Author Topic: Need advice on handling a financial emergency (plumbing, rental house, landlord)  (Read 4946 times)

marlo

  • 5 O'Clock Shadow
  • *
  • Posts: 2
I sent this question to MMM, but I thought I'd ask you all as well:

I own a house in BC, and currently live in southern California (in a trailer -- very low rent!). I get a modest amount of rental income from the house, and we are currently using that income to pay off my husband's student loan. Last week a plumbing situation cropped up at the house; the plumber suspects a broken sewage pipe.

I am waiting for results of the camera inspection early next week, but he's already prepping me for a $7,000-$14,000 dig in the front yard.

I've already asked the plumber to detail his findings so that I have an opportunity to get alternate quotes on the repair. I will probably raise the rents by the allowable amount next year (about 3%). What else can I do?

I don't have $7,000 lying around, and will have to borrow that on the line of credit attached to my mortgage (currently at 3%, so not too bad), which will mean wiping out any profit for a year or two. Is there something else I could be doing to mitigate this frustrating setback?

Self-employed-swami

  • Handlebar Stache
  • *****
  • Posts: 1094
  • Location: Canada
I think you likely should have been charging more rent to begin with.

Unfortunately, that isn't helpful advice now.  Sorry.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5013
About the best you can do at this point is look for the cheapest fix.  Once the yard is dug up, you will have no choice but replacement if the pipe is broken.  What exactly is the problem?  If it's roots in the pipe, maybe you can auger them out and put the replacement off until Spring.  Send the cameras down when the money is in hand.  Not the correct way, but a temporary way of dealing with a clogged line.

This is a perfect illustration of why reserves are critical in the operation of rental property.  You need the financial capacity to deal with a $10,000 repair if the need arises.  A HELOC or cash in the bank are the best choices.

You can't raise rents just because you did a major repair.  The market has to support the increase.  Sadly, unlike paint, carpet, or new appliances, operating sewer pipes don't increase your rent.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27890
  • Age: -999
  • Location: Traveling the World
I think you likely should have been charging more rent to begin with.

Unfortunately, that isn't helpful advice now.  Sorry.

Rent is set at what the market can bear.

It's why the 50% rule is so important. If you have 1k rent and 800 mortgage (as a hypothetical, no idea what the OP's is), you're cash flow negative by a few hundred, not positive by a few hundred.  Most months it'll be positive, but then something like this hits.

100% agree on the reserves comment as well, ties in to the 50% rule, you just have to save excess.

Sorry this happened to you.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Self-employed-swami

  • Handlebar Stache
  • *****
  • Posts: 1094
  • Location: Canada
I think you likely should have been charging more rent to begin with.

Unfortunately, that isn't helpful advice now.  Sorry.

Rent is set at what the market can bear.

It's why the 50% rule is so important. If you have 1k rent and 800 mortgage (as a hypothetical, no idea what the OP's is), you're cash flow negative by a few hundred, not positive by a few hundred.  Most months it'll be positive, but then something like this hits.

100% agree on the reserves comment as well, ties in to the 50% rule, you just have to save excess.

Sorry this happened to you.

Well, generally yes, but my interpretation is that perhaps the OP has been undercharging on the rent.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2376
  • Location: NZ
I don't have $7,000 lying around, and will have to borrow that on the line of credit attached to my mortgage (currently at 3%, so not too bad), which will mean wiping out any profit for a year or two. Is there something else I could be doing to mitigate this frustrating setback?

Have you considered selling the property? (Obviously after fixing the sewer).

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5013
Since the OP mentioned raising rents by the "maximum allowable," is there rent control in that city?  Rent control is a good reason to sell a property.  When the government limits your rental income growth, you will eventually start losing money on cash flow.  Increases in operating expenses will start to outstrip whatever the government says a reasonable rate of rent increase is.  Neither market rent nor the cost of operating and maintaining the property go up by whatever the local government says they should.  Long term, below market rents mean landlords cannot afford to do maintenance, and the condition of the rental stock deteriorates.

Kenoryn

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: Ontario, Canada
Not sure about B.C., but I assume it's similar to Ontario where you establish the rent in the first place, and as long as you have the same tenants, you cannot randomly raise the rent on them by whatever you feel like - only by a maximum amount each year, determined by inflation (per the consumer price index) plus x percent.

marlo

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Quote
Not sure about B.C., but I assume it's similar to Ontario where you establish the rent in the first place, and as long as you have the same tenants, you cannot randomly raise the rent on them by whatever you feel like - only by a maximum amount each year, determined by inflation (per the consumer price index) plus x percent.

Yes, that's the situation exactly. I think my rents are on the low side of market rates, which I justified because I want my tenants to stay a long time, because they are excellent and I don't live in town, so finding new ones would be a huge hassle. Raising the rent 3.8% (the 2013 rate for bc) bring in about $1,100 more per year. I should have raised last year as well (it was 4.3%).

I had no reserves because I used them up paying down a big chunk of my husbands student debt, which was at 6% interest. Keeping reserves lying around with a debt like that made no sense. Taking out a loan on the house line of credit at 3% is still a better deal than having kept reserves and that student debt.

I have considered selling the property, but it's not a great time to do it. I would just barely recoup my purchase price + renovation expenses.

What is this 50% rule? Can you point me to a reference?




Another Reader

  • Walrus Stache
  • *******
  • Posts: 5013
The 50 percent rule has been discussed here several times.  Arebelspy ran the numbers on another property to illustrate the rule in another thread.  It's also discussed at length over at BiggerPockets.com.  It's a rule of thumb, arrived at by evaluating years of experience from a lot of landlords.

If you need to use your LOC, it probably does not matter when the work is done, as long as you can cashflow the payments.  Just make sure you can't get away with the RotoRooter approach, at least for now. 

With regard to selling, the question is, can whatever you net be put to better use elsewhere?  In the case where you are not local and you are not planning on acquiring several rental properties in the area or moving back in at some point, you may be better off selling and putting your down payment to work elsewhere.  If the house is in need of other capital improvements in the next few years, it is not likely to contribute much to paying off your husband's loans.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27890
  • Age: -999
  • Location: Traveling the World
Sounds like the LOC is the way to go.  Paying off 6% debt and having a 3% LOC and having no reserves was mathematically the smart thing to do.  Now you're in the situation where you have to use the LOC.. Go for it.

With regard to selling, the question is, can whatever you net be put to better use elsewhere? 

And, even if there is no net if selling, is it actually cash flow negative?  You may want to sell even if you don't get anything (or even sell at a slight loss).

You may want to do an honest evaluation and see if maybe this property isn't a great investment. (Then again, maybe it is, and yu'll just deal with stuff like this often).
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2376
  • Location: NZ
Don't forget to see if insurance covers some of the damage.