In my last FI Value Engineer post, I was headed to Kansas to work on this house. I was there for three weeks, working 12 hour days alongside my team of construction experts. Our tenants moved in on September 13, as we were putting the finishing touches on closets, windows, and bathrooms.
When we got into the rental business, we thought it was going to be pretty straightforward – buy a house, put a new coat of paint on it, do some minor repairs, and rent it out. We’ve learned so much more!
Lesson #1: Have the person who will be doing the renovations walk through the house before you buy it.
Although it took us time to find them, On the Level Construction were amazing partners in strategizing the most cost-effective way to renovate the house. Had they been at the walk-thought we would have had a much more realistic understanding of what renovations would cost. I think we would’ve still bought the house, but we would’ve been smarter about what we were getting into.
Lesson #2: Good contractors are worth their weight in gold
It took us a stupid amount of time to find tradespeople who were competent and had space on their schedule, and once they were involved, it was like a gateway opened up to a group of secret contractors. In a small town, it’s all about who you know! I had one HVAC contractor who was overworked, and frankly just needs to retire, and he delayed the project by at least two weeks, and cost me about $5,000 in additional concrete and drywall work.
Lesson #3: The size of your ducts matters
This house had 3 inch duct work, which according to our home inspection, was perfectly adequate. When we did an energy audit, they recommended upgrading the furnace and AC (and the energy company financed it). New energy efficient systems require at least 4″ ducts in order to move the air. That meant that we had to rip out all the old duct work and reinstall new ducts…$$$.
Lesson #4: Be clear on your purpose
As the project drug on and on, I began to question if it was even worth it. We sold stock, and we refinanced our primary home to make sure we could keep up with this investment. Knowing that it would cash flow once we got a tenant in was one thing, but understanding our time horizon of when we would be able to pay ourselves back, kept us in the game.
So what was the damage?
Capital Expenses and Renovations
In 2020, we spent $62,447 on renovations. This included transforming a hair salon into a master bedroom, replacing all the water lines to PEX, replacing the furnace, AC, and all the ductwork, drywalling the basement, rebuilding a half bathroom, and updating all the toilets.
Operating Expenses
While all the renovations were happening, we still had to pay all the utilities and the mortgage. We spent $14,632 on operations. We did request a mortgage forbearance for a few months, but Chase had us pay it in full within three months. The mortgage forbearance also would’ve messed up our refinance, so that was another reason we didn’t keep it longer.
Rental Income
We were able to secure a tenant. We gave them some free rent, because of construction delays, and they notified us that they are ending their lease early. From Sept. to December, they paid us $7,450, excluding their security deposit.
How is this going to pencil out?
Monthly Income/Expenses
| Total Monthly Income | $1,800.00 |
| Expenses | |
| Utilities | $251.00 |
| Insurance | $110.00 |
| Mortgage | $666.66 |
| Property Management | $180.00 |
| Total Expenses | $1,207.66 |
| Sinking Funds | |
| Income Tax | $142.16 |
| Maintenance | $162.00 |
| Capital Expenses | $90.00 |
| Total Sinking Funds | $394.16 |
| Net Monthly Revenue – Guaranteed Profit | $198.18 |
This house is bringing n about $200 a month or $2,400 a year in profit, if it stays occupied. At that rate, we need to hold the house for 25 years to recoup our renovation investment. We can shorten that time horizon, depending on how much taxes we have to pay on the house, but it better to be safe than sorry. We also want to maintain healthy sinking funds for repairs or capital replacements so we don’t have to fund it through out main income.