Saturday, January 7, 2017
2016 Review: Rental Property #1 (Missouri)
I'll try to review the property's cash flow, mortgage paydown, capital appreciation, general thoughts/advice I have, and anything else pertinent to the property.
I hope this post is helpful for those looking to get into real estate as an investment, and I imagine it will be helpful for me as well. Without further adieu, here is what happened with my Missouri rental property this past year:
Cash flow is often the #1 metric for rental property performance. For my Missouri property, 2016 was a terrible year (for cash flow, that is)! In fact, I made $1.92/mo this year for a whopping total of $23.09 for the entire year. This was of course above all expenses (property management, repairs, etc).
Pure profit baby (...please catch the sarcasm!). I had unexpected repairs in January, April, June, September, November, and December. What a drag! That is a lot of repairs. All of these were relatively smaller repairs (~$120), but that was quite the strain on achieving positive cash flow. I attribute a lot of these repairs actually to poor property management, but frankly I've looked around a lot online, have already switched property management companies once, and EVERYONE in this area of Missouri has terrible reviews. I'm somewhat stuck at the moment.
All of that aside, what a small cash flow number! I look at that number and basically think that I broke even this year. However, believe it or not, there is good news: this is the first year I have actually had positive cash flow.
I've been renting this property since 2013, and it has done nothing but cost me money per month when evaluating it from an aggregate cash flow perspective. NOTE - In the early years (2013, 2014), I was contributing a lot of extra money to the principle payment each month, which I used and deducted from my 'cash flow' numbers so perhaps cash flow would have been positive (or at least better) in those years, but my tracking wasn't as precise back then. Bottom line, I believe this property has finally turned the corner and will achieve positive, albeit small, cash flow. I'm thankful.
Do not get me wrong though, overall I still think it has been an ok/good investment, which I will talk more about in my "General Thoughts" section, and which leads me to the next section of my analysis, mortgage paydown.
In addition to cash flow, I like to look at how much my loan balance was reduced each year. I've said this before elsewhere on my site, but my mortgage is NOT being paid off by me, but by my tenants. This is their rental check paying off my loan for me. I like to say that I've "outsourced my debt to my tenants," and this is a great benefit of being an investment property owner.
For this metric, my Missouri property performed much better. I had an average of $317.84/mo in mortgage paydown, for a total mortgage reduction of $3,814 for the year.
Not a huge number, but not too bad either. Considering I did nothing and used no capital to generate this $3,814, I am happy with it.
I would say almost $0 in capital appreciation this year for this property. The particular geographic location of Missouri I am in saw a massive market downturn in 2015, and has really not recovered. Thankfully I have no intention of selling, but I do not think there was any growth this year, as the job market is still weak in this area and the supply of homes is still too high.
Therefore, adding Cash Flow and Mortgage Paydown together, I averaged $319.76/mo for this property in 2016. Not bad. Definitely not great.
Remember though that I have zero dollars (yes, $0) of my own money 'in this property.' I was able to get 100% financing at slightly over 3.8% fixed for 30 years and I have not put any of my own capital towards the mortgage or anything else.
This property is far from the best rental investment, but its numbers continue to get better each year. With zero dollars of my own money in this investment, each year I hold it my returns continue to get bigger and the risk of ownership continues to go down (assuming it's rented!...but with how low of rent I am currently charging, I am not too concerned about it). Plus, I don't even consider the mortgage interest deduction tax benefits I receive for this property, which would make the numbers better overall.
Also, having had this property as a rental for slightly over 4 years now, in the 50 months or so it has been a rental property for us, I have probably lost around $6000 or so in cash flow (not good!), but I now have conservatively around $35,000 in equity. At one point I estimated I had around $55,000 in equity but have since reduced that number by $20,000 due to the market's downturn. That is good.
In closing, not too bad, but by no means great for 2016 for this home. The financing of this property is really what makes it a good investment and my returns essentially infinite. Having my first year of positive cash flow also suggests that things will get better over time. Especially if the market in Missouri finally improves. I'm cautiously optimistic.
Well, that's it. I'll publish a review of my other two (much better performing properties, thankfully) over the next few weeks.
Thanks for reading!
Passive Income Dude