As you may know, in addition to my venture into multifamily investing, I also own single family rentals. Single families are a great way to start out in real estate investing and was, in fact, my first foray into the world of cash flow. Find out more about my story here.
I had been self-managing my properties for over a year and a half and ultimately decided to hire a property manager, which was a great step in the right direction. It really allowed me to free up my time and attention; as I like to say, I did not receive calls much from our great residents, but it was stressful knowing that I could receive calls any time. Yes, I pay 10% off my rental income for the service, but over the years I began to appreciate the relative value of time vs. money. So these last few months have been a huge load off of my shoulders and now I feel that I can work on my real estate business and not in it, as I have been since I started.
The Event
Last month, I learned a very important lesson when it comes to managing assets. I will start with the situation and end with the lesson. One property is a Class C property in a Class C neighborhood. It cash flows better than my other which is in a B area and less maintenance (often, there is a trade off between cash flow and headache). This particular house is the one that we bought in 2019, fixed up and rented in two months to great residents, who have lived there ever since.
During the rehab, my wife and I sought to do any repairs and upgrades that we felt would prevent recurring operating expenses in the future. We changed toilets, added durable counter tops in the kitchen, and more. As we finished and prepared to rent, we believed we had a great product for our future resident. And we certainly did. Interestingly though, just as soon as the resident moved in, the AC broke. An easy repair, a handy man came and made the fix for a few hundred dollars.
Since then, we had to fix something or replace something else with the AC. Finally, last month, after needing to add refrigerant for the second time in weeks, it all came to a head when we were told by the AC contractor that it is highly recommended to replace the full system for nearly $5,000. While I had the funds to cover this expense, I was deeply disturbed. From a financial standpoint, for an asset $400 in cash flow monthly, a $5,000 expense wipes away twelve whole months of earnings. What a blow…
Lesson Learned
But then I realized, aside from the expense and the washing away of cash flow, what really stressed me out was not having strong enough a cash position. While I am glad to have been obedient enough to follow the guidance of countless experienced investors and have reserves for repairs, to build a more solid and stable foundation in my business is to have larger reserves and liquidity, especially during this uncertain economic environment. Furthermore when acquiring and turning a property it is in your and your resident’s best interests to do the up front repairs, such as AC, that are going to prevent future headaches and recurring expenses. So immediately, I resolved to grow reserves and allocate much larger portion of my portfolio to cash, for opportunities but most importantly defensively against the unforeseen. I strongly recommend for others to do the same.
As for the AC, I have a brand new unit on the inside and outside and a 10 year warranty, so should not have any more AC woes for a long time. Both I and my residents appreciate the permanent fix.
What About You?
A friend told me that slower can often be better because you are spending your time building a deeper foundation and the deeper the foundation, the taller the building can grow. For those getting started, let that be encouragement to prioritize the foundation over quick growth. Think about what it looks like for you. Reach out with questions!
Safe investing!
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– How To Use Your 401k To Invest In Real Estate
