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Rental Property Cash Flow Report – The Right Perspective – October 2017

November 2, 2017

What is it curmudgeony old people say about millenials?

Kids these days want everything immediately. They have no perspective.

Remember the original Willy Wonka movie from 1971? Turns out they were saying the same things about kids back then too. It’s not just millennials, I feel better now.

Even though I’m an impatient millennial, I have the right perspective on my rental property investments, which is why I have never hesitated to contact a property management firm similar to Eagle Property Management, LLC.

Anyway, let the world say whatever it wants to. We will just continue our work. So, let us take a look at what happened in October and why it doesn’t matter.

Quick Overview for First Time Visitors

I currently own 3 rental properties.

My goal is to generate some impressive turns over multiple decades while taking a passive approach – spend a little more time than index fund investing for much greater returns.

The impressive returns are possible by taking advantage of the ridiculously attractive leverage available. Multiply appreciation (expected to be just the rate of inflation) by 4 to 5 times!

See: The Thing Most Investors Don’t Understand about Leverage

This doesn’t have to be risky. Rather than chasing what is sexy, I buy in boring markets that have a health cash flow. The cash flow is a margin of safety to make sure I can always make payments and stay in the game for a long long time.

I expect 20-25% overall yearly returns over decades. Since the market has been going up for a while now, I’m ahead of pace – so far I’ve earned 30% a year over 6+ years.

Every 6 months I dig into the complete numbers: 6 Months, $9596 More Dollars – Rental Property Portfolio Update

Monthly I do a quick cash flow and time spent report. Now let’s get into it!

Atlanta

3 bed 2.5 bath, 2050 square feet
Purchased in 2011 for $81.5k, cash out refi in 2017, rent $1000 (goes to $1050 in 2018)

No deposits into my checking account. Bummer.

There will be expenses of $90 for property management and $760 PITI (so high because I did a cash out refinance).

Time spent? 5 minutes on the phone following up on how much the property manager collected and when to expect it in my account.

I found out the total rent collected for October was $700, with another $500 to $700 expected on Friday November 2nd. So they fell a little farther behind (currently all of October and November) and we are getting a payment plan in writing.

Memphis #1

3 bed 2 bath, 1450 square feet
Purchased in 2014 for $93k, rent $1020

The rent of $1020 was collected. Property management is 10%, so $102. $560 goes to PITI. No other expenses. So in September cash flow was $358.

I spent 0 minutes on this property in October.

Last month the tenant signed a new 2 year lease with modest rent increases of $1035 the first year and $1045 the second year. Which means no tenant turnover any time soon and minimal time invested in keeping up with this property.

Memphis #2

5 bed 2 bath, 2200 square feet
Purchased in 2017 for $105k, rent $1100

This is the latest property that closed on September 22nd.

See: The Surprising 95 Day Closing of Rental Property #3

The property was vacant at the beginning of October, so we needed to find a tenant as soon as possible. Overall it went pretty well and I spent maybe 60 to 90 minutes communicating with the property manager.

It took a little longer to place the tenant than I would have hoped – the rehab finished in mid-August and it took another month to get it appraised and closed. Then it took another month until the tenant moved in. Ideally there would have been a sense of urgency to get those done at the same time, but it is better to take an extra week or two to find a high quality tenant.

The tenant signed a 1 year lease for $1100 a month. Seems like a quality tenant too, no evictions or credit issues. Military job, which should be pretty stable.

The move in date was October 20th. We received the prorated portion for October and November in full, so $1490. Expected expenses on that are 58% – 50% for tenant placement, 8% for monthly property management. So $626 to me, but then $598 for PITI.

But the money hasn’t hit my account yet. So either a tiny $28 cash flow or a negative October balanced out by a big November. However you want to look at it.

Total? Whatever

I’m not going to bother picking numbers for each property to consider as my October cash flow. Doesn’t matter.

Why doesn’t it matter? The end of a month is an arbitrary and short cut off that makes things look good or bad, when they might just even out the next month.

