Monday, April 24, 2017
Our 3rd Rental Property Has A Tenant!
Well, I am happy to report that we just had a very nice couple sign a two year lease, at our asking price, with them moving in only 5 days after we move out! What an absolute blessing!
I've written about this before, but I was as concerned that this property would not be able to get our asking rental price, and I was also concerned that it would sit vacant for awhile. With a very large mortgage, even one month of vacancy can seriously hurt your cash flow. And when you have several other properties, multiple vacancies for multiple months can put you in hot water in a hurry! I've said it before, but just because you've got a good investment doesn't mean that you can survive the short term liquidity problems. This very thing happens to many businesses and forces them into bankruptcy! And so to have a tenant locked in now, at our asking price, for not one but TWO years, with only 5 total days of vacancy at the start, is about as good as I could have hoped.
As such, I wanted to provide a few of the financial details behind this investment, now that things are going from "projected numbers," to actual numbers starting on 01 June.
For those of you have looked at my other properties (Missouri) and (Colorado), you know I personally like to track two main things: cash flow, and a metric I call 'total earnings', which is really just a summation of the cash flow and the equity earned from your tenant's rental payment. The equity earned is simply the amount of 'mortgage paydown' that went into equity for you. Another way of saying it is simply, the amount that your mortgage balanced was reduced each month. I track this number, my 'mortgage paydown', because I DIDN'T have to pay any of my own money to earn that amount of equity. My tenant is paying the mortgage off for me! So, in order to understand your investment's performance, I think a summation of cash flow and equity (that I call total earnings) is important to be aware of. Of course, I have left out tax benefits and capital appreciation via your home value increasing, etc. but that's ok. I'm trying to keep it simple and relatively straightforward.
So the agreement I negotiated with this couple results in the following return metrics:
Cash flow above all expenses: $371.49 per month
*When I say "all expenses" I mean: my mortgage payment - to include PITI (Principle, Interest, Taxes, and Insurance) and property management expenses. I don't deduct maintenance in this number, as those expenses are pretty variable and unexpected. Bottom line - with no problems, this investment will generate $371.49 per month for two years. Ideally after two years, they resign a new lease or I increase the rent and get even more cash flow per month.
I personally am very excited about this number! It is higher than my other two properties and will be close to stable for two entire years, which should help reduce my liquidity risk if there are vacancies elsewhere. Praise the Lord!
When I add cash flow to the monthly mortage paydown, total earnings are: $727 in the first month with it increasing about $1.25 each month, as more of the payment goes to principle as the mortgage is paid off. By the end of this first tenant cycle, this number will be up to $760 per month, assuming I do not contribute extra each month towards the principle (which I typically DO NOT recommend doing).
I think that's the overview for the two primary metrics I track closely on a monthly basis. Of course there are a lot of risks not described (...tenant doesn't pay, or there is a repair needed), but there are also benefits (the NC market's home values go up, etc.) and I try to minimize the downside risks mentioned by choosing a high quality tenant and a newer home. Of course things will still happen.
But overall I am very excited about this! I've been working diligently to pay off the debt it took to get this property (as you know!), and I've been waiting patiently for it to pay off. I should also say that while we lived here it was a great home for our family, so it is been a blessing in that way as well.
As I said in my 2017 Goals Post, hitting my passive income goal of $13,000 for the year depended A LOT on what would happen with this property. With it rented so quickly, at our asking price, I think I have a good shot of reaching my passive income goal now. At the best scenario, my passive income should at least be $371 higher per month.
I think that's it. What are your thoughts on this property? I'd love to discuss below. Thanks again for reading,
Passive Income Dude