Some Setbacks on My First Income Property

June 18, 2015 Posted by Tyler Cruz

In my blog post from last Friday, I wrote about how I got my first income property under contract, pending subject removals tomorrow (June 19th, 2015). I was very excited, pretty similar to the feeling you have when you’re buying a new home for yourself. All you want is for time to speed up and everything to be done so that you can have the keys in hand.

Unfortunately, there have been a number of setbacks over the past 6 days that have changed my disposition towards the whole thing.

I’ll start with the worst issues first.

5-Year Amortization Reduction

When I had originally ran my numbers, I used a 30-year-amortization for everything. After all, for income properties, in most cases the longer the amortization period the better.

However, obtaining a lender for an income property is a bit different than getting one for personal residential use – you won’t really know what you can get until you show them the exact deal on the table. The lenders want to know the exact listing and how investment numbers work out before offering you anything.

So the mortgage that my broker set up for me is a 25-year-amortization instead of 30. This hurts both cashflow and ROI.

No Bundling

This one is partly my fault for not anticipating this could happen, as I was kind of hoping that someone in my team (broker, realtor, etc.) would have warned me about this first.

On this property I am going to be replacing the roof and adding some more fence.

In my numbers, I had assumed that I would have been able to bundle in any immediate capital expenditure improvements into the mortgage. This is something you can normally do… and in fact I likely would have been able to… had I obtained quotes before the loan was set up.

While I’ve been researching trades here for good roofers, I haven’t actually obtained any quotes yet because I was waiting for the inspection which is today. After all, I don’t actually know just how bad a shape the roof is in, I just assumed it needed a new one, and so I was waiting for the inspection report to see just exactly what I needed to do first.

So, it’s a bit of a chicken and the egg scenario… but in the future if I buy more properties, I’ll definitely not make this mistake again – if I plan on bundling in any work into the mortgage, I’ll be sure to obtain quotes before having that set up.

What this means for me is that I’ll have to pay these costs out of pocket. I’ve allocated $16,500 for this. It’s not the out of pocket costs that annoy me, it’s the fact that this hurts ROI.

The only consolation is that it actually helps cashflow.

Insurance Annoyances

Since my last post, I went to my insurance broker to inquire about insurance and get a quote set up should I follow through with the property.

I thought that setting house insurance up was a bit of a pain in the ass, but as I just learned, setting up insurance on a rental property is actually a bigger pain in the ass! Here’s why:

They Hate Vacancy

Both sides of this duplex are vacant. If anything, I thought that the insurance companies would have liked that, as it means less likelihood of damage to the property. But I guess they actually hate it since there is nobody living in the property in case of water leaks and other immediate issues that they could potentially tend to.

There’s also the possibility of vandalism and squatters (although in my city and this neighbourhood, this is extremely unlikely). Okay, okay, so I can kind of understand it.

What this means is that I have to jump through a few more hoops. I have to get a different high-risk vacant policy while it’s vacant, up to a maximum of 2-3 months (I forget which) and then either renegotiate with them at that time or else find a different, higher-priced insurer.

The high-risk policy is a bare-minimum policy and doesn’t cover important issues such as water damage, and it’s like 3x more expensive.

Constant Inspections

Apparently insurance companies mandate that rental properties be inspected every 2-3 months. I forget now if the interior and exterior inspections have separate inspection times (I believe they do), but this will be a bit of a pain in the ass to renters.

I’m not sure how or if they can determine that these inspections took place though. That being said, the property management companies here appear to offer inspections in their services, ranging from every 3-6 months. If I wanted them every 2-3 months it would be an added cost.

Higher Fees

In my numbers, I thought I had padded them pretty well, but I guess I missed the mark on insurance, as I ended up going with the cheapest insurer out there and it still ended up being $55 more per month which hurts my cashflow and ROI.

However, this is adding earthquake coverage into the policy which is a significant portion of the cost, so that may be why.

New Roof Mandatory

The property was built in 1977 and from the best of my knowledge, the roof is still the original.

The insurance company doesn’t like this and the policy will only cover me if I put a new roof on it.

This isn’t a big deal since I was already planning on it, but it’s something to consider on future properties!

They Don’t Like My Holding Company

On this property, they are fine insuring it under my holding company.

However, as I start to obtain more properties, they will cut me off as they will then consider it as more of an operating company than a holding company, meaning that I’d likely then have to create yet another corporation, this time a separate operating company just for real estate.

It’s weird because my accountant told me that this would happen as far as income taxes are concerned, but I don’t know why the insurance company cares…

This would again be killer on my accounting and legal fees, but again it’s not a huge deal since I would likely have to change this for government tax reasons anyway. The only question is how many properties the insurance company will allow me before doing this.

If they allow me 3 duplexes, for example, then at that point I should hopefully have enough income to where this doesn’t really make much of an issue for me.

Property Management

Over the past couple of months I’ve contacted all the major property management companies in my city which is around 8. I contacted them all via e-mail because I want a company that is tech friendly and will respond to my queries in a timely manner. In fact, good communication and response time is the #1 thing I’m looking for in a property management company, even over services and costs.

I received responses from 7/8 of the companies I contacted, 1 or 2 the same day and most of the rest the next day.

I then sent a follow-up e-mail 2 months later (I got busy with other things) and received responses from I think only 2 of them.

One of these companies sent me quick replies both times… the second time within the hour from their phone. I like this! They also have very good rates. The only thing is that this company isn’t very big (which could arguably be a good thing) and isn’t a dedicated property management company (they’re a smaller real estate agency here too).

Another company quoted me higher rental rates on the property which is intriguing, but that could just be talk.

I’m torn on which company to go with, although I suspect that they’re more or less all the same. Plus, I can always switch companies down the road.

There’s also the possibility of me becoming a property manager for Merendi Holdings Inc. and managing both sides myself. I would save exactly $325.50 a month by doing so, but then I’d also have to learn a crapload of stuff and deal with paperwork and a lot of crap, so I’m very unlikely to go this route. The only thing I wouldn’t mind doing (I’d actually enjoy it) is marketing and showing the properties. I wonder if the management companies would give me a discount for doing this – I suspect not!

Inspection Day!

Today is the big day – inspection day! The inspector will show up at the property in around 4 hours from now and spend around 5 hours inspecting both sides. I’ll then show up at the end to get a thorough walkthrough.

When I bought my personal residence in October 2013, I wasn’t worried about the inspection at all since it was a nicer building and only 7 years old.

But this property is 38 years old and the one side was renovated by the owner and not very well! The carports were also enclosed without a permit. There is a lot of potential for issues to come up today. We’ll see how it goes…

Appraisal

Last but not least, the mortgage loan is good to go pending the appraisal comes back okay.

I should be hearing back regarding that any time now – hopefully before the subject removal deadline!

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Posted: June 18th, 2015 under Income Properties  

3 Responses to “Some Setbacks on My First Income Property”

  1. Emma says:

    If you can afford a property manager it hopefully can relieve a lot of headaches, but a bad property manager can cause even more. Ultimately, if they do something wrong you end up being the one held accountable.

    There is also a fine art to screening tenants. Everyone is on their best behavior and many people lie, an astute landlord kind of learns to read between the lines. It might be a good experience for you to start out managing yourself, just to learn the ropes and to understand what you really expect from your property manager.

    Get a landlord law book and scour some landlord forums and screen the heck out of your new tenants. Trust your gut instincts and don’t ignore any red flags.

  2. YeeWiseMan says:

    I told you stocks are easier lol….

PeerFly

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