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Wednesday, August 15, 2018
Reviewing My Rental Property Returns

Someone pointed out that I am long overdue for a financial update on my rental properties.  You’re absolutely right.  Since buying the second rental property last year, so much has happened that I haven’t taken the time to evaluate just how they’re doing financially.  It’s time to share.

For those of you who have not been around for the past three years, I now own two rental properties containing three units.  These homes are located in an economically depressed area in Pennsylvania.  Did I mention that I live in New York City?

I decided to buy both of these homes strictly as investments.  In order to do that, I raided my 401(K) in the form of loans to finance my purchases since I did not have the cash on hand and because it’s incredibly hard to find financing for homes valued at less than $50,000.  You can read more about that decision in Why I’m Buying Rental Property While Still In Debt. Anyway, it’s time to get to the finances.

Let’s review how each house is doing separately.

House #1

Purchase Price: $19,500
Annual Taxes: $1,617 a fricken 50% increase in ONE damn year
Annual Insurance: $600
Sewer & Garage Collection: $360
Annual budget for repairs: $575
Annual rent: $ 6,900
Net annual cash flow: $3,748

After a few initial hiccups with bad tenants, I found the perfect set of tenants last year.  So far, they’ve always paid on time and never called me for repairs or anything.  I did make a few upgrades to the home even though they did not request them.  Their lease is up for renewal at the end of July and I hope to keep them forever.  I would kidnap them and tie them in the basement if I could.  Alas, I hear that kind of thing is illegal.  Instead, I’ll keep the rent as is in the hope that they choose to stay.  Plus, they’re both chefs and baked me the most awesome pumpkin cookies for the holidays.

House #2

Purchase Price: $36,000
Annual Taxes: $1,663
Annual Insurance: $725
Sewer & Garage Collection: $720
Annual budget for repairs/incidentals: $1,100
Annual rent: $13,800
Net annual cash flow: $9,592

Now, keep in mind that the numbers of all assume a 100% occupancy rate. I purchased that home less than a year ago and will now be on my second set of tenants.  The tenant with the horrible credit score will move into the second floor apartment on June 1, and I’ll be going to court for final eviction proceedings for the first floor tenants tomorrow.  If all goes well I will have a new tenant downstairs for July 1.

Since purchasing home number two I’ve completed a gut-renovation of one bathroom, and replaced pretty much all of the flooring in the entire house.  I’ve also made some minor updates as well.  In total, since purchasing the house, I’ve spent about $4,500 on renovations.  I had budgeted for half that amount, but you never know what you will find when you open up walls or floors in an old house.  I do hold a mortgage on this second house which I track in my monthly debt updates.

If we use the best case scenario numbers above (which is pretty much what I call them), then the payback period on the initial purchase price of each home is a little over 5 years and a little under 4 years respectively.  Assuming that I hold on to each property until those periods elapse, any rents received after those time periods (minus expenses of course) pretty much goes straight into my pocket.

Now, if I were employing a different strategy I would be more concerned with the value of each home.  Based on the improvements that I had made to each home and recent comparable sales I could probably sell each house for $25,000 and $45,000 respectively.  If I use a website such as Zillow to check home values, the numbers are $45,000 and $85,000 respectively.  Apparently Zillow is on crack which would be normal in this area. So, if I wanted to cut and run I would still make a profit.

Before you go thinking that everything is rosy, the numbers don’t exactly match what I had expected when it purchased homes.  A few things impacted my calculations:

  1. Property taxes have gone way up.  The tax on the smaller house went up by 50% in the last year alone.  WTF man!  How greedy can the local government get?
  2. My insurance premiums are much higher than the previous owner’s because this is not my primary residence and because I live out of state.  Double whammy.  The insurance premiums would be  one third lower if I lived in the house.
  3. Obviously, I have not had a 100% occupancy rate.

This is pretty much why you must plan for a worst case scenario.  As long as the homes have a five year repayment period or less, I’m very happy.  I could not do this in New York City, where I live.  Based on the price of homes in New York, I would face a minimum of 15 years before I would break even.  Yes, the rents are higher but so are the home prices.  There’s a much bigger risk associated with a more costly home.  So, I dabble at the bottom end of the market because everyone deserves a decent place to live…and someone has to provide them with those homes.