In October the cash flow was horrible. Over examining a mediocre month can result in over reacting. I’d rather zoom out and take a long term view.

Cash flow into my bank account was poor, but I there should be deposits in the next week to even it out. No big deal.

Plus I shouldn’t myopically focus on cash flow. There are other components of overall return that are just as important. The tenants paid down the mortgages for me in October about $350. There were tax benefits and appreciation. I review all these every 6 months.

See: 6 Months, $9596 More Dollars – Rental Property Portfolio Update

How Were Your October Returns?

That’s the quick update from me, how did your month go?

If you don’t have a rental property yet, how did you get closer to your goal in the last month?

Do you examine things monthly or is that too much of a short-term focus?

Let me know!

Why I’m Kicking Myself Over Bitcoin – Recognizing Unbalanced Upside

October 23, 2017

Is there a lesson that you are forced to learn over and over in life?

There is for me. I can identify it when I see someone else going through it, but for some reason when it is me, I have no idea.

I’m talking unbalanced upside. A situation where the downside is capped and the upside, while maybe a small likelihood, is limitless. A small percentage times infinity is still infinity.

Infinity is good, you want infinity. So let’s examine a couple situations where this has come to mind recently for me: Bitcoin and dating.

Add Value, Capture the Benefit

The typical lens through which I like to view business and investments: add value and capture the benefit.

You can’t assume just because you add value, someone is going to pay you for it. You have to ensure you capture the benefit too, often by agreeing to it in the first place.

“I will do X for you, and you will pay me $Y.” That’s how a standard job works as well as running your own business. You don’t just show up at an employer and start doing stuff, hoping that will pay you at the end of the day. That would be silly.

Ideally investments follow the same add value, capture benefit line of reasoning. “I will loan you $X, and you will pay me back $Y in Z days.” More variables at play here, but fundamentally your investment of time or money should add value to the person, company, or situation.

This way of viewing investments is logical, but not really how the world works.

You buy an index fund that purchases shares in many different companies. Let’s look at just one of those companies, Boeing. Since you invested in Boeing, you are giving them money to make new planes and they’ll give you back more money later? No. Not even close.

Boeing does sometimes bring new shares to the market to raise money for making planes. However now the shares are just traded around and they offer a small dividend to shareholders. So you prop up their market cap in exchange for a couple percentage points a year in dividends and a gamble on where the share price is going next.

There is also the lens of supply and demand. Maybe that is a more accurate way to view the stock market?

Supply is easy to understand and predict. Demand? Forecasting the hype for something? Is that what “investing” boils down to? That sounds more like gambling.

As you can see, I generally like to keep things simple and not get caught up in forecasting hype when investing.

Bitcoin “Investing”

The section above is basically an excuse. That’s the default way I view the world, but shouldn’t be the only way.

I’m plugged in to the tech world and have a Computer Science background. Reading articles on websites like aboutbitcoin.io was fascinating to me and often linked up nicely with my Computer Science background. I first started hearing about Bitcoin back in 2012, way before most of the world had ever heard of the word cryptocurrency.

It was kicking around $10 to $15 back then. For months on end, not exactly a rocketship, there was plenty of time to think it through. If only I used websites similar to bitcoin.com.au at the time?

But I never seriously considered putting any money into it. It was just a cool idea that I checked the price of every once in a while.

Here is what I should have noticed back in 2012 and early 2013 – the upside was nearly unlimited.

We aren’t talking about a potential 20% return if things go well. We are talking a decent chance of a 10x return. A small chance of a 100x return. Orders of magnitude. This is why so many people are currently investing in bitcoin traders similar to bitcoin loophole check out this bitcoin loophole scam review if you’re interested in learning more.

Why? The hype was minimal, essentially limited to techies back then, and it had all the components of being buzzworthy once the word got out.

If I sat down at the end of 2012 and I was forced to guess the likelihood of a 10x return within 5 years, I might have said 20%. 100x return maybe 1%.

Decently low, but let’s do the math.

