Last year was the first year I had my real estate business operating. While I think I got a good price on the front end I definitely learned some costly lessons, and got a piece of humble pie. For one I didn’t even consider that a landlord wouldn’t buy insurance on a rental house. After I acquired the houses and tried to get insurance on one of them the insurance company said I would have to get a new garage roof put on for it to be insurable. I checked with the prior owner and they said they had elected to go with not replacing the roof and foregoing the insurance payment. There went a quick four thousand dollars (seen below as a capital expenditure, or CapEx).
2019 was a crash course in the importance of good tenants and high occupancy. When one gets a vacancy or has to evict someone it’s really like a whammy with trickle down whammies attached to it. Not only do you lose out on the lost rents but often times there are legal fees associated with evicting a person. There are also maintenance expenses associated with fixing it up for the next renter and, if that’s not enough, the impact is amplified by the fact that I then have to take over paying the utilities while it’s vacant. You can see those interactions by looking at the 2019 income statement:
You can see above that I missed out on a lot of money from missed Stone Street rents, almost $3,000! A metric landlords use is a vacancy rate. A vacancy rate is: 1 – (rents collected/rents over the year if tenant paid every month) as a percentage. I had two evictions at the Stone St house and a 34% vacancy rate! That was definitely the takeaway from 2019; get a good tenant in Stone.
So how did we do in 2020, and were we able to get our net operating income up?
My overall vacancy rate went down from 14% in 2019 to 5% in 2020. This resulted in an increase to total rents collected and decreases to legal fees and maintenance expenses:
For those of you interested in the setup of this analysis, I use an excel spreadsheet to log the rents and expenses:
I then setup an income statement that uses a bunch of Sumifs() to aggregate the rents/expenses by date:
By going through this process I can review the expenses and see if all the rents check out. I found one check that my property manager billed 10% for but I haven’t received. I also had found a bill that showed up twice, the first one coming in 12/19, for $460! It’s things like this I really need to stay on top of. I will meet soon with my property manager to go over the year’s numbers, as well as discuss options for improving the homes and the rents.
While the $8200 in NOI is not as high as I would have liked the houses are trending in the right direction and I’m gaining valuable experience. I find it very uncomfortable pointing out when the manager makes mistakes and questioning some of his charges but that is something I need to learn. I’m learning that some of my number skills will only go so far.
Ok, now I need to get these sent off and figure out what I will owe in taxes. I also want to derive a plan for 2021 which I can then compare to actual 2021 numbers. Hopefully through this process I will become better at forecasting how the business will do and become a better asset allocator.
If you have any questions about the spreadsheets I use I’d be happy to share them and show you how you could customize them to your situation. If you think what I’m doing is a complete waste of time and could be done in a simpler way I’d also be curious to hear from you.