In the United States, we learn, either through actually being taught or simply by observing those around us, that a successful life typically includes attending school, going to college, working in a career for 40 years, saving for retirement during those working years, retiring in our sixties, and spending almost all the money we saved.
That life, which in financial planning fits into what is called Life-Cycle Planning, is a fine way to live. It’s just not for us. My husband and I are attempting to condense these typical life steps by working for less than 20 years, saving and investing like crazy, and having a 40-year retirement. (If you’re curious, I wrote about our vision for retirement.)
The general idea behind achieving financial independence and retiring earlier than the norm is that you should make as much money as possible and spend a relatively small percentage of that money each year, 50% or less (for some of those who ascribe to this way of thinking, it’s more like 10-20%). The remainder should be invested. There are countless ways to invest your assets. Thus far, we’ve chosen 401(k)s, Roth IRAs, HSAs, a taxable brokerage account, and real estate.
In 2019, we sold a single-family rental home in a wonderful area of St. Pete to buy a duplex on the south side of town, in an area desperately in need of gentrification. We wanted to make a better return through cash flow and – hopefully – benefit from appreciation. Even using conservative assumptions for vacancy, repairs, and capital expenditures, the block duplex looked great in a spreadsheet.
Then Covid-19 hit in March 2020. Unit B continued to pay. Unit A did not pay and did some actual damage to the place before abandoning it in June. I won’t bore you with the details, but there was a homeless man, cops, human feces, broken windows, a smashed stove, and maggots involved.
Now that it’s July, and Unit A is cleaned up, repaired, and will be rented next month, I wanted to see how badly we were impacted by the Coronavirus. Here are the numbers.
Purchase price, closing costs, initial repairs, LLC setup: $175,000
Rent Collected: $11,700
o November:
Unit A: $900
Unit B: $0
o December:
A: $900
B: $900
o January:
A: $900
B: $900
o February:
A: $900
B: $900
o March:
A: $900
B: $900
o April:
A: $0
B: $900
o May:
A: $0
B: $900
o June:
A: $0
B: $900
o July:
A: $0
B: $900
Expenses: $6,405
o Property Management: $1,170 (10% of rent)
o Taxes: $1,600
o Insurance: $1,700
o Misc. supplies: $300
o Unit A: $2,100, less security deposit of $900 = $1,200
- Board up broken window: $150
- Fix broken window and broken gate: $120
- Fix broken window the day after the first one: $90
- Locksmith: $200
- Movers: $250
- Storage unit: $200
- Deep cleaning: $300
- Lawn: $40
- Misc. repairs: $300
- New stove (glass top had been smashed): $250 value (we had one we were going to sell and couldn’t because we had to bring it here)
- Utilities: $200
o Unit B: $0
o CPA: $300
o LLC fee: $135
Net: $5,295
Return for the first 9 months: 3%
My initial thought: at least we’re not in the red. Our projections indicated we could expect around an 8% cash on cash return annually. It looks like we’re on track for 5% or so. Basically, Covid-19 impacted us, but it could have been so much worse. If we would have had to wait to go through a full eviction process, we would not have gained control over Unit A until the Fall, so the resident abandoning the place worked in our favor. If we would have had a mortgage instead of having paid cash, we would have been hurt a lot worse. And I feel for landlords in those situations.
Would we go back and buy this duplex in October 2019? No. Was it a terrible financial decision? To be determined.