Unexpected Expenses

As the saying goes, “Just when you think you’ve heard it all …” Unexpected expenses are extremely common in rental properties. The more rental units you own, the more often you’re going to think, “Wow. I never saw that one coming.” If you think you’re exempt from freak occurrences, you’d better hope you’re right. Ask any residential homeowner what the most expensive repair they’ve ever had was, then multiply it by two or four or however many rental units you have. Owning one home you have a decent chance of something unusual happening. Owning 25 rental units, you stand an astronomical chance of something unusual happening.

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What types of freak occurrences are we talking about? An elderly tenant accidentally hits the gas instead of the brake pedal and slams into your apartment building. The local building inspector declares the building unfit for human habitation. Your insurance won’t pay because it says the tenant’s auto insurance is responsible for the damage. The tenant’s auto insurance might take months to pay. What do you do in the meantime?

Considering the current drug crisis, think of the possible worst case scenarios. What if one of your tenants tries cooking crystal meth and sets the apartment on fire? The police declare the building a crime scene and you won’t be allowed to rebuild until after the tenant’s criminal case is settled in court. If you think that’s far fetched, you haven’t watched the news lately. People overdose while driving cars. People are constantly starting fires with one-pot meth labs.

Let’s turn to more common freak occurrences. In many areas, most of the homes in certain neighborhoods were built at the same time. Pine Street might’ve been created in 1972 and every dwelling on the street was built in the following two years. If you purchase two rental properties on Pine Street, chances are they were both built at the same time. Monday morning one of your tenants at 86 Pine Street calls to say the furnace is dead.  It costs $8,000 for a new furnace.  Two weeks later a tenant at 213 Pine Street calls to say the furnace at that building is dead. There goes another $8,000.  Dwellings built at the same time often need repairs at the same time.

Here’s another example of a freak occurrence that might make you carefully review the restrictions you include in rental agreements. In some areas, apartment buildings were once large single-family homes. Houses built in the late 1800s and early 1900s often have ten bedrooms and two or three livingrooms. Most of the large homes have been converted into apartments. What was once a 10-bedroom single-family home is now 3 separate apartments. It’s not uncommon for these buildings to have one main furnace or boiler and one plumbing system. As a result, this type of apartments are often rented with free heat and water. One of your tenants decides to put a swimming pool in the backyard. If the rental agreement doesn’t state otherwise, it’s perfectly legal to put up a swimming pool.  The pool takes 6,000 gallons of water to fill, which you have to pay for. The tenant forgets the hose is running and overfills the pool.  The pool explodes and floods into the basement. Since the furnace and electric hot water heater are located in the basement, they immediately short out and will need to be replaced. With the furnace and hot water heater serving so many apartments, you’re looking at massive costs to replace them. Is the tenant responsible? Only if you stated “no swimming pools” in the rental agreement.

To close this lesson we’re going to list the headlines of recent news articles. If you think you’ll never experience a freak accident, so did these homeowners.

Cessna plane crashes into apartment building

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Drunk driver crashes car into apartment building

Faulty wiring in stove blamed for fire that destroyed four apartments

One-pot meth lab blamed on apartment fire

Wild bear wanders into open house door

Improper disposal of smoking material blamed on fire that displaced three families

Fire officials still unable to determine cause of fire that displaced 22 residents

 

And the list goes on and on …


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