Week 2 of full-time self-employment – I feel like I quit my job just in the nick of time. It looks like all of our apartments have finally been rented! Even the two we haven't quite finished renovating look like we'll have ink dry on the signed leases before the paint is dry on the walls. I know I couldn't have done this without the team effort I described in last week's post: http://thisgingerjustsnapped.weebly.com/blog/self-employed-week-1-filling-empty-rentals
This week when I settle the business accounts I will be writing a nice commission check to each of our leasing team members. We decided to take a month's rent and split it four ways: Sherri for doing daily return calls and applicant screening, Mark for returning calls and handling some showings, and Illana for handling quite a few showings. Steve & I will split the remaining quarter for our own efforts. This week I'll be writing commission checks on three leased apartments. Probably a fourth one next week.
This is a huge turnaround for our rental business, which has been in the doldrums since early 2016. We won't be exactly rolling in dough, but now the rental side of our business will hold its own – rents will cover all expenses with a small profit left over provided no major disasters occur. And that's a huge improvement on what had been – rentals running at a loss, sucking profit from other areas of our business – the sale of our flips, wholesale commissions, construction jobs.
So why keep the rentals?
I get asked this question a lot. If the other streams of income are more profitable, why keep being a landlord? Rentals are a huge pain in the ass. Tenants destroy things. They can stop paying rent and it can take over a month to get your unit back, plus if they trash it it will cost a lot of money to clean it up, fix it up and rent it to someone else who just may do the same thing. Why bother?
Well... Tenants, for the most part, are just regular people who want a place to live, take a shower, go to work, raise their families, play beer pong on Friday nights and binge watch This Is Us. Bad tenants destroy things. Having a good screening system helps. But even with the best screening, you're going to get a bad tenant every once in awhile. Ask any landlord. It was very life-affirming to find out it wasn't just me!
You need a 30% maintenance and vacancy pad, NOT 10%
When Steve & I were purchasing our rentals, we included a 30% maintenance and vacancy pad per unit. That means if a unit rents for $1,000/month we set aside $300 every month. Most realtors only allow for 10%, which is unrealistic. I hear the argument – you will NOT spend $300 every month on maintenance to that unit! No, we won't. BUT if that tenant doesn't pay the rent one month, we're out $1,000. By the time we go through eviction that's another $1,000 we'll lose the next month, plus nearly $300 to the court system. If they trash the place on the way out, it'll be $1,000 to $2,000 more to clean it out, fix anything broken, make it look nice again, advertise, screen applicants, show and finally lease. If we re-rent it quickly enough so that we don't lose another $1,000 rent check we will have done well. All the sudden that $300 per month seems like a smart idea rather than overkill, doesn't it?
We need to profit $100 per month, per unit, after mortgage, taxes, insurance, any utilities, and that 30% pad. That means we walked away from a lot of rentals for sale before we bought the ones we did. We only bought if the numbers worked. And that, I believe, is the main reason we are still alive after two rather crappy rental years! That, and the fact we found other sources of income like flipping houses, wholesaling and renovating for other investors.
6 Good Reasons to Keep Rental Property:
1- Most tenants are decent people who pay their rent and keep a nice home
2- If we have that 30% maintenance & vacancy pad, even a Tenant From Hell won't kill our business
3- The income from rentals is favorable under current tax code – the government doesn't take as big a chunk out of it as they do other types of self-employment income
4- Rental income is pretty consistent – you're going to get something coming in every month so if you have a crappy month of wholesale commissions you can still keep the lights on
5- The buildings we own are assets and increase our net worth. As the years go by and the mortgages are paid off, there are many options: we could refinance and use the cash to fund other business ventures, or even to send Savannah to college. Or we could choose not to refinance and own the buildings free and clear, increasing their cash flow and providing a nice, passive retirement income for us.
6- If the shit really hits the fan, we can sell a building or two, and still have a nice portfolio. We did that last year. We weren't desperate to sell (the shit hadn't quite hit the fan yet, but I could smell something!) The price we were offered was right and the money came in handy, believe me.
And that's why we're bothering to keep the rentals, even though we have developed other sources of business income.
Yes, they are a pain in the ass. I got a complaint this morning (Easter Sunday) from a second floor tenant. Some of our new tenants moved into the apartment below her – three young men in their early twenties. She smelled pot in the hallway. I will address that with them tomorrow. I will explain that illegal drugs are not tolerated in my building. I'll probably also tell them about towels under doors, incense and fans. By their age they should know about these things! Geez, kids today!
I also have one uncollected rent. The tenant is claiming she mailed the check. Problem is, this tenant is a “frequent flier” as far as paying rent late. That I will have to deal with tomorrow as well. I'm pretty gentle with my later payers. So far I've managed to collect from them without having to file any evictions. I hope this holds true with this one. If not, that's just the cost of doing business.
Successful Systems = Successful Business
My husband and I are creating a system. One year from today, I want to be training someone else for the job I do now as property manager. It shouldn't take us longer than one year to put a system in place through trial and error and find out what works. This person will be an actual employee of our company, not an independent contractor. Rental profits alone aren't going to pay her salary, so we need to expand our other lines of business as well.
This is only week #2. I have such grand visions for this business and so much work to do to make them come true. I worry about my husband's stress levels. This week I'll be set up to take all the maintenance requests from the tenants as well. I don't want Steve to even know what's going on with tenants anymore – he needs to focus on dealing with the sub-contractors on our flips and construction projects. And he needs to stop eating at Long John Silver's and go to the gym, but that's another blog post for another week. Let's just say as we build this company, self-care will be part of the corporate culture.