20% times 10x + 1% times 100x + 79% times 0x (let’s say the rest the time Bitcoin goes away and is worth nothing). Expected value was tripling my money in 5 years.

Note: Turns out those hypothetical end of 2012 estimates were low too. Since then Bitcoin is up closer to 400x!

With something so risky (79% chance of losing money) it would not be a good idea to put a significant chunk of money into it. Good chance you lose it all, even if the expected value is a 3x return.

But you can put 5-10% of your portfolio into riskier investments. Cap your downside while opening yourself up to the sweet upside.

For me in 2012 I could have put $1k into Bitcoin and maybe $100 a month for a while. $2k in Bitcoin at even $50 each is 40 Bitcoin… which is worth well over $200k right now! Imagine being able to gamble with 200 hundred thousand dollars worth of bitcoin, funfair Wrote an analysis between Fun token and Bitcoin regarding their bitcoin casino, considering the world of cryptocurrency is evolving at an incredibly fast rate with everyone trying to jump in on the bandwagon it was only right cryptocurrency casinos were created.

So even though I don’t consider it investing, I should have realized the unbalanced upside made it worth doing with a small chunk of my resources.

Dating – Recognizing Unbalanced Upside in Others

It seems so obvious when I’m not the one directly involved. Here is an example that has nothing to do with money, but everything to do with unbalanced upside.

I have a single friend who wants to fall in love and get married one day. But man is it brutal going on first dates and making small talk. Even worse is the process of getting to the first date, filtering through Tinder morons trying too hard to be clever.

Most Fridays, exhausted from a long work week and with the incredible amount of good television these days, my friend stays home on the couch. Much better than another disaster first date.

What is the one activity that will bring the most happiness over many decades? Finding the one person you want to spend your life with. Speaking from experience, it is totally awesome.

My friend realizes it too. Yet the continued effort in dating is too much to muster.

From my vantage point, it is easy to identify this as a situation with limited short-term downside and infinite long-term upside. Even if it is just a 1% chance of a positive first-date, that should be enough.

Once identified, it should be easy to consistently devote a percentage of resources to the cause. You don’t have to push all in, as we saw with Bitcoin, simply week in and week out devote 5% to 10% of your effort to it.

Consistency, capped downside, unbalanced upside.

Are There More Situations With Unbalanced Upside?

What are the other possibilities for a capped downside with an unbalanced upside?

Seriously, I want to hear from you. As I mentioned, I am bad at identifying these things in the moment and think it is easier for an outside observer.

What other situations am I missing?

Photo: Anton Lindstrom

You Are What You Read

October 11, 2017

I cannot remember the books I’ve read any more than the meals I have eaten; even so, they have made me.
Ralph Waldo Emerson

What a quote from Old Waldo, as he’s called in Seabiscuit.

I have to agree with the sentiment – the books you read shape the way you view the world.

But personally I know the books I’ve read. I’ve diligently kept a list for almost ten years now!

My Influences

I posted a new page to the website – go take a look at what I’ve been reading recently. (It’s a work in progress, there are a ton of books to format nicely.)

A book a month over a decade is a ton of learning. Example entry for those who don’t click to the actual page:

Flags of Our Fathers: Heroes of Iwo Jima
James Bradley
August 2017

Brian’s thoughts: Powerful story of the WW2 Pacific battles told through the lives of the flag raisers in the famous photo. I think the Japanese aspect of WW2 is fascinating and underappreciated due to all the Nazi focus.

Someone out there on the internet: “But wait a minute – there’s nothing about real estate investing there! I thought that was a huge interest and what you spend all your time thinking about!”

Nope. Investing in rental properties is a means to an end. I think more people should consider it, but I do it as passively as possible, it barely occupies my thoughts through a typical week.