Before you go thinking that I’m a slum lord, these are actually really nice homes.  The bottom just completely fell out of the real estate market in that particular area.  Homes were being sold for less than 50% of their values in 2008.  The home that I purchased for $19,500 had previously been sold for $75,000 only a few years ago.

The question that you’re going to ask next is, was this worth it? Absolutely!  I firmly believe in having a mix of different types of investments within your retirement portfolio.  Here I am at age 35.  These homes will have paid for themselves well before I turn 40.  Having both property paid off this early gives me a decent income stream for years to come.

Is this something that you should do? I can’t tell you that you should.  There are a lot of risks and headaches involved with owning rentals.  My initial strategy was to buy one home every 2 years, however, I am seriously thinking about revising that strategy for something else.  When I decide what to do, you’ll be the second to know.

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This messy little blog was all my doing. I started this blog four years ago as a way of keeping myself accountable to my own debt reduction plans. Now I'm using this blog to help others get out of debt as well. Consider subscribing to get more delicious posts like this at least twice per week.

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25 Comments

krantcents May 23, 2013 at 1:47 pm

Those prices are amazing! As a former landlord, I understand how things can go wrong. It starts with selection of the tenant. You have to spend the time to screen and credit check them.

    Sandy Smith May 23, 2013 at 1:57 pm

    Yes, I had a sharp learning curve! I’m using an awesome tenant screening program now that’s working really well.

      Susan July 8, 2013 at 12:29 am

      Great story, Sandy. What screening company do you use?

        Sandy Smith July 8, 2013 at 12:06 pm

        I use My Smart Move. It’s really good and I can see criminal history as well as credit history and any evictions. It makes recommendations based on my settings and the renter’s income and credit history.

    Free Money Minute May 23, 2013 at 5:25 pm

    I agree, those are amazing prices for the amount of rent you are collecting. If you can get a few more at this price, you will be set to do this over and over if you so desire. There will be risk involved as you could potentially sit vacant for some time or a tentant may cause damage to the home, etc. I am very glad to see you are doing well. You will ge out of debt in no time with your smarts and worth ethic!

      Sandy Smith May 23, 2013 at 8:42 pm

      Yea the plan was to have a total of 10 rental units. The strategy was to buy a 2 unit house every 2 years. I figured that would get me at least $40 in income per year.

Tara May 23, 2013 at 1:58 pm

I live in NYC and am looking at buying real estate in PA too. Would you recommend doing it? My fiance’s family lives in central PA where there is dearth of apartments and home rentals but homes can be purchased for $25,000 and you’d still be able to charge much more than a mortgage payment in rent. We both have spoken about possibly investing in such a house and paying fiance’s father a bit to be the local super for minor repairs. I know getting into such a purchase takes a lot of work and we’d probably be driving to PA nearly every weekend at first if we end up doing that but it’s interesting to see other folks trying it out.

    Sandy Smith May 23, 2013 at 2:16 pm

    You sound like my clone except that you will have someone locally to help you manage. I’d go for it if you have the stomach for dealing with tenants. I’d get to know all of the local landlord/tenant rules first though.

Sean @ One Smart Dollar May 23, 2013 at 4:38 pm

We have tenants in our place that are going on their third year. Bad tenants can easily make or break the experience.

    Sandy Smith May 23, 2013 at 4:51 pm

    Absolutely! The tenant that I am in the process of evicting decided to become a drug dealer after he moved in and couldn’t find a job. The other tenants in that house moved out because of the drug activity.

    I’m now doing an initial month-to-month tenancy for six months and then a year lease afterwards. You live an learn, right?

    Now, If I could clone the tenants at the other house I would be in a lab somewhere right now.

Joel @ SaveOutsidetheBox May 23, 2013 at 4:56 pm

Sandy, I really think that rental properties are one of THE BEST ways to get rich slowly. Your homes will appreciate well over time which will pay off in a big way 30 years from now. You’ll also be receiving the equivalent of a huge dividend payment every month for YEARS to come.

