Friday, January 13, 2017

2016 Review: Rental Property #2 (Colorado)

This is my second property review for 2016. In this post I would like to follow a similar method to what I did with my Missouri Property: a thorough, yet to the point, review of my Colorado property's rental performance in 2016.

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 Colorado rental property this past year:




Cash Flow
As I said in my first 2016 rental property article, cash flow is often the #1 metric for rental property performance.  For my Colorado property, 2016 was a great year.  I earned $291.76/mo for an annual total of $3,501.12.   

That is a pretty solid year considering I had repairs in April, June, and November  and that I only invested $17,000 to get this property (...more on this later).  As for the repairs, thankfully all of them were relatively small (around an average of $50, with one large $350).

Unfortunately, however, I recently learned that my property taxes will be raised in 2017 and that the home needs a new refrigerator (ouch!) , so this year's cash flow will not be nearly as high.  Overall though I am very thankful for the cash flow that this property provided in 2016. And here is why:

If you've read about this home elsewhere on my site, you'll know that I only have around $17,000 of my own money invested in this property.  With $17,000 I was able to leverage myself around 21 times and purchase this home valued at around $350,000.   With that amount of leverage, cash flow alone in this one year, 2016, paid back 15% of my initial investment.  Needless to say, I am very pleased with this result, especially when compared to my Missouri Property's cash flow

That said, these cash flow numbers (believe it or not), of slightly under $300 per month, are really not that impressive for what you can get with a rental property.  We purchased this home back in 2012 not because of cash flow potential, but because I actually liked it enough to live in with my family first, and because I thought there was a high potential with what I call "monthly mortgage paydown," which is detailed in the next section.  This metric, mortgage paydown, has been the real benefit of owning this property.

Mortgage Paydown
In addition to cash flow, I like to look at how much my loan balance was reduced each year; hence "mortgage paydown."

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 it really is a great benefit of being an investment property owner.

For this metric, my Colorado property performed incredibly.  I had an average of $612/mo in mortgage paydownfor a total mortgage reduction of $7,347 for the year.

This number is incredible to me.  It essentially means that under this one tenant's contract, my first tenant (since we just started renting it last year), and they signed as a 3yr lease, I should see my mortgage reduced by around $22,000 total.....in my first tenant's contract.  Wow, just incredible.  I'm so thankful for this number as it greatly reduces my risk if for some reason I need to sell.

Capital Appreciation
This property also saw very good capital appreciation (though not as hot as many other real estate markets) . Since this is my first year tracking this property on PID, I don't know exactly how much it appreciated in the twelve months of 2016, but what I do know is that since we started renting it (in the middle of 2015), this home's value has gone up around $50,000.  Stop and consider that for a second. Capital appreciation alone has provided $50,000 in value on an investment of $17,000...in only 1.5 years.  That is almost a 200% return in just the 'capital appreciation' category for this investment, in only a year and a half.  This is EXACTLY why leverage, which I've written about (here) before, is so powerful.

Numbers Overview
Therefore, adding Cash Flow and Mortgage Paydown together, I averaged $903.98/mo for this property in 2016.


Wow. All of that on a $17,000 investment. How large of a portfolio do you need to average $903 per month in dividends?  I bring up the $17,000 again simply to show my amazement of leverage and how thankful my wife and I are to have this property.  This $900 number doesn't even include the capital appreciation talked about above or the mortgage interest tax deduction benefits.

General Thoughts
I suppose I'll end this post just stating that this property has been incredible for us this far, but that it doesn't mean things will always go this well.  I am extremely thankful for how it performed in 2016, but I don't want to come across as arrogant, and I definitely don't want to make it seem like real estate is risk free or easy.

Consider this for a second: if my tenant moves out, or their lease ends, and I don't find a replacement tenant, I will experience around $1700 in cash flow losses EACH MONTH that it is not rented. That, is a scary thought.  What if it sits empty for four months like my Missouri property did in 2015 when the market took a downturn?  How long can I sustain $1700 in monthly costs?  This reminds me of the quote (I think from Peter lynch), that "the market can remain irrational longer than you can remain solvent!"

Though I know this particular city is much more vibrant than the one where my Missouri house is located, I want to show the potential downside (..let's call them challenges), with real estate investing as well.  It's not all awesome.

Well, I think that's it. Overall, my Colorado property has has by far been my best investment ever. Since we turned it into a rental property in 2015 we've seen great returns and I anticipate it only will get better with time.

Thanks for reading! I'll publish a review of my final property (North Carolina) some time next week.

Excited,

Passive Income Dude

3 comments:

  1. Real estate is something that I'm not yet involved in so I'll definitely be reading through your real estate/ rental posts. Any particular post you'd recommend starting at? An, did you find any books or websites especially helpful to get started? I have started to listen to the BiggerPockets podcast and find that pretty interesting. Also, do you tend to buy property that is nearby to where you live or do you just use property management companies to manage the day to day operation? Thanks!

    Scott

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    1. Hey Scott, I'd take a look at my three property tabs above (Missouri, Colorado, North Carolina) first. Those have some excellent information about a real-world journey with three different properties, in detail. BiggerPockets is great and a lot of folks use that as well. WSJ Complete Guide to RE investing is also a great resource. Stay in touch,

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  2. I think you should definitely find someone with more knowledge of these matters than I have to sort this out. apartment management companies

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