But there is one real estate book that I read way back in high school and has had a lasting impact:

Why Books? I Learn Other Ways

I’ve heard plenty of arguments for why books are no longer relevant and people can learn in other ways. Check out this quote from The Shallows: What the Internet Is Doing to Our Brains:

For some people, the very idea of reading a book has come to seem old-fashioned, maybe even a little silly – like sewing your own shirts or butchering your own meat. “I don’t read books,” says Joe O’Shea, a former president of the student body at Florida State University and a 2008 recipient of a Rhodes Scholarship. “I go to Google, and I can absorb relevant information quickly.” O’Shea, a philosophy major, doesn’t see a reason to plow through chapters of text when it takes a minute or two to cherry-pick the pertinent passages using Google Book Search.

What’s sad is the quote is from a philosophy major. Philosophy! With big ideas and lots of nuance, not simply facts. Come on guy!

I’m not buying into the idea you just need the bullet points of a book – even non-fiction. You have to sit with the idea for a long time and view it from many different angles. Then and only then will it sink in and actually influence the way you view the world.

Think of it as a wavelength for impacting your brain. Books are very low frequency and penetrating. They are low bandwidth but leave a lasting impact. High frequency bullet points and summaries are exciting and noteworthy, but often hit the surface of your brain and bounce off.

Plus, thanks to the Amazon Kindle and other types of e-readers, there really are no excuses for not getting stuck into a book. Personally, I always seem to be ordering new books from Amazon. There’s a certain charm when it comes to buying books. It feels equally weird and fun to smell new books and mark the pages with a book marker (you could buy them from https://serp.co/best/book-markers/ or other similar sites) so that you don’t forget up until where you’ve read. Moreover, I like to read a combination of old-fashioned printed books and modern eBooks.

Whenever I place an Amazon order, there is almost always a book that gets added to my basket at some point! Do you order your books from Amazon? If so, you should definitely check out the website for Raise. Their website is filled with useful promo codes and coupons that you can use to secure a discount on your next order.

Above all, I suppose what I am trying to say is that it does not matter if you prefer to purchase paper books or eBooks, as long as you are reading a book of some description, you can keep your brain busy. If you’re in need of something new to read, then you can head over to this website https://likewise.com/books to find plenty of great recommendations.

Also Learn Other Ways

I’ve learned about real estate investing through passive education (podcasts, books), active education (meetups, seminars), and hands-on education (making the leap and learning on the way).

Obviously I’m pro learning from blogs too.

Just don’t think all those other ways are replacement for books. They should be in addition!

How About You?

You are on the internet seeking knowledge – do you read books? What’s the per year pace that you’ve found works for you?

Do you buy that reading is a different than other types of learning?

After taking a look at what I’ve read, any recommendations for me?

Rental Property Cash Flow – $805 in 3 Hours and 15 Minutes – September 2017

October 4, 2017

It’s that time of the month again.

No not like that… the first week of the month, time to provide an update on how little work I did on my portfolio.

I felt silly calling it a portfolio when I had just two properties. Three? Totes legit.

See: How I Locked Up My Third Rental Property Investment

First Some Thoughts

I was previously hesitant to give monthly updates because usually nothing much happens and it is too zoomed in to get any feel for how the numbers work out long term.

I finally caved. My goal is to show you how little time I typically spend with my passive approach to rental property investing.

And hopefully the numbers on those sales forecast and rental data are compelling, but I don’t really worry about them too much. I have a decades-long approach to rental property investing, so any individual month isn’t that vital.

Not to mention the cash flow numbers are just one part of the overall return. Twice a year I go through all the numbers: appreciation, tax benefits, mortgage pay down, and more. I’ve found that financing rental property from Roofstock is a much more sensible approach; it helps you to save as well as making the Landlord life much easier.

See my latest deep dive into the numbers: 6 Months, $9596 More Dollars – Rental Property Portfolio Update

Atlanta

3 bed 2.5 bath, 2050 square feet
Purchased in 2011 for $81.5k, cash out refi in 2017, rent $1000 (goes to $1050 in 2018)

The tenant has been in the property for over 6 years, as long as I have owned it. That’s the good news. The bad news is they are typically 2-6 weeks behind on rent at any given time.