Anyone interested in being truly financially self sufficient should strongly consider rental properties. That being said, I only have one right now and I’m 29. I started renting the home that I used to live in last November and purchased another primary residence. This kept my interest rate low because both loans were considered primary residence loans at the time of purchase. I’m making around $500 a month and saving up for the necessary repairs. I’m hoping to purchase a duplex or triplex in the next year or two because THAT is where I truly believe you can make the most money in rentals.

Thanks for sharing. Your real estate income is something I aspire towards.

    Sandy Smith May 23, 2013 at 8:44 pm

    You’re doing well. i never even thought about it until I was in my 30’s. Then it dawned on me – I’m putting money into a 401K when home prices are so low. I could probably beat the markets returns. I know that over the long run, I will.

Savvy Financial Latina May 23, 2013 at 9:12 pm

I think rental properties will eventually be a part of our strategy. Maybe in 2-3 years? Have to build up the cash first. We are working on it. Thanks for sharing your progress!

    Sandy Smith May 23, 2013 at 9:16 pm

    I didn’t have the money either, but I borrow it from my 401K and then paid that back…for both homes. 😉

      Pavel February 15, 2014 at 2:48 pm

      I would like to have more details on how I can borrow from my 401K to pay for a rental home. Thanks

Blair@LifeDollarsandSense May 24, 2013 at 4:31 pm

I love to read about the lessons learned from real estate investors! Thank you for sharing. I’m hoping to break into rentals as soon as possible (im 24, students loans and saving for down payment right now). I hope to start by buying a duplex and living in one side. But lots of landlord realities to learn. I want to go into the process with my eyes wide open.

Manette @ Barbara Friedberg Personal Finance May 28, 2013 at 11:32 am

We are in the process of moving to our second home and we plan to have our first home rented out. I a learning a lot from your posts on rental properties. Thank you for sharing.

Jon May 31, 2013 at 1:34 pm

I am jealous at how cheap you got those prices. My house (an expensive mistake) is actually losing money every month unless you include the small amount of equity I receive. I need to sell it and adopt your strategy.

    Sandy Smith May 31, 2013 at 2:09 pm

    It all depends on your strategy. I’m going strictly for cash flow. If I were buying expensive property, I may adopt a buy and wait for price appreciation value, OR I would even hold property that loses just a little bit of money every month if it will almost pay for itself in the long run. Just different strategies is all. Nothing wrong with a property losing some money if you’re okay with it.

FI Fighter February 15, 2014 at 1:28 pm

Just discovered your blog, but I already know that I’m going to be enjoying it. I’m also a big fan of rentals and trying to secure two more this year.

Looking forward to tracking your progress. Those houses in Pennsylvania are CHEAP!

All the best!

    Sandy Smith February 15, 2014 at 1:29 pm

    Yeah they are! My friend is adding an 8th one in another week or so. It’s a foreclosure that he put a bid of $7,000 for. The house sold for $70K about 5 years ago. He’ll end up renting probably for $600 a month.

Danielle June 4, 2014 at 11:40 am

Thank you for this post! I’m looking into purchasing rental property myself, so I really like seeing the numbers broken down like this 🙂 However, I’m currently a renter (a recent grad living in a new city) so I was thinking of possibly purchasing a duplex and living in one unit. With your experiences as a landlord, is this something you would recommend?

    Sandy Smith June 4, 2014 at 2:18 pm

    Hi Danielle,

    That’s probably THE best way to go about being a first-time landlord. You’ll be living in the home so you’re close to any potential issues and can manage your property yourself. Also, living in the home qualifies you for lower insurance rates as well. Good luck on your new venture!

Ricky August 12, 2014 at 9:43 pm

Sandy, how much have your properties appreciated now? Any good deals left in Pennsylvania?

    Sandy Smith August 19, 2014 at 6:21 pm

    Ricky, good question! To be sure, they’re not as good as they were even 2 years ago, but I have a friend who is continuing to buy in PA. There’s a decent inventory of foreclosures that are coming to the market now, so he’s hopping on them. I’ve been on the fence, but my strategy would really say that I should be buying a house THIS YEAR.

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