Section 8 tenant, and her monthly rent comes out to be only $94. So, even when she doesn’t pay, it’s not the end of the world… The PM and I are working to get her caught up.
Total cash flow this month for Chicago came out to be $978.14.
Rental Property #4: Indianapolis
A quiet, uneventful (boring) month is EXACTLY the kind of month I’m looking for. When investing is “fun” or “exciting” (see below), it usually means things aren’t going so smoothly…
Rental Property #4 ran into some problems last month, and I almost had to face my first eviction. At the last minute, the tenant decided to show up at the PM office and make rent payment.
I was quite relieved! This month, I was hoping she would get back on track, but it was just not meant to be. The tenant decided to go AWOL again this month, so the PM and I were right back on the eviction trail.
From the PM:
She has been struggling for a while now to stay caught up so I wish I was surprised. She was trying to make it work, but I think she’s just given up. She didn’t provide anything other than that (information). I know it’s difficult for people like you and I to understand how someone could just let that happen without giving a backstory, but that is the case in this situation.
It will take a week or two to have the home in rent ready condition again but we will begin marketing the property immediately. I do not want to nail down a timeframe for you and misspeak, but your rent guarantee will ensure that you will not go without seeing a return. We take the hit on all of these costs to prepare the home for the new resident as well, so trust me when I say that we have tried to prevent this from happening.
Going through an eviction isn’t fun, but it is a good learning experience. I’m actively figuring out what to do to help prevent this from happening again in the future. To be clear, I’m not blaming the PM for this mess (they get this one free pass). However, I do find it necessary for me to put in the time to learn how the entire process of tenant screening works. If I don’t learn from this experience and it happens again in the future, then it’s both our faults. I’m currently working with the PM to setup the screening criteria for the next tenant.
Here’s how the process works:
We use the National Tenant Network to do all of our screenings for new residents and based on their score (which computes together several factors) we either approve, approve with a higher deposit or conditions or reject. We can adjust market rents if that is needed, and I can talk to our leasing team about that if we are seeing a home vacant for more than we like.
I want you to feel confident that you don’t have worry about these things…our job is to do these things for you and for you to see the return on the investment and the monthly disbursement.
An eviction also lets me test the PM and gauge their performance in handling the situation. In my case, I actually have nothing to lose because one of my conditions for closing was to secure a 1-year rent protection guarantee. So, the PM really has no incentive to want to go through an eviction; they’re the ones eating all the costs.
Here’s some more info about evictions:
Evicted tenants do not get their security deposits back…namely because they owe us more money than the security deposit is for and typically have other costs on top of just the arrearage. The tenants are charged legals bills just as you are. In fact, they are charged a large bill because we charge an admin cost for the time and effort is takes to process evictions on our end. So yes, those charges are added on. Once the tenant is out of the home and we have final numbers to process their final account statements, we then submit those to our attorneys and a damage hearing is set for a future date (typically a couple of months out). If the resident does not dispute the final accounting statement, then a judgement is settled at the hearing and goes on their credit report and our collection agency then works for you/us to collect on the outstanding debt. If the resident pays any of that debt, it goes back to you.
Costs for eviction (no rent protection):
There isn’t a set price on what it costs to prepare the home…it depends on the condition at move out. We can sometimes gauge it from a pre-move out inspection, but all in all, we really can’t say until. It also depends on the deposit paid. The owner is only responsible for the cost of the turn above and beyond the security deposit. Evicted tenants do not typically take the time to clean or touch up anything before they move so basic expenses are cleaning the home ($130-150), cleaning the carpet ($110-150), touch up paint or full paint ($150-500 — this is the most variable expense), and minor maintenance like changing an air filter, mowing the lawn, etc. ($75-100).
Legal bills for an eviction will total $186 for the filing, and $13 additional if a writ is issued.
You are only charged a leasing fee once per a 12 month period, so in this case, there would be not extra leasing fees (tenant placement fee) after a new resident is placed in the home. You would just begin seeing regular management fees come out again.
I was charged this month for a writ bill:
A writ is provided by the courts for the landlord to take back possession of the home. It goes into effect at a certain time/date and can be used anytime during a set period of time (typically 30 days). We have the ability to exercise the writ anytime after it begins. It is also what is needed in order to call the constable and have her forced out of the home. This means that if she does not move voluntarily, the writ gives the landlord the legal right to remove any and all belongings that are on the property out of the property by our own means and costs and then the property is re-keyed and her possessions go into storage and we are no longer tied to them.
In spite of all this drama, I was able to collect $505.18 this month in cash flow.
The PM has a court order to take back the home on April 07 (I’m so glad Indianapolis is in a landlord friendly state!). Once the home is secured, 1-2 weeks will be needed to make it rent-ready for the next tenant. The PM has already begun to actively search for a new tenant.
So, am I turned off from this negative experience? I wouldn’t say so. I still believe that I picked out a quality property in a good neighborhood. Further, I have trust in the PM in place, and I really believe that this one incident is more an aberration than anything. I do have datapoints from other investors who are working through the same PM company, and so far they’ve been having a great experience. Evictions are unavoidable… It comes with the territory of being a landlord. On the bright side, it’s a good thing this is happening now while my rent protection is still in effect! 🙂
Rental Property #5: Chicago
Moving on from the drama that was Indianapolis, we arrive at Rental Property #5. From Day 1 of closing, this property was cash flowing, which is just the way I like it! The first floor tenant is Section 8, and $1098/month of the rent is subsidized. The tenant portion is $110/month. The second floor tenant is market, and their portion is $1250/month. Total rent for both units comes in at $2458/month. I was able to collect full month’s rent for March, and pro-rated rent for February.
After all expenses, total cash flow came out to be $1,524.45.
March marked the first full month where I’ve had five properties (seven units) rented out. Total cash flow for the month came out to be $3,800.20. Granted, a bit of extra change came in this month due to additional rents coming in for Rental Property #5 (pro-rated February). Nevertheless, seeing over $3,000/month in net cash flow is still a great feeling. Moving forward, I still plan on acquiring an additional rental property sometime this year; this will only help increase the cash flow even more. Getting to $3,000/month in net cash flow (after all expenses but assuming no vacancy/maintenance reserves) was one of my goals for 2014.
With that said, it is important (and always necessary) to point out the need to set aside a large portion of any net income for reserves. One of my primary goals this year is to build up a strong cash buffer. I’m going to keep diligently working on that throughout the year. Hopefully, the passive income stream keeps on snowballing and I’ll be ready to declare early FI sooner rather than later. In an ideal world, I’ll be able to hit $5,000/month in cash flow before checking out of the cube for good. Next month, I hope to have Rental Property #4 back on track…