[This is the second part of My 2015 Financial Year in Review. You can read more of my financial picture at that link as I publish more articles.]
If you read my year in investing, you may have come away a bit depressed. (Or maybe you enjoyed a little schadenfreude.) Whatever you felt, get ready for a second dose of the same.
The quick story is that we have three condos aside from the house we live in. My wife and I each bought condos (before we met) near the height of the market (around 2003). We got married and a job opportunity moved us to California with them both under water. The only solution was to become reluctant landlords. Refinancing them to low 15-year rates (thanks Double HARP!) and using renter's money to buy equity has worked wonders over the last nearly 10 years.
In 2013, we did the ultimate in dollar cost averaging purchase. We bought another condo unit in the community my wife bought into a decade before. She paid around $140K for her original one... we paid $95K for this new one. And yes, today they are probably worth between 115K and 120K each.
So far everything looks like it's going towards a nice happy ending right? I hope so, but what we experienced in 2015 was far from happy.
The thing with real estate is that they require maintenance. The condo that I bought in 2004 needed a new heating/cooling HVAC unit. It was still on the original equipment... now over 40 years old. The property manager said that I might be the last unit with the original equipment. When I got the complaint that it wasn't working this summer, there was no way around avoiding the expense. My bank account was soon nearly $9000 lighter. That would have been easier to take if I didn't have to replace nearly every appliance in the unit earlier in the year.
A few months later I found that the place needed new windows and sliding glass doors. That was another few thousand dollars. I should be thankful that it is a small apartment without too many windows.
We'll get to the blogging update in a bit. For now, let's just say that blogging money doesn't cover 5-figure bills well.
This was followed up with another HVAC failure. This time it was the property we bought in 2013. Fortunately, it was just the cooling unit, so it only cost us around $4000.
None of this was a surprise. When you have original equipment in places that are 30-40 years old, the cost is expected. In hindsight, we should have had a separate fund specifically for real estate maintenance. Instead we used our emergency fund. I suppose it doesn't really matter which pool of money it comes from, they are essentially the same thing. Maybe I'd feel better about the expenses if I saw the money come out of accounts that it was earmarked for all along.
There were quite a few months that between this and other surprise expenses, we were writing four-figure checks each month. The only question was what number the check started with.
However, much like the year review in investing, there's a silver lining at the end of the story. We ended up paying down $18,000 in debt between all the properties (which includes our primary residence). It would have been $38,000 of debt paid down, but we added $22,000 in debt when we got a HELOC to buy solar panels. This is one of those cases where I'm fine to adding "good" debt as it will save us money over the long haul.
Many people in real estate focus on properties that are positive cash flow (they make more money that they cost this month). This can make a lot of sense, but I don't believe it is everything. I'm fine with losing a little money each month as we quickly build equity. In about 12 years all the properties will be paid for and I estimate they'll bring in about $35,000 a year after taxes and maintenance expenses. That's a great income stream to have in retirement.
If you were to draw up a plan for how to invest in real estate on a white board, it would look nothing like what we've done. At the same time, sometimes you can make some lemons into delicious lemonade.
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