Building systems. Corporate culture. I sound so grown up! Trust me, I know what I'm doing. Not terrified at all! Now to get ready for Week #3.
This week when I settle the business accounts I will be writing a nice commission check to each of our leasing team members. We decided to take a month's rent and split it four ways: Sherri for doing daily return calls and applicant screening, Mark for returning calls and handling some showings, and Illana for handling quite a few showings. Steve & I will split the remaining quarter for our own efforts. This week I'll be writing commission checks on three leased apartments. Probably a fourth one next week.
This is a huge turnaround for our rental business, which has been in the doldrums since early 2016. We won't be exactly rolling in dough, but now the rental side of our business will hold its own – rents will cover all expenses with a small profit left over provided no major disasters occur. And that's a huge improvement on what had been – rentals running at a loss, sucking profit from other areas of our business – the sale of our flips, wholesale commissions, construction jobs.
So why keep the rentals?
I get asked this question a lot. If the other streams of income are more profitable, why keep being a landlord? Rentals are a huge pain in the ass. Tenants destroy things. They can stop paying rent and it can take over a month to get your unit back, plus if they trash it it will cost a lot of money to clean it up, fix it up and rent it to someone else who just may do the same thing. Why bother?
Well... Tenants, for the most part, are just regular people who want a place to live, take a shower, go to work, raise their families, play beer pong on Friday nights and binge watch This Is Us. Bad tenants destroy things. Having a good screening system helps. But even with the best screening, you're going to get a bad tenant every once in awhile. Ask any landlord. It was very life-affirming to find out it wasn't just me!
You need a 30% maintenance and vacancy pad, NOT 10%
When Steve & I were purchasing our rentals, we included a 30% maintenance and vacancy pad per unit. That means if a unit rents for $1,000/month we set aside $300 every month. Most realtors only allow for 10%, which is unrealistic. I hear the argument – you will NOT spend $300 every month on maintenance to that unit! No, we won't. BUT if that tenant doesn't pay the rent one month, we're out $1,000. By the time we go through eviction that's another $1,000 we'll lose the next month, plus nearly $300 to the court system. If they trash the place on the way out, it'll be $1,000 to $2,000 more to clean it out, fix anything broken, make it look nice again, advertise, screen applicants, show and finally lease. If we re-rent it quickly enough so that we don't lose another $1,000 rent check we will have done well. All the sudden that $300 per month seems like a smart idea rather than overkill, doesn't it?
We need to profit $100 per month, per unit, after mortgage, taxes, insurance, any utilities, and that 30% pad. That means we walked away from a lot of rentals for sale before we bought the ones we did. We only bought if the numbers worked. And that, I believe, is the main reason we are still alive after two rather crappy rental years! That, and the fact we found other sources of income like flipping houses, wholesaling and renovating for other investors.
6 Good Reasons to Keep Rental Property:
1- Most tenants are decent people who pay their rent and keep a nice home
2- If we have that 30% maintenance & vacancy pad, even a Tenant From Hell won't kill our business
3- The income from rentals is favorable under current tax code – the government doesn't take as big a chunk out of it as they do other types of self-employment income
4- Rental income is pretty consistent – you're going to get something coming in every month so if you have a crappy month of wholesale commissions you can still keep the lights on
5- The buildings we own are assets and increase our net worth. As the years go by and the mortgages are paid off, there are many options: we could refinance and use the cash to fund other business ventures, or even to send Savannah to college. Or we could choose not to refinance and own the buildings free and clear, increasing their cash flow and providing a nice, passive retirement income for us.
6- If the shit really hits the fan, we can sell a building or two, and still have a nice portfolio. We did that last year. We weren't desperate to sell (the shit hadn't quite hit the fan yet, but I could smell something!) The price we were offered was right and the money came in handy, believe me.
And that's why we're bothering to keep the rentals, even though we have developed other sources of business income.
Yes, they are a pain in the ass. I got a complaint this morning (Easter Sunday) from a second floor tenant. Some of our new tenants moved into the apartment below her – three young men in their early twenties. She smelled pot in the hallway. I will address that with them tomorrow. I will explain that illegal drugs are not tolerated in my building. I'll probably also tell them about towels under doors, incense and fans. By their age they should know about these things! Geez, kids today!
I also have one uncollected rent. The tenant is claiming she mailed the check. Problem is, this tenant is a “frequent flier” as far as paying rent late. That I will have to deal with tomorrow as well. I'm pretty gentle with my later payers. So far I've managed to collect from them without having to file any evictions. I hope this holds true with this one. If not, that's just the cost of doing business.
Successful Systems = Successful Business
My husband and I are creating a system. One year from today, I want to be training someone else for the job I do now as property manager. It shouldn't take us longer than one year to put a system in place through trial and error and find out what works. This person will be an actual employee of our company, not an independent contractor. Rental profits alone aren't going to pay her salary, so we need to expand our other lines of business as well.
This is only week #2. I have such grand visions for this business and so much work to do to make them come true. I worry about my husband's stress levels. This week I'll be set up to take all the maintenance requests from the tenants as well. I don't want Steve to even know what's going on with tenants anymore – he needs to focus on dealing with the sub-contractors on our flips and construction projects. And he needs to stop eating at Long John Silver's and go to the gym, but that's another blog post for another week. Let's just say as we build this company, self-care will be part of the corporate culture.
Building systems. Corporate culture. I sound so grown up! Trust me, I know what I'm doing. Not terrified at all! Now to get ready for Week #3.