Rental Income 2016-03

Gross Revenue : +$4,895

Duplex Unit#1: $1,375.

Duplex Unit#2: $1,320

House: $2,200 – Finally!!!….Our tenants moved in mid month.  They paid first month up front, so next months rent will only be a half month.  But still, we are getting money in the door.

Expenses : -$4,831

Duplex: -$2,374

This breaks down to $2,167 in mortgages, and $207 for water and trash.  We had 2 water payments hit this month, $101, and $106.  (Just the luck of the draw in terms of how the calendar hit.)

If you notice, our escrow readjusted (happens annually) and raised our monthly payment from $1,886 to $2,167 or +281.

House: -$2,457

Our House payment was $1,976 split between a first and second mortgage. If you notice, our escrow readjusted (happens annually) and raised our monthly payment from $1,512 to $1,976 or +464.

A note, I know this seems like a huge increase and it was, but about $300/m of the increase is due to the payback of an escrow shortage.  When we bought this house, it had been totally redone.  The property taxes went way up and left a shortage in the escrow account.  Instead of paying for the escrow shortage up front, we decided to let the monthly payment go up for a year.

The reality is this $300/m or $3,600/yr was really property tax from 2015 when my wife and I lived there and I  would expect a $300/m decrease in 2017.

During the month we spent, $120 to clean up the yard and get it ready for the new tenants, $160 to fix a gate and $15 more on cleaning supplies.

On a side note, those magic erase sponges are fantastic.  We were able to use them to clean up some white trim around our windows and doors.  Because they worked so well, we didn’t have to repaint the trim saving a ton of time (and money).

We also spent $186 on electric, water and trash during the month.  These expenses go away in the future as the tenant will be paying for them going forward.

 

Monthly Profit : $64

Duplex: $321  – Satisfied…but holy cow that increase in property taxes hurts.

House: -$257 – not satisfied…yet

Overall we are getting there, next month will be tight because we only get a half month rent out of our house.  I would expect things to really kick in during May.

Since I began these updates the cash flow has been mediocre to poor.  A lot of things have happened, we had a lot of expenses that were incurred as we moved out of the house and got it ready to rent.  To be fair we would have had the exact same expenses had we been getting it ready to sell.

I sort of discount the $300/M that we are paying back to the escrow account, it really is not a rental expense per say, rather the increased escrow is a property tax expense we incurred while we lived there that is now being paid by our tenants.

Most bloggers don’t mention this, by the time you clean up the property, make small repairs, paint, have property taxes readjusted etc, that it seems to take a year or so before a property starts to make money.

It gets better, rents typically go up a little each year, the property taxes have had their initial jump, any major repairs have been completed etc.  You have changed the locks, fixed the paint colors etc.

Also don’t forget, the way the properties are leveraged (the types of loans on the property) play a huge part in the cash flow.  For instance we have PMI on the duplex (approx $60/Month), and have a second mortgage on the house.  ($220/Month).  Those expenses will go away as we pay down the loans.

But its not just cash flow….

We put down total cash of about $63K to buy the duplex (2013), $57.8K+$4K in repairs (foundation, fence, minor plumbing etc)  …$4,500 of the $63K was stupid tax.

On the house we invested $19.8K (2014) of cash to close.

Conservatively we have about $110K in unrealized price appreciation between the two properties (after closing costs) if we chose to sell. About $60K from the duplex, and $50K from the house.  So 132% ROI since 2013.

Our rentals are in trendy areas of Dallas (Lower Greenville and the Bishop Arts district).  These are booming neighborhoods with a ton of development .  I think they will continue to appreciate.  The duplex is a likely target for developers, there are probably 10 or 15 high end (350-550K/unit) condo/town home developments within a 6-8 block radius of our place.  To the right developer, the property might be worth an additional $30-50K or so above what we are calling the conservative number.

Plus just by paying the payments, we have a monthly reduction of $700/month on the principal owed between the two properties.  And all of that is being paid by the tenants.

If you are thinking about getting into the rental game.  Have additional savings above and beyond the down payment and closing costs that you can use for unanticipated expenses.

So overall I am very pleased with what we have done so far with our properties, we have bought houses that we could live in initially.  Then move on and rent out behind us.

 

(disclaimer: I am pulling the data out of our Quicken system. I may on occasion make category revisions, therefore the month by month updates may not tie exactly to the year to date or year end totals.)

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8 thoughts on “Rental Income 2016-03

    • Ulyanna I think the biggest thing about doing it is to do it. Ie take the plunge. I wish I had bought a duplex and lived in half of it very early on.

      Get all your debts paid off, save up a downpayment and go for it!!!!

      Thanks for reading.

      Liked by 1 person

      • Housing prices where we live are ridiculous. Townhouses in our area start at close to 700k!! Our home is actually considered a duplex since we have a (detached) rental on our property. It’ll take awhile before we could even consider getting a second property with these prices but the ROI isn’t the best with such high purchase prices and property taxes. I think it would come up to maybe $800k to get a detached home with a basement suite in a less popular area that’s still close enough to self-manage, but that’ll still require a 160k down payment!

        Liked by 1 person

      • Ulyana, first and foremost, make sure you pick a place that had solid returns. Paula Pant from Affordanything.com does a nice job of talking about the 1% rule and other criteria she uses when buying a property. She talks about focusing in on working class neighborhoods, ie where do the admins, or housekeepers or policemen and firemen go to live?

