Most people own a car.
Statistically, there are more registered cars in the United States
than there are licensed drivers! And
people have different strategies on their ownership depending on that they want
to pay. Some people like expensive
foreign cars, other people just want a “beater” to get them from point A to
point B. Some keep them a long time;
others keep them less than a year.
For the sake of this example, I’ll separate car owners into
2 categories with the pro’s and cons of each:
- The stereotypical Realtor car owners: They want the latest and greatest car to flaunt and exhibit success. They’ll buy or lease a new model of car and then trade it in every 6 months or year to upgrade to the newer model or newest taste.
Pros: They look really good! Their Instagram is cool and lots of their
pictures seem to have the car in it somehow.
Though they may make others feel poor and unsatisfactory at times,
people want to have a few of these car owners as friends so they can drive them
places to make an entrance. And they
never have embarrassing car problems which leave them curbside and ruin road
trips.
Cons: It costs a lot more money to
roll like this. Friends may feel poorer
than them, but in actuality, their net worth might dwarf theirs. There is more paperwork involved in constant
car turnover, but the upside of filling it out in a new fully-loaded Tesla may
make up for it.
- The long term car owners: They will literally drive the wheels off the car. They seek a good, reliable vehicle that looks good at first, but will continue to drive it as it mechanically and cosmetically deteriorates. A reactive repair policy will fix major operational issues so it will continue to run, but it will stop looking cool fairly early in the ownership game as it becomes a “Mom/Dad Car”. As the average age of a car in the United States is 12 years old, most owners follow this strategy.
Pros: It’s much more economical
and takes much less administrative energy.
Cons: Their Instagram doesn’t
feature their car and their kids groan when it’s their turn to drive the
carpool. There are ketchup stains on the
car mats and a few rips in the seats.
Buffing out the scratches on the exterior is not in the budget. The tires are starting to bald so it’s a
little slippery at times in the rain.
The tape deck stopped working 2 years ago when it ate “Billy Joel’s
Greatest Hits, Volume 1”.
Landlords are similar to car owners when replacing “new
cars” with “new tenants”. When tenants
move out, it gives the landlord or property manager
the opportunity to come into the property and perform deferred maintenance. If tenants vacate after a 1-year lease, the
rental home usually looks pretty good and there is not much to do. Fix-up costs are minimal.
But what about when the tenants stay for a long time?
Pros: It’s great for cash flow. Having a tenant pay month-in and month-out
for 8-10 years is a dream. There are
minimal management costs and the loan is being paid down significantly as the
property is appreciating (especially in Charlotte!). The landlord’s net worth is climbing and the
property is being maintained by the tenant.
Good stuff!
Cons: When the tenant eventually leaves, it’s time to pay
the piper. And this is where it hurts a
lot at one time. I notice I don’t see
many late night real estate gurus touting “Millionaire Real Estate Dreams” covering
this topic. Unless a landlord is really
lucky, the home will need to be painted.
The carpet will need to be replaced.
There will be miscellaneous broken things inside and outside the house
that the tenant learned to live with that need to be addressed. These things cost thousands and thousands of
dollars. Totally not cool! And it burns even more when the incoming
monthly rent flow stops at the same time.
Much like the old car where the repairs start becoming so
extensive that it needs to be replaced (expensive), the homes with old tenants
need to be revamped (also expensive!).
Paying these expenses as late as possible is economically more sound and
costs less overall, but paying all the deferred maintenance at one time is
painful. Not everyone has $5-10K sitting
around!
When adopting a long-term strategy for keeping a car or a
tenant, it is wise to put aside funds for this fact- No car or tenant lasts
forever and longer stays equal higher eventual costs.
Happy Landlording!
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