Note from Paula: This is the final installment of my three-part series about my building my real estate empire, one lopsided rotting house at a time. Check out Part 1 — House-Hunting — and Part 2 — Funding — before you read this conclusion.
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NOTE: This article was last updated in 2014 (and all numbers reflect that year).
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More than 2,000 years ago, Roman statesman Cicero said that “refusing to set aside trivial preferences” is one of mankind’s most common mistakes.
Clearly Cicero was a landlord.
I’ve been a renter my entire adult life. So when I bought a three-unit property and started showing it to potential tenants, I assumed I’d be an ace at knowing what tenants want. After all, I’m a renter myself – right?
Turns out, my “trivial preferences” are different than everyone else’s.
I’ve always looked for spaces with character. I love cheerful, bright colors that burst from the walls. It’s flavor you’ll never find in a mass-produced market.
So when I had to replace the home’s exterior siding (it was old and starting to rot), I painted the outside a vibrant, uplifting shade of blue. It’s a beautiful contrast to the drab colors on cookie-cutter homes – or so I thought.
But renters are startled by ‘something different.’
“Gee, that’s sure bright,” the polite ones would say. “Wow, it looks cartoonish,” the blunt ones would say.
Oh sigh.
Here was my first lesson as a new landlord: homes are “cookie cutter” for a reason. Neutral tones are boring (IMHO), but they’re socially acceptable. They sell better. They increase your chances of finding a tenant. Unfortunately.
This sounds like a small lesson, but it strikes at the emotional core of landlording: You must to set aside your “sense of ownership.”
It’s natural to want to put your personal stamp on your home. This isn’t YOUR house. It’s your tenants’ house. This space doesn’t belong to you – it belongs to your “clients,” the renters. I’m just the guardian, the caretaker.
So as I make upgrades, I have to refrain from stamping too much personality onto my choices. I restrain my “trivial preferences,” as Cicero would say.
Who Wants to Live in a Lopsided House?
Cicero’s lesson actually works to my advantage.
As I described in the previous chapter of this series, the house is lopsided. The floors and walls slant towards the center, and the foundation is sinking into the ground.
I worried this would be a turn-off to tenants. Who wants to live in a lopsided house?
Turns out, tenants don’t care about that. Tenants and owners have different interests.
Owners care about structural stability. Tenants just want to know how much the utilities cost.
If I could make one major upgrade to the house, it would be to level the floors, replace the piping or move some walls around.
That’s not what tenants want. Tenants want a nicer dishwasher.
Which is great news for me. A new dishwasher is easy to install. A major foundational shift is much tougher.
This makes it easy to rent the space. Washer and dryer in every unit? Done. Motion-activated security lights? Done. More insulation so that your utility bills are lower? Done.
These are relatively cheap and easy upgrades – and these are the upgrades tenants care about the most.
Create Win-Wins
Cicero also said one of mankind’s mistakes is “the delusion that personal gain is made by crushing others.” Two millennia later, bestselling author Stephen Covey (The 7 Habits of Highly Effective People) rephrased this more succinctly: create win-wins.
This is the key to good real estate investing. Always create win-wins between yourself and your tenants.
Two months before the former owner sold the building, he re-signed one of the tenants into a lease at a steeply discounted rate. Her rent was far below market value – and far below the rate that she herself paid the previous year.
I asked her why she drove such a hard bargain.
“My heating bills in the winter are ridiculous,” she replied. “I need the cheaper rent to make up for the high heating bills.”
I let her keep her below-market rent for the rest of her lease. But I showed good faith by installing $1,000 of new insulation in the attic above her unit. I also added weatherstripping and re-sealed her ducts.
Ten months later, at lease renewal time, I raised her rent $100 per month. She agreed happily.
This is a perfect example of a win-win. I’ll “earn back” our insulation cost in less than 1 year. She enjoys lower heating AND cooling bills year-round.
Okay, Let’s Talk Money
Now for the question on everyone’s mind: Paula, spill your numbers.**
**Note: This post was updated in 2014 to reflect:
- Lower Costs (I battled the property tax bill, found cheaper insurance, snagged lower management costs, and installed water-efficient upgrades)
- Higher Income (I morphed the units into luxury apartments — which commands much higher rent).
Mortgage — $1,361 per month. (This is PITI: Principal, interest, taxes and insurance. Battling our property tax bill and aggressively shopping for insurance helped us lower our mortgage!)
Water — City of Atlanta water prices are among the highest in the nation – we averaged a $350 monthly water bill when we bought the place. Our efficiency upgrades (low-flow shower heads, aerators, WaterSense toilets) lowered our water bill to $150/mo. Another win-win between our wallet and the earth.
Trash — I nearly fell out of my chair when I opened my $1,200 annual bill for city trash service. The City of Atlanta charges for trash as through we’re three separate households – tripling the trash bill. Cost: $100/mo.
Maintenance — We save one percent of the purchase price, or $2,250 per year ($187 per month) in “standard” maintenance costs. Round it up to $200/mo for an even number.
Management — Allocating $250 per month for the building in management fees. Yes, I manage the property myself, but I also pay myself for my time. That’s my active income as a manager, not passive income as an owner. If you talk to a landlord who pretends their “profits” are sky-high because they pay themselves $0, they’re engaging in bullshit accounting.
Vacancy: The moment I advertise an opening, a unit fills within hours. (At the next turnover, I raise the rent, and it STILL fills within a couple of hours). Nonetheless, for the sake of being ultra-conservative, I’ll work a $200/month vacancy factor into the equation, despite the fact that I haven’t had a single unplanned vacancy in 4 years.
Total Expenses = $2,161 per month, or $25,932 per year.
Income (as of 2014):
3-Bed/2-Bath: $1,700
1-Bed/1-Bath: $1,100 (This now varies monthly due to The AirBnb Experiment).
1-Bed/1-Bath: $1,150
Total Income: $3,950 per month, or $47,400 per year
Cash Flow: $21,468 per year!
What happens with the money? It’s reinvested, of course! The cash flow gets used for renovations.
This creates another win-win. The tenants get to live in a progressively nicer house. Their rent goes directly into improving their living space. And I get to fix the many (many!) problems in this 100-year-old building.
Update 2014: I’m finished renovating the house. I’m now putting the cash flow into aggressively paying off the mortgage, with an ambitious goal of being completely mortgage-free by Christmas 2015 (five years after buying the house.)
Epilogue
Update: I’ve expanded my portfolio, and now earn more than $40,000 per year in passive rental income. I’ve bought House #2, House #3, House #4 and House #5. Read about them here, or check out the Real Estate FAQ HQ, which has a bunch of details on all the properties.