This month they are getting caught back up – moving from 6 weeks behind to around 2. Let’s see if they get all the way caught up.

I received deposits in my checking account of $810 and $500. That’s after the expense of $90 for property management services similar to this Property Management Adelaide firm can provide to property investors. And before $760 PITI (so high because I did a cash out refinance). So this month my cash flow was $550 on this rental property.

How long did it take to earn this money? 10 minutes. I made a quick phone call to the property manager between the deposits to find out the payment plan they worked out (paying $600 every 2 weeks until caught up).

Memphis #1

3 bed 2 bath, 1450 square feet
Purchased in 2014 for $93k, rent $1020

The rent of $1020 was collected. Property management is 10%, so $102. The plumber had to come out to replace the flapper on a leaking toilet, which came to $103. Then $560 goes to PITI. So in September cash flow was $255.

I spent about 20 minutes on this property because a new lease was signed and I went through the paperwork to find out the details.

This tenant started a 2 year lease in March 2016. It really did not start out well with the new tenant. After 10 months, we were averaging $225 a month in repairs. Ouch. It seemed like this tenant called about any minor thing.

See: My Roller Coaster Cash Flow on a Rental Property Investment

It has been 10 months since then with minimal repairs. I won’t go through now and add it up, but just a few hundred total including this month’s toilet fix. Of course, it’s important to ensure that your home fixtures are repaired properly so that they will not require any further repairs. That’s why it’s always best to choose people (plumbers in this case) that are reliable and well known. If you’re in need of a reliable plumber just like I was, you might want to have a look at a site like sharpplumbing.com/service-areas/hopkinton-ma/plumbing-services/ for more information on how you can ensure that your plumbing needs are met to your standards.

Replacing a tenant is expensive. On this property the 2016 tenant turnover cost $2400 between fees and the property being vacant for a little while.

See: Tenant Turnover From Thousands of Miles Away

So considering this tenant stabilized with fewer maintenance calls, I wanted her to stay. This property management company is on top of it – they already approached the tenant to sign a new lease before it is up in March 2018.

The tenant signed a new 2 year lease with modest rent increases of $1035 the first year and $1045 the second year. For re-upping for 2 years the tenant receives $150 off their March 2018 rent.

The rent increase is nice, but the big win here is avoiding the need to find a new tenant, which costs $1.5-2.5k and gives back a huge chunk of your hard earned cash flow.

Memphis #2

5 bed 2 bath, 2200 square feet
Purchased in 2017 for $105k, rent $1100 (pending)

This is the latest property – I closed on September 22nd.

See: The Surprising 95 Day Closing of Rental Property #3

How much time did I spent on the closing in September? Maybe 2 and a half hours. I received the appraisal and went through it to understand the comps used. I received the closing package by email and read through all the documents before the notary came over to have me sign.

Since the closing I have spent maybe 15 minutes. I called a few times to get an update on the placement of the tenant. They outsource it to someone else, which once again makes communication tricky.

Things are in motion, but honestly not off to a great start with this new property management company. My phone calls typically go to voicemail and my messages typically aren’t returned. I’m beginning to think email will work best with them.

How about the cash flow? Nothing yet. It will hopefully rent at $1100 soon with 8% going to the property manager and $598 for PITI. The first mortgage payment isn’t due until November 1st though, so no expenses yet.

$805 in 3 hours and 15 Minutes

Total cash flow in September was $805 against 3 hours and 15 minutes spent.

Obvious caveats apply like setting aside money for maintenance, repairs, tenant turnover, etc. There will be negative months.

Most of the time was spent on the closing. Once property #3 is rented, I should hopefully spend only about an hour a month keeping an eye on all three.

The Snowball is Gaining Mass

On my email list I discuss how I think of my portfolio as a snowball rolling down the hill.

With each turn the snowball gathers more mass – the bigger it is, the more it gains – exponential growth. It starts slowly at first though, barely noticeable.

After the refi on property #1 and purchase of property #3, I feel like I have turned a corner on the