As I received April’s invoices, I knew it would only be a couple more days and I would finally get paid…for all four rental units.
I bought these units last Fall, and have been waiting for a tenant for months. It has been tough. I called the agent they hired to find tenants twice.
This is part of the price for buying brand spanking new rental units. They aren’t occupied. Duh! Hopefully, this was the relative startup cost. My gut tells me that units with tenants may tend to attract future tenants because it shows that someone has decided the place was good enough to live.
It’s not ‘if’ but ‘when’ Murphy decides to visit
Whether or not I’m right about future tenants, this exercise has definitely put me through Murphy Training 101. When the property manager sent me my first batch of invoices back in September along with rental agreements, I was nervous when I noticed that only three of my four units had leases. But I knew we had set things up real good. And then the first check came in. After paying that month’s mortgage payment, I had plenty of left-over cash. Whew!
While that was good, I knew in the long run, we needed to be fully occupied, so I watched slowly, month-by-month. I was feeling a strong emotional desire to cut the rent rate and get someone into the unit. But my wealth building nature quickly interrupted that train of thought. I knew that would probably impact all future rents for the life of the property. It took me little effort to visualize how bad a $300 drop in monthly rent times 20 years would be.
You see, even if you raise the rents down the road, a drop up front would establish a lower overall baseline and take out a sizable chunk of total wealth. It would also impact the future sales price of the units as well. I understood this concept, but I lacked the real world, boots-on-the-ground experience to solve the problem.
So, when January rolled around, and we still had no tenant for the fourth unit, I called Jeff Brown. He quickly confirmed my assumptions about the negative impacts of cutting the rent. He explained how he had done a rent calculation and our mortgage broker had done his own, and they had both reached the same conclusion. To tie things up with a bow, he told me they had already a top notch pro to get those units rented. They had already rented several in that neighborhood, and the evidence was already rolling in that their rent rates were right on target.
Good things come to those who wait
There are some upfront fees. For one thing, they pay the agent who found the tenant out of the first month of rent. The property manager has also been paying to keep the lights on for several months, so that has to be paid as well. Finally, they had been keeping the lawn mowed. So I’m only getting about 35% of the total rent in April. In the Land of Investing Based on Fees, that is tragic and a ripoff. Such costs would never be tolerated. Instead, the recommendation would be to sell everything and put it into a low cost index fund.
But for those in the Wealth Building Society, this is fantastic. That’s because I’m leveraged about 3.5-to-1, we have our tenants building the equity of our investment, we don’t have to deal with much in repairs, and are smoothly cash flow positive with a nice cushion of cash. Next month, with all the one-time costs for a new tenant out of the way, should be even better.
Can your wealth building plan still net a good profit even if only 3/4 of it is in operation? Imagine that your mutual fund investments had taken a 25% hit. You would need 33% growth to recover from that. That isn’t our case. We have a fixed mortgage meaning despite the shortage of rent for the past six months, our loans have been paid off consistently and the estimated values of the units have continued to rise. Not bad for my first run in with Murphy after diving head first into rental property. But remain ever vigilant. Murphy will strike again. We must be prepared.