We bought our second rental property in April at a price that was at the upper end of our budget. While we knew the property would need some work, we were confident the deal was worth it and that the estimated repairs wouldn't exceed our maximum budget of $190,000 - the cash we had on hand for this investment.
One of the services provided by our property management company is overseeing repairs and make ready work for clients' properties. We enlisted their help to make the needed repairs so that the property would be rentable as we couldn't do it ourselves.
On top of a $181,000 purchase... we have additional expenses of:
- $2,200 to replace carpet; $1,700 over estimate (initial assessment was that cleaning and stretching would suffice)
- $1,055 to replace a sliding glass door; $800 over estimate (initial assessment was that it was repairable)
- $400 dishwasher; $400 over estimate (inspector wasn't able to test this during inspection but we were told it was in working condition by owner)
- $200 to paint cabinet faces
- $1,200-1,400 for GFI upgrades and light replacement (we have aluminum wiring and expected this expense)
$245 for blinds
$1,121 make ready (general repairs like caulking, touch-ups, etc.)
$3,200 interior painting
$300 for cleaning
The grand total for repair and make-ready? $9,921
That puts us just over our maximum budget of $190,000 by $921. So far. It looks like that figure will be the final one for this property, but as we know from experience with our first property, we have to be prepared for the unexpected repairs. (Does anyone ever see a $6,000 sewer line replacement coming their way?)
Fortunately, we were able to cash flow the extra $921 in repairs as the work orders came in over a span of about a month. However, we've completely cashed out our non-retirement savings except for a few thousand in the bank for monthly expenses and our emergency fund covering about 4 months of expenses. I love financial security and that emergency fund is what has allowed me to sleep at night! I have never lived paycheck-to-paycheck and I certainly don't intend to start now.
We've learned a few lessons from this rental property purchase, as I expected we would:
- It's always better to lay eyes on a property before you buy it. We knew we wouldn't be able to do this, but it's still a best practice rather than buying sight unseen. Kind of a "duh" lesson, but one to keep in mind for anyone contemplating buying in a market they don't live in or at auction.
- Prioritize repairs. We've put off making some other electrical upgrades and repairing some of the fence as they aren't as high of a priority. The goal is to make the property rentable as soon as possible, without cutting safety corners and without going overboard on improvements that won't draw in added rental income.
- Expect repairs to cost more than you expect. And have funds available to cover them or be prepared to cash flow. We ended up with a really tight repairs budget by purchasing at the top end of our price range.
- Have trustworthy contractors on hand. Our property manager has a team of trusted contractors and we have never had anything but a good experience with our property management company. All of the repairs they want to do align with our property inspection report. Before we even closed on the house, we gave them two weeks notice about the purchase and the likely repairs so that they could get their team ready. If you do the repairs yourself, you need to get the property to market quickly to start making your investment pay off so call up your contractors prior to closing with an estimated start date for work.
- It takes time to turn around a rental that needs repairs. If we cash flowed more repairs, we obviously couldn't use the rental income from this property (unless it was rentable without the repairs). Don't plan on having access to rental income for at least a few months with a new purchase unless tenants are staying.