        If it is a place that you intend on living in , for your first house you might consider relaxing the rule a bit. But it at least is a good initial guideline.

        I under no circumstances would jump at a house that was 700K and whose rent was $1,500-$2,000. Take your time and stock up on cash before you do a deal.

        Good luck to you!!!! Thanks for reading.

        Like

  1. I see you are a real estate investor with multi-unit property. This is something I am very interested in doing. I want to live in one unit and rent the rest. Do you have any advice on how to approach this endeavor?

    Liked by 1 person

    • @Budget A couple of things….ok maybe more than a couple of things, maybe I will edit this and turn it into a blog post….lol….

      1) Assume that everything will cost more, and rent for less than you think it will.

      2)Have a large cushion of cash on hand above and beyond your purchase price.

      3) We stepped into it cautiously. By that I mean we stepped into it slowly, each and every property we bought, we have lived in as our primary residence.

      4)Every property we bought we had scouted the neighborhood and spent several months scouring Zillow. My wife and I would get in a car and drive up and down promising neighborhoods where we wanted to buy. I set up Zillow searches and checked out every property that showed up in those neighborhoods. That way we had a good idea about the market direction, the price where deals were done and knew what a good deal looked like..

      With the Duplex we had viewed 10 or 15 similar duplexes over a 6-7 month period in the same neighborhood starting in the middle of 2012, and culminating in a purchase in June of ’13. WE literally knew the value of the property we bought better than the listing agent, because we had physically stood in every competing property for nearly a year. We knew the place we bought showed better, had a better layout and was reasonably priced. Things were moving so fast that cash offers were made sight unseen. Many of the sellers agents werent even showing their properties. So we put in a bid that was above asking on the place we bought. (there were 5 offers the week the house we bought went on the market). Its a different market now, I wouldnt be nearly as aggressive.

      With our two single family house, we had been driving the neighborhoods, and knew the markets. The one we are currently leasing out luckily had poor pictures, but it was a fabulous house in an up and coming neighborhood. The other we we live in now was listed FSBO, so it wasnt on the MLS, and the seller had lost his job and needed out.

      5) Find a real estate agent who knows INVESTMENT real estate. It cost us a lot of money with our first real estate agent who didnt know rentals, didnt know investing. A good RE agent who focuses on investments will know the rents, will be able to help you find contractors, will be able to help you with renters etc. And if they are really good, they will offer you guidance when not to buy.

      6) I would suggest you have to make a decision about your objectives. My wife and I were buying as the market was turning around. we bought a place that we wanted to live in, in a trendy up and coming neighborhood. You might have to go to a little more transitional of a neighborhood, or maybe a slightly lower income neighborhood to get a good return today.

      Our niche so far has been to buy homes in up and coming neighborhoods that we would be willing to live in. We began with a duplex, and rented the other side. Since then we have focused on trendy neighborhoods where we can buy single family homes that cash flow. We have focused on 3+ bedrooms, and 2+ baths. In historic homes.

      Every single purchase we have gone in knowing we had the cash flow to pay our mortgages or make repairs if someone big went wrong (knock on wood) without bankrupting us.

      As far as cash flow goes. We probably give up a little because we bought in a little better neighborhood paid a little higher price and we wanted to get in because it was clear the neighborhood was moving up. I dont think bargains are just sitting around on the MLS like they were in June ’13.

      7) Be Patient. It might take you a hundred or two hundred homes on Zillow to find 3 or 4 to look at in person, and you might do that for 3-5 months before you bid on one. And then that one might be multi bid, or you might walk away and start the process again. Dont get house fever, you wont be living in these houses at all or at least not for long if you intend on renting them out.

      BE patient with your tenants. THE worst thing you can do is put yourself in the situation where you are so desperate for a tenant that you jump at the first one. Make sure these are people who will pay.

      Paula Pant over at Affordanything does a really nice job of lining out some very specific criteria for buying rentals. She does a fabulous job of outlining her criteria and how to value ones time. I think her ideas work best for someone who is buying and renting properties and is getting Non-owner occupied loans.

      http://affordanything.com/

      She is an experienced real estate professional however I would not try the long distance land lording thing ever, or at least until you were really comfortable with the process locally for a few years.

      I also think she does a really nice job of property selection, but that perhaps her last few properties have been better at cash flow for a non owner occupied house vs buy/live in/then rent out model my wife and I use.

      I would also suggest reading

      http://www.nononsenselandlord.com

      He does a great job of talking about rentals, maintenance, leasing agreements, the real nuts and bolts of being a landlord. His specialty is that he does nearly all the work personally. I don’t trust my handyman skills nearly that far and we hire out a lot of our maintenance and repairs.

      8)Give up a little cash flow and upside in your first rental to get a nice solid house that is easy to rent and that lets you cut your teeth on deciding if you really want to be a landlord. I probably would stay away from exotic purchase methods, like wholesaling, or REo’s or any of the other fringe areas of the market. Yes all of those are probably better returns, but they have a ton of risk and require deeper pockets that the first time rental property buyer likely doesnt have.

      MY biggest comment, is go slow. Think about hitting a single vs a home run, figure out on your first property if you really want to do more..Good luck to you.

      Like

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