January 26, 2010

Rental #4 - Time is Money

Our fourth rental was originally my wife's home when I met her.    When we got married we decided to move into my home together and then rent out her home.

Currently the house has about 50% equity in it.  The house is worth about 50% more than what it was bought for about 7 years ago. It has appreciated around 5.5% since the initial purchase. We are netting a small cash flow of maybe a few hundred dollars a year.  But that would easily be eaten up if we ran into any repair or maintenance bills.  On the other hand we do get a decent tax deduction and the loan principal is being paid down faster now which puts us a bit ahead financially overall.   Best case we're getting about 6% return on equity but the month to month cash flow is negligible.    So far we're doing fine with this rental financially but it has not been a rental for very long.   And we've had minimal repair and maintenance costs and no vacancy problems and its only a matter of time before those costs things hit us.

The notable story on this rental was what happened with the preparations before we rented it.

When we first decided to rent the house we had to clean out my wife's belongings and make some repairs.   Cleaning out the house took a while.   If you've ever had to clean out a house full of 'stuff' that has been accumulated over several years then you know how time consuming it can be.    As we were moving in together we also had to sort out which of her belongings to keep and which of mine to keep.   We couldn't fit all her stuff and all my stuff into our current home and we had duplicates of many things (two toasters, two beds, etc.)   Once belongings were sorted out we had to haul them somewhere, usually to a charity or the trash.   This whole process ended up taking 2-4 months.

The cleaning and repair work we had to do wasn't very extensive but there were a few things to get done.   We had to clean up the place, paint and then fix some damage to the kitchen floor and bathtub.   We ended up doing all the work ourselves with the help of a couple relatives for the more complicated things.   In addition to the main things we did there were a ton of little projects that added up to a substantial amount of work.  I'm not sure how long we spent in the cleaning and repair stage but it was probably 1-3 months.

Altogether it took us 5-6 months to get the house prepared to rent it.   That is 3-5 months more than it should have taken us.  Every extra month we took was a months lost rent so the wasted time lost us 3-5 months worth of rental income.   

Let me repeat that:  we wasted 3-5 months total time while preparing this rental for market and lost 3-5 months rental income in the process.

We wasted time in a number of ways.   Part of it wasn't exactly our fault.   My wife's house is on the other side of town and it can take 1-2 hours to get there depending on traffic.   That makes it a bit harder to get more time there to do work.   But most the time wasted was our fault.   We decided to do all the work ourselves.   That seemed like a good idea since paying people to do repairs is expensive.  But in hind sight if we'd paid professionals we'd have gotten things done much sooner and it would have saved us money in avoiding lost rent.    We also got help from our relatives which meant doing things on their schedule.   We weren't very efficient with our time usage and often spent just 2-3 hours at a time working which is an easy way to turn a few days work into a month.    One of the biggest reasons we spent so long was that we didn't feel a sense of urgency.    In several cases we underestimated how much work we had to do and how long it would take to do the work.   We also spent a lot of time planning and deciding what to do rather than doing it.  Lack of an initial overall plan wasted us a lot of time.  We started out without really thinking of everything that needed to be done and so we didn't have a real overall plan to get all the work finished.

Summary of reasons it took us too long: 
1) travel distance, 2) doing work ourselves 3) working around relatives time schedules, 4)  inefficient use of time, 5) lack of urgency, 6) underestimating time to do work, 7) indecision, and 8) lack of overall planning

To be fair to ourselves we didn't plan to waste 3-5 months.    This is another situation where hindsight is 20/20.  We had some good intentions in doing work by ourselves to save money and we didn't initially realize just how fast time was going by and how slow our work was progressing.    At the time it didn't seem like a bad thing that we were only spending half of most weekends and additional weekday hours working on our property ourselves.  Seeking the skilled help of relatives also seemed like a good idea at the time but then trying to work it all into coordinating your free schedule with their free schedule and you can turn around and a month has gone by.  Maybe we should have known better in the first place, but if we didn't know better then we do know better now.  

Next time we'll know to treat the work with a sense of urgency up front. Every wasted day is wasted rental income.   In hind sight I'd try and get the work done as fast as possible and hire professionals to do it.   The amount of work we had to do could have been accomplished within a month without that much difficulty.   I would have done preparation for moving first which would be the biggest time sink then I'd simply hired professionals to do everything else.   Hiring people  certainly would cost us more than doing it ourselves but it would have saved us money.   For example : Paying someone to fix the floor in the kitchen probably would have cost us $500 but wasting a month to do so lost us more rent.    I wouldn't always hire professionals for everything.   I would have done the painting myself.  It only took us a part of a weekend to paint the house  and we probably saved $1000 or more so doing that ourselves still makes sense.   I'll also make sure that I have a strong plan with a good assessment of all the work that needs to be done.  And I will make sure I don't underestimate the amount of work required.  

Overall this rental has been a good investment and it has worked out fine.   The key learning from this rental was that we should not waste time doing work and renting a unit faster will pay off in higher rents.

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