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
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!
Total Earnings
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).
Closing thoughts
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
Congrats on renting your house out, and on a 2-year lease. Best of luck with your move.
ReplyDeleteThanks IH! It is quite the blessing, and I'm excited to keep the plan moving forward. When are you going to get into real estate?
DeleteWow, that's an amazing find you got with those renters. Two year lease is great and the house won't be empty. Congrats. I hope those tenants will be as good to you as you are to them. These stories are almost unheard of. Looks like you are on your way to achieving your 2017 passive income goals.
ReplyDeleteThanks Keith. It really worked out nicely. I don't know exactly what you mean by 'these stories are almost unheard of' - can you elaborate? As for my passive income goals, I think I'll probably still fall short (for the second year in a row!) but at least this gives me a fighting chance and I don't have to embarrassingly report a total that is VERY far from my stated goal. :)
DeleteAlmost unheard that the timing for a move out and move in for a new tenant coincide. A five day turnaround is amazing. Also, a two year lease. Most rentals one annual. Looks good all around.
DeleteAh ok, yea, the timing was great. I think there are smaller things you can do to help align a move-out/move-in situation, and so thankfully it worked out. I've got a friend who is about to rent his home here in the area and it seems like I could have asked for even a bit more in rent, which I was shocked to hear! So when the two years are up, we'll most likely increase the rent!
DeleteWow a 2 year lease. Are those common in your area?
ReplyDeleteThanks FI Three-Thousand! I wouldn't say they are common or uncommon to be honest. It really depends on the specific needs of each tenant and what can be negotiated when the deal comes together. My other properties have seen 1yr leases, and even 3yr leases. So I would say it is pretty variable. Thanks for stopping by; I'll check out your site now,
DeleteGreat job on quickly getting a tenant to lease out the property for a two year lease. This will give you two years with a steady rental check without having to worry about cash flow problems. When you invest in rental properties in other states, do you visit each of these properties before buying?
ReplyDeleteHey Christian Investor, thanks! Yea I am very excited about this property now that we have a tenant in place. We'e been diligently working for the last two years to get this investment financed correctly, and so for about two entire years we've been waiting for it to pay off, so now that it is about to start, we are very excited.
DeleteAs to your question, we DEFINITELY visit each of the properties before buying them. In fact, we LIVE in them for several years first. :) That is what makes these 'somewhat' real estate investments, but also somewhat just places that we've lived that we've turned into rental properties. I have not actually purchased a property yet where I've considered it a PURE rental property. So since we have to live somewhere, we always try to maximize both ends of the deal - us living there, and what happens to it when we leave. Thanks for stopping by and hope that helps!
Thanks - that does help. I always wondered how people managed and searched for investment properties in various states outside of their home state. Are you always moving from state to state due to career reasons?
DeleteHey Christian Investor, yea I think that my next property purchase will be strictly a rental property, where we purchase it solely based on its investment performance numbers and not as a place to live in temporarily as well. I still think it is very possible to do this from out of state, and that the internet makes this relatively easy (compared to years ago) to research and purchase a property without ever having lived in it or being in the same state. And to answer your other question - yes, we move every 2-3years because of the military. Ideally we'll settle down eventually and I will start a real estate holdings business. Still several years (like 10!) away from that though! Thanks for stopping by!
DeleteCongrats on getting the rental property filled, just shy of $400 a month in profit is outstanding and will definitely help move you into financial independence sooner. Keep up the great work and congrats on the two year lease, that's outstanding.
ReplyDeleteHey Duncan thanks for your kind words! I really appreciate your thoughts. I think once this property is rented and our debt is gone we really will be able to turn it up into high gear. Looking forward to that! Discipline and patience! :)
DeleteWow, very cool to unload that stress!
ReplyDeleteI'm still looking for my first rental property and I know who to call to get some tips! The problem with rentals is the more I read on them the more horror stories I hear.
I'm glad yours is turning out better than many others I have read about.
Blessed indeed.
Cheers
Divi Cents! Forget all of those horror stories! We should set up a time to talk and we can go over what to look for and analyze some numbers together. I am telling you, there IS NO BETTER investment than real estate. :)
Deletecongrats on a fast renting! we are about turning my fiance's house into rental property as well. Best wishes!
ReplyDeleteHi HHAWG! That is awesome to hear about you being a part of the real estate game as well. Congrats and keep rocking!
DeleteCongrats on getting tenent's quickly. :)
ReplyDeleteYou're generating a solid monthly income from this rental! And the 2-year lease ensures some stability for a while, which is great! Our rental barely covers the mortgage and other costs, like property taxes and management fees. Plus, we just had to replace the roof. On the other hand, we have great renters (into year 3 now) who pay on time and takes good care of the place. So cashflow-wise we're not doing great, but "total earnings" is good and property values here in California are continuing to rise...
ReplyDeleteRight now only One property is occupied with Net income around 4.5%. The yield is reasonably high as its free of mortgage. property services
ReplyDelete