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
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.
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.
Capital Appreciation
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.
Numbers Overview
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.
General Thoughts
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
This is a timely post as I'm looking to get into single family house rentals and your post is very informative. I'd love to learn more:
ReplyDelete1) Did you purchase this house as a "fixer upper" or was it in good shape to begin with? If it's the latter, that does sound like a lot of repairs so how do you keep the property management company honest? In other words, do you have to view and confirm all repairs or do they just repair as needed and bill you (and maybe they create phony repair items)?
2) Is it spelled out what you are legally responsible for doing or fixing vs the management company? For example, if the management company/tenant calls and says they need every room painted bright pink or they want a new efficient hot water heater to lower their electric bill...are you required to do it?
3) Does the monthly management fee you pay to the property management company not include any repairs (up to a dollar amount)? I would think a simple $120 repair should be covered and your out of pocket would only be for big ticket items. What does the monthly management fee actually get you?
Thanks!
TheDividendLife.com
Hey DivLife, these are great questions! I have all of the details about the home on my "Rental Property (Missouri) tab, but the home is definitely newer construction, so I agree the repairs seem high. The monthly management fee does not include any repairs, and I am not aware of any companies that manage their fees the way you describe. I need to look at the details of our contract for Q2, but no, the painting thing would be ran by me first and then we'd work out how it was paid for. Minor repairs are automatic completed by Prop manager hires; major are first approved by me. Think the amount is over $150 or something. Thanks for stopping by! I'm publishing my Colorado house tomorrow!
DeleteHonestly, I think your experience is pretty typical. I suspect many people that blog about real estate are less than candid about disclosing the full costs associated with renting the property. They just want to talk about the monthly rental checks they receive without actually discussing the outflows as well. This makes it easy to think: "What the heck am I doing wrong if I'm not generating enormous cash flows like them?"
ReplyDeleteYou're not doing anything wrong. There is a tremendous amount of understatement of expenses in the real estate blogging community.
Keep it up.
Signed,
Tim from www.theconservativeincomeinvestor.com
Conservative Income Investor,
DeleteYour comment was awesome! Thank you. If I'm honest, I find it harder to disclose my crappier investments (IE this one), and so I imagine there is a lot of pick-and-choose reporting when it is all voluntary. Especially with real estate. Even hedge funds do this in real life, so blogging is probably more rampant.
Anyway, know that I appreciate your comment and I look forward to publishing about my Colorado property in a few days, which is a much better performer so far. Take care,
Hi PID,
ReplyDeleteIt's good that it's showing a positive cash-flow finally. Although the margins don't seem very high if there was a more expensive repair needed. But since the mortgage payment is fixed, hopefully higher future rents can help with that.
I chose to sell my second house since it was out of state and I didn't want to have to worry about it. But had I gone with renting it, I would have set a low rental amount, mostly to ensure it's always occupied.
Best wishes,
-DL
Hi DivLife,
DeleteYea, I am thankful it is actually rented! lol. In 2015 it sat empty for almost 4 months, which was terrible. But now the rent is low enough to where that shouldn't happen. But yea, margins are pretty tight currently. This was our first home purchase and we loved living in it for the year we were there. The equity we put into it has essentially been paid back by our tenants now. Very cool! Take care,
You're looking at it right. this is an equity play too. Passive income will come as the mortgage is paid down or off, but equity is just as important. Anytime tenants can pay off an investment, you're winning.
ReplyDeleteThanks IH. I agree. Once I had to lower the rent to keep it occupied, all cash flow hopes kind of went out the window. :) As equity gets higher and higher I might cash out and buy another property. Thanks for the encouragement though!
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ReplyDeleteI got my already programmed blank ATM card to withdraw a maximum of $5,000 daily for 30 days. I am so happy about this because i got mine last week and I have used it to get $100,000. Mrs OMON is giving out the card just to help the poor and needy though it is illegal but it is something nice and she is not like other scam pretending to have the blank ATM cards. And no one gets caught when using the card. get yours from her. Just send her an email ON: atmmachine581@gmail.com OR atmmachine352@gmail.com
ReplyDelete