New York City Living & Landlording: Count the Cost
“Suppose one of you wants to build a tower. Won’t you first sit down and count the cost to see if you have enough money to complete it?”
Jesus Christ (Luke 14:28)
Shortly after I graduated college, I moved to New York City (NYC- aka the “Big Apple”). “If I could make it there, I could make it anywhere.” Wow! It was definitely an experience.
Honestly, I was a little scared. All the television shows and movies that had criminals crushing the common folk were in NYC. I grew up in NJ, but my parents really never took me into the big city so I wasn’t sure what to expect. The mafia and gangs could just be waiting for fresh meat to show up so they could take my lunch money every day. Who knew?
Fortunately, my physical safety was never really threatened. My issues were more on the economic side. I wasn’t making much money; I was in a sales job and wasn’t selling anything. My manager nicknamed me “rowboat”… because I had no sales (get it?). The lack of cash inflow was tough.
And the cash outflow required was excruciating. It was the $3.50 for a small apple at the corner bodega. Then buying a round of 5 drinks after work that ran $90.00 (without tip). I used to joke that it cost me $20.00 to cross the street. Geez, it was an expensive place to live!
Good deals were hard to come by. And breakfast at the food cart on the corner of my street was one of them. $2.00 got you a large coffee (with milk and sugar) and a huge cinnamon raisin bagel with butter. It was my go-to meal every morning that I’d take on the subway into work.
One morning, there was a couple in front of me in line at the food cart. I could make out parts of their conversation; it was apparent that they were visiting from the Midwest somewhere. When the man was placing his order I could see him getting agitated. Then he said something that I’ll never forget:
“$1.00 for a cup of coffee??? I’ve NEVER paid $1.00 for a cup of coffee in my life!”
That’s when I knew that he was going to absolutely hate this trip to the big city. I almost felt obligated to get him in a cab (and pay for it) so he could immediately return back home. If $1.00 for a cup of Joe was cause for righteous price indignation, he was due for a heart attack later that day.
He did not count the cost of what visiting New York City was going to do to him.
Unfortunately, the same can be said of being a Charlotte landlord.
The investment real estate gurus preach that you will be a millionaire through rental homes! Buy as many properties as you can! This is the way that you build residual income that will last a lifetime for you and your children’s children!
They just don’t tell you that it is a cash-poor business. All of the above can be true, but the trick is the ability to stay solvent for year upon year as things break and wear out. All the financial models go out the window when a messy eviction happens or your HVAC unit needs to be replaced (just happened to me this month- the dreaded $5K phone call…).
Carpet will not last forever and will need to be replaced. The entire house will need to be repainted at some point. Appliances only last so long. The roof too…
Long term real estate investment can be a wonderful, profitable endeavor (you’ll love your net worth!), but don’t let anyone fool you- it can and will cost you money. So before diving in too far, count the cost. A few miserable days in NYC can be remedied with an early flight home to your 25 cent coffee vendor. Several broken-down rental homes saddled with mortgages in a buyer’s market is a little tougher to navigate out of.
Happy Landlording!
Learn MoreCharlotte Property Management Weekly: Lessons Learned from Holding Expensive Rental Homes Way Too Long: Why 1 -5 Years is Ideal
I wanted to share a dilemma I’ve had with an expensive rental home I’ve kept. But before I start, a good place to begin is my overall philosophy on “expensive versus cheaper rental homes”:
Expensive rental homes are ideal and appreciate greatly (cha-ching!!) in rising real estate markets, yet are more expensive to maintain, cash flow every month, and pay the mortgage during vacancies. Cheaper rentals are the opposite; they don’t tend to go up in value much, but are much cheaper to fix up, maintain, and positive cash flow every month.
And without further ado, here’s my personal tale of dealing with my big, expensive rental home:
It is a really nice home! When the economy and real estate market were soaring, my paper net worth (cue laughter) was awesome! Comparable sales in the subdivision kept going up which made me look like a genius with my home investment (I bought a pre-foreclosure at a great discount).
As a property manager, I put this home up for rent-to-sell and rental to a number of tenants over the years. The cash flow more than covered the mortgage and I was pretty happy with myself. The tenants kept the home in relatively good condition so maintenance and upkeep was minimal. I was living the real estate high life as prices in the subdivision continued to go up, and up, and up!
However, there was always normal “wear and tear” on the property. And as the years rolled by and tenants moved-in and out, the minor damages started to add up. Then it came to a point when I realized that the home needed to be updated, as tenants and buyers started turning their noses at it when it went on the market. So I mentally knew it was probably time to pay the piper; unfortunately, the costs started disturbingly revealing themselves (new paint, new carpet, new appliances, etc.). For larger homes like this one, it became clear that real money ($10-$20K) would need to be expended. What wasn’t clear was where this money was supposed to come from.
In a down economy, the expensive home becomes a weight wrapped around your neck; it’s much like the old Mighty Mouse cartoons where every episode had someone (something?) locked in a weighted treasure, sinking to the bottom of the ocean (of financial ruin). It’s tough! The clear answer is to sell the home, but stomaching the “investment” of all of this money to fix it up, waiting months (minimum) before it is sold at a depressed price, while paying the (expensive) mortgage every month is certainly not ideal. It’s also a question of remaining solvent while this selling process drags on.
That’s life, right? Suck it up! But maybe there are some lessons to be learned from this experience when buying an expensive investment home:
- Always buy at a significant discount (preferably in a down economy, like now)
- Target to sell it in 1-5 years, or before a significant fix-up investment is required
- Selling it should be the ultimate, short-term goal. First, try to flip it if it is feasible. If it’s not, try the rent-to-sell method of selling (placing a rent-to-own tenant into the property who is targeted to buy it in 1-3 years); sell it to them, or put it on the market when they move out.
- Don’t be greedy. Making money instantly is better than losing money perpetually.
Buy low, sell high, and don’t get caught fixing up expensive homes! Keeping cheaper rental homes for long-term investments is less risky, less stressful, and easier on the wallet in the long-term; use expensive rentals for a short-term (1-5 years) bounce in income.
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Weekly: “Sully Love”: Customers Will Like You More if You Fly Them into the Hudson River?
“I messed up. I placed a tenant into an owner’s home and they wound up tearing it up and not paying rent. There is no way they will ever hire me again…” (Charlotte Property Manager)
“It was crazy, you see. I took off and then two hours later, I landed in Charlotte. I guess technically you could say that I did my job. But the guy who crashed into the river, no, he’s the hero. It’s weird, right?” (Bitter Captain Roger Baines, played by Jason Sudeikis- Saturday Night Live Weekend Update Thursday- 10/2/09)
Learn MoreRental Pricing by Bernie Madoff
“When I used to rent my property out, we had tenants in it paying $1,495/month. You have it listed for $1,195/month. What’s wrong with you?”
First of all, if things were so rosy in $1,495/month self-management land, I don’t think you would be talking to a property manager. But I already digress…
Learn MoreCharlotte Rental Market Singing the Blues- Remember Econ 101?
What is wrong with the Charlotte Rental Market? Why is my rental home still vacant? The answer: 3 Keys from Economics 101.
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