Re: Am I crazy? - Posted by Mike-OH
Posted by Mike-OH on March 18, 2006 at 06:18:09:
I don’t think that your big mistake is using your retirement money. However, you are making a HUGH mistake by accepting “break even” cash flow. Even worse, you don’t seem to have a grasp of the numbers for your property.
Here’s what typically happens in a situation like yours. A newbie investor buys a few properties with a “break even” cash flow. Things seem to go very well for the first year or two. Suddenly, several things go wrong - almost at once. Here’s an example: one of your tenants suddenly moves out - leaving a bunch of personal belongings in your property. Since their property is still there and they haven’t given you the keys, you’ll have to evict them to legally get possession. A week later, a second tenant decides to stop paying the rent. Tenant #2 says that they’ll have the rent in two weeks. Being a new landlord, you take the tenant at their word. In two weeks, they tell you that their check has been lost, but another is being issued next Monday. You believe them again and wait another week. This goes on for several weeks before you finally decide to evict. Each eviction takes 6 weeks. You finally get possession of your first house with four months lost rent and $1,000 in legal fees, court costs, and dump fees (getting rid of the tenant’s stuff). Unfortunately, you’re not so lucky on your second house and when the eviction is finally done, the tenant had punched a hole in every single wall and poured concrete down the commode and both sinks. The legal fees court costs, and setout costs were again $1,000. And by the way, the tenant stole the furnace on the way out.
Am I being alarmist with this scenario? NO. It happens all the time!
Here is my true story for this month (March). I have my properties divided up into LLCs for asset protection reasons. One of the LLCs has five SFHs. Just this month, one of the houses was involved with a big drug bust. There was $2,300 in damage cause by the drug task force. The tenant in another property lost his job and stopped paying. I immediately filed the eviction and should have him out within the next three weeks. A third tenant is having job problems, but was able to get public assistance to help her with the rent THIS MONTH.
The big difference between me and you is that I understand that these things DO happen (with some regularity). I won’t accept anything even close to break even cash flow and I have a bunch of other properties producing excellent cash flow to overcome the loss.
Without a strong positive cash flow, you’re almost certain to lose the properties in the long term. If you’re lucky, you can get away with “break even” cash flow for a while, but eventually this fundamental error in your business plan will catch up with you. Unfortunately, this often happens sooner rather than later and the result is a disgruntled and broke landlord. It happens every day!
Therefore, I’d suggest getting educated on these issues and adjusting your purchasing parameters accordingly. Cash flow is King with rentals!