Some Perspective on Rental Property Cash Flow Disruption
About a year ago, Sept 2014, during a violent Austin thunder storm, a rental property I personally own in SW Austin was struck by lightening and caught fire in the attic.
As the thunderous flash of light, noise and immediate smoke jolted the tenant out of bed at 2:30AM, he quickly realized that he was standing in water. The home was flooding, and also on fire, simultaneously.
Wow! Wake up!! His elderly mother was visiting and he was able to get her and his son out quickly as the house filled with smoke. Then he called 911. Then me.
I showed up around 3:15AM, sloshed through about 18 inches of water at my driveway, as about 6 firetrucks were on the scene. It was an apocalyptic scene, like out of a movie. But everyone was ok, and the fire was contained to mostly the attic and three bedrooms. But the home was rendered uninhabitable.
Of course the tenant had to move out, insurance got involved, and a year later I’m just now getting ready to re-rent the home. Insurance only paid 4 months of lost rent, and denied my appeal for more, not accepting my explanations of why the job took longer. So, as it stands, I’m out of pocket 8 months rent ($12K) and about $8K more after insurance deductibles and other snafus that I won’t go into. Plus whatever continued vacancy loss I incur until I place a new tenant.
The silver lining was that the insurance company allowed all the water damage from the fire hoses to be the “cause” of water damage which otherwise would have been uncovered flood damage had the fire not occurred. The home isn’t in a flood zone and I don’t have flood insurance.
Luckily I own other rental property, don’t need the monthly rent to cover the payment, and could absorb this cash flow hiccup without financial distress. It also didn’t cause me to come unglued emotionally, because I’m “battle tested” and have been through my share of disasters and debacles the past 25 years.
Also, because of continuing value appreciation the past few years in Austin, the house is actually worth $25K-$30K more than it was a year or two ago, as that area in Oak Hill has “caught on fire” (pun intended) and values are rising quickly.
We replaced all the brown panelling with new sheetrock and paint, so it looks much improved over the “original 1970s brown” look that I had been happy to leave it in as a rental.
So, on paper, from a Net Worth standpoint, the house is still “up” for the year after all is said and done, even with the cash flow hit. Had this happened 2007 to 2008, when the market lost air until about 2011, that would not be the case and I would be “in the hole” big time. So I’m “lucky” in that timing aspect as it softens the blow. An appreciating market cures many problems.
Glad it Wasn’t One of My Owner’s Houses
But still, as this major ordeal unfolded and dragged out with contractor problems and other issues, I kept thinking “I’m just glad it’s not one of my owner’s houses”.
I can handle these things because I’m in it for the long haul as a real estate investor, and “shit happens” is part of pros and cons of real estate investing. But I hate seeing bad luck visit my owners, especially those who are not true “investors” and just want their home cared for until they move back to Austin someday.
Many of my clients are “involuntary landlords”, own just one house, and while most can handle a typical “worst case” 2-4 month cash flow hiccup, a year of downtime might be a show stopper for many. This is the risk exposure of investing in real estate. It’s why I talk to each prospective new client about the two capacities required to be a rental property owner.
1) Financial Capacity – which means having the equivalent of 6 months rent set aside or available at all times in order to weather an unexpected disruption in cash flow without it affecting your personal budget.
2) Emotional Capacity – the ability to treat it like a business, ride the ups and downs without losing sleep (literally for some), or becoming overwrought with fear and concern. That can be very draining. You have to be able to roll with the punches.
So, if you own rental property, and if you occasionally feel jolted by an unexpected expense, or some vacancy loss, just remember, it could always be worse. Say to yourself, “at least it didn’t catch fire and flood!”
A Word to Tenants
Finally, my renter didn’t have Renter’s Insurance, even though it’s required in the lease agreement. If you lease from me, it’s in your lease that you agreed to purchase renter’s insurance. We “require but don’t enforce” that provision because there is no reasonable way to do so logistically or administratively. Many tenants pay this monthly and we can’t monitor if you stopped paying.
But, as a tenant, you’re exposed as well to financial disruptions caused by “acts of nature”, that render your home uninhabitable, namely fire or flood. You could find yourself with the loss of some or all of your stuff, and nowhere to live. Your Renter’s Insurance covers this life disruption, at least partially, if not entirely.
That insurance coverage will get you into a hotel, cover your move, and replace your lost stuff up to about $30K under most policies. You’d be out a small deductible, usually $500. For the relatively small $12-$18 per month cost of Renter’s Insurance, it’s dumb to not have it. Your auto insurance company can provide it for you most likely.