My first real estate investment purchase was an 8-unit multi-family complex I purchased using equity from my primary residence by way of a cash-out refinance.  After my first purchase, I was super excited and eager to get more.  But before acquiring additional properties, I had to budget for maintenance & improvement projects at the multi-family.  I would be remiss if I didn’t go over some road blocks I ran into and challenges I had along the way. 

Renovation Problems

To start, six of the eight units were occupied while the remaining two were vacant.  One of the two units that was vacant needed a complete renovation.  For some reason unbeknownst to me, this unit was built without a kitchen area.  My first order of business was to get this unit renovated and rented.  My plan was to install a small kitchenette in the unit along with other updates such as new flooring, new coat of paint & new entry door.  I started by meeting with contractors to get bid proposals.  Most of the contractors quoted a price in the same range so I went with the one who could start the earliest.  At this point my goal was to get this work done as quickly as possible and start renting the place out.  My contractor (let’s call him Tom) and I agreed on a price and time frame (two weeks).  We even wrote up a contract specifying the terms.  The first mistake I made was not including any provisions spelling out what happens if terms or deadlines were not met.

The first day Tom was scheduled to start, I went by the property to check on his work.  I was impressed by how much he had done the first day.  He had already completed most of the plumbing work for the new kitchenette.  I was encouraged that this project would finish on time and on budget.  Things sort of went downhill from there.  The second day I went by the property in the evening and saw that while Tom had done some work, he hadn’t done as much as I expected.  I’m not sure what slowed him down but I didn’t worry too much because it was only the second day and maybe he’d pick it up tomorrow.  Wrong!  The third day Tom didn’t show up to the property at all.  After the fourth day, when Tom again didn’t show up again, I called him to ask, “what’s going on?”.  He told me his fiancé had a medical condition that caused him to take her to the hospital.  He indicated that he had been caring for her the past two days but assured me he would be back on the job site the following day with additional help to get back on schedule.  This never happened.  He did show up the following day with a helper to assist him, but he never got back on schedule.

Over the next few weeks Tom would sporadically show up at job site, always with an excuse on why he couldn’t come earlier or why he couldn’t stay the entire day.  This was a very frustrating step in the process because his lack of performance directly impacted my revenue.  The longer he took the longer I had to wait to collect rent from the unit.  I thought about terminating his contract and finding a new contractor but decided against it.  My reasoning behind not firing him was because most new contractors would not be able to start immediately on the project.  I would likely end up waiting until they finished their current project before they were able to start on my project.  Therefore, I would end up waiting either way so I felt it would be better to just continue to stay with Tom and convince him do what needs to be done to finish in a timely fashion.

It took Tom approximately four weeks to finish the project we initially estimated would take two weeks.  In the end, I was pleased with the work but not how long the project took.  The lesson I took away from that project was to have provisions in your contract to spell out what happens if one party fails to meet their obligations of the contract.

It’s my opinion that if I had imposed a penalty for each day or each week the contractor was behind schedule then he certainly would have been more motivated to complete the project on time.  Similarly, it may have also been helpful to have a provision that provides the contractor a bonus if he finishes the project ahead of schedule.

Figure 1: new kitchenette

The finishing touches on this unit included a new set of stairs that led up to this updated unit.  The existing stairs were very old and hazardous.  For this project, I brought in a new set of contractors that specialize in building stairs and decks.  These stairs ending up costing me around $900.

I ended up spending close to $8,000 renovating this unit.  That included new vinyl flooring, new toilet, paint (doors, ceiling & trim), new kitchenette (cabinets, sink, range, fridge, vent hood & counter tops), new exterior door, & new stairs to the unit.

After renovations were complete, we rented this one bedroom unit out to a young college student who loves the place.  It rents for $400 per month so that increases my revenue by $4,800 annually.  I estimate that it will take a little under two years of steady rent to recoup the expenses on this renovation.

Over the next couple of weeks, I would go on to tackle numerous maintenance projects as tenants were more than willing to alert us of things the previous owner had neglected to repair.  These projects included:

• installing security lights around the complex
• spraying units for pests and bugs
• replacing the broken coin operated dryer in the laundry room
• replacing smoke detectors & adding fire extinguishers
• replacing old mailboxes that were missing doors
• installing ceiling fans in the bedrooms
• repairing leaky plumbing
• replacing a roof on two of the three buildings

I was fortunate to have a solid property manager who also doubles as my maintenance guy.  Having a good property manager makes the process go a lot smoother.

Tenant Problems

When I first took over the property the previous owner had not done a great job of keeping with the paperwork, including lease agreements. So, all the tenants I inherited had expired leases and were renting on a month to month basis.  About three months after the purchase one of the tenants alerted me she was moving out at the end of the month.  I wasn’t sad to see her leave because she had been a tenant who appeared to have problems paying her rent on time.  I was only a little disappointed that she hadn’t given me much notice.  She told me around the 20^th that she would be leaving at the end of the month.  As I mentioned I was somewhat happy to see her go because I felt like I could get a much better tenant in her unit.

Once the end of the month came she continued to stay in the apartment.  Whenever the property manager asked when she planned to move out she would tell him she’s been busy and hasn’t had time to move her belongings out.  Long story short, she ended up staying in the unit about two weeks into the next month without making a rental payment.  After we pressed the issue of “either pay rent for the month or leave”, she finally left.  I deducted a prorated amount rent from her security deposit for the two weeks she stayed plus I deducted a cleaning fee since the left the unit dirty.  These two deductions essentially wiped out her security deposit.  Needless to say, she was very unhappy to learn that she wasn’t getting a security deposit after she left.  So much so that she dismissed the explanation my property manager gave her and demanded to speak with me (the owner) personally.  I agreed to meet with her and again explained the breakdown of her deductions and why she wasn’t going to have her security deposit returned to her.  I was baffled that she didn’t grasp the concept that she owned half a month rent for staying in the apartment for an additional two weeks.  She grew very belligerent and even made a vailed threat toward me (it wasn’t clear if it was a threat of legal action or threat of bodily harm).  I explained to her that this was just business and I didn’t want any hard feelings so I agreed to cut her a check for $50 just for her to walk away and consider the issue resolved.  She begrudgingly took the check and that was the last time I ever saw her.  To this day I haven’t received any legal notices nor have I received any bodily harm so I’ll say crisis averted.

I’m happy to say now that all units are currently rented out.  Things have gotten to the point where they’re operating smoothly, tenants are paying rent on time and I’m enjoying having the cash flow roll in each month.  Of course, I had to spend a significant amount of money on repairs and maintenance to get to this point.  I estimate that I’ve spent over $21,000 on maintenance, repairs and renovations since I purchased this property.  Before I purchased the property, I had a home inspection performed on the units so most of the projects I was aware of the problem beforehand.  I believe it was all money well spent.  As a result, I have an 8-unit multi-family investment, managed by a property manager, which cashflows approximately $1,500 per month.  This project has me eager to find more real estate deals.

The Numbers

Purchase Price:               $84,798 ($80,000 purchase price + $4,798 in closing costs)

Repairs:                           $21,311

Monthly Income:              $3,300 (with all units filled)

Monthly Expenses:          $1,800 (including PITI, utilities, property management, repairs, capex, etc.)

Monthly Cash Flow:         $1,500

Return on Investment:   (12 * Monthly Cash Flow) / Total Investment = (12 * $1,500) / $106,109 = 17% ROI

OK, so there you have it — a run-down on expenses and issues I experienced on my first rental property.  The entire process seemed nerve-racking in the beginning but when I look back now I can’t believe I waited this long to get started investing in real estate.  Hope this post was informative and encourages my fellow newbie investors to go out and complete their first deal. Check back for future investment posts.