Rental Property (Colorado)

Home purchase #2

This was my second rental property purchase, completed towards the end of 2012.  It was an incredible home in Colorado that really stretched us financially for about half a year, but we purchased it with the intention of turning it into a rental property after we moved, and it has been a fantastic investment thus far.  I would even say that this has been the best investment I have ever made.

In this page of PassiveIncomeDude, I would like to share as many details as possible of this particular investment, like I did with my Missouri Property, which has not performed nearly as well as this home.  My goal is to be as transparent as possible about my passive income journey with you as I think we both learn the most from each other that way.  So here we go:

Home Facts
*Purchase Date: Late 2012
*Purchase Price: ~$350,000
*Layout: ~3200sf, 4 bedrooms, 3.5 bathrooms, finished basement
*Finance Details: 30yr fixed, 3.5%
*Amount Financed: ~$333,000, 95% of Loan Amount
*Amount of Own Money Invested: ~$17,000

Similar to my Missouri rental, the 'going in' purchase details on this home were pretty good.  I again chose to leverage myself as much as possible with cheap, long-term fixed rate debt, and only put 5% down, which in my opinion is an excellent wealth creation strategy. The purchase price was by no means a steal, but we knew it was in a great neighborhood and in the best school district in our city.  So twice now I have not purchased a home that is significantly undervalued, but I will hopefully show that it can still be a great investment.  Someday I will buy a rental property investment that is undervalued, and one where we choose to live in it first, but that has not been the case yet.

Here is a picture of the kitchen, to give more perspective.  A very nice home, but again, not something way over priced or huge.

Equity Details
*Loan Balance at Start of Rental Period: ~$314,500
*JULY 2016 Approx. Loan Balance: ~$307,000
*JULY 2016 Home Value: $385,000
*Implied Equity: $77,000

Wow.  Does the above not excite you to the possibilities of real estate? I put in about $17,000 of my own money and I now have equity 3.5 years later of $77,000!  And to be honest, that is just with modest yearly appreciation.  Colorado hasn't even been considered a 'hot' market.  But THAT is the power of leverage.  I essentially took $17K and earned a 352% return, not including the tax benefits or income that I will show in more detail below.  That is an annual return of about 100%. Wow.  And again, if you looked at the numbers closely above you noticed that since the rental period started the equity has been paid down about $7k....almost half of the total I paid when I lived there.  So in a little more time with renter's paying my mortgage, I will have essentially lived there for free for over two years.

Rental Performance
In this section I will detail my monthly cash flow each year, and will also proved a number I call 'Total Earnings,' which is essentially the annual sum of my monthly cash flow I received plus the annual sum of the 'mortgage debt' paydown. 

I think this number is a better overall measurement and will explain why in the following example: say I pay more towards my mortgage payment each month than what is required.  As a result, my monthly cash flow will be lower (and perhaps even negative) if I am putting a lot of extra $ towards my loan balance.  But at the same time my mortgage debt paydown number would also be higher.  So, given the allocation decisions one can make with cash flow and the mortgage payment amount, I think 'total earnings' is a better representation of which direction your property is 'moving' as an investment. Here are this property's numbers:

2015 (~5mos of rent after we moved)
Monthly Cash Flow: $203.81
Total Annual Earnings: $4010.45
Occupancy: 100%

2016 (JAN-JUL only)
Monthly Cash Flow: $256.00
Total Annual Earnings: $5179.00
Occupancy: 100%

Again, all I can say is wow.  Ponder the above cash flow numbers compared to my original investment.  Forget tax benefits. Forget capital appreciation.  Solely consider how large of a portfolio you would need to generate that amount of cash per month in the stock market.  At a generous 4% yield, to get a monthly cash flow of, say $225, you would need $67,500! With a more realistic 3%, you would need $90,000.  And I am getting that cash flow with only $17,000.  That is again the POWER of real estate.  You pay 5% (or at worst 20%) of the home value, but you still get 100% of the income!  

It gets even better when you consider my 'mortgage debt' paydown as well.  Here's what I mean: My mortgage is getting paid off to the tune of ~$600 per month.  ~$600 + the ~$250 in cash flow is $850 per month.  To generate $850 per month in the stock market at a 3% yield you need....wait for it....$340,000! How long does it take to save up that amount??  

To be honest, this home thus far has been almost exclusively benefits.  I've had several very small repairs that have hurt cash flow, but otherwise it has been incredible.  Again, the best investment I have ever made.  I have an EXCELLENT property manager, and I imagine the numbers will only get better over time. Remember, I am getting the above numbers in my first year as a rental. Praise the Lord!

What are your thoughts? I'd love to hear your thoughts or ideas below!

Thanks for reading,

Passive Income Dude

1 comment:

  1. I'm a bit late in my comment, but I love this write up. I'm a Coloradan myself and it's interesting to see how to make real estate investments work. At these prices, I'm staying on the sidelines but am always interested. Cheyenne may be an interesting opportunity not too far away. Do you still have the same awesome property manager? Do you still hold the property or have you thought about taking the capital gains? Have you been able to increase rent rates at all? Congrats on getting a great price in 2012! Would love to hear an update on this property if you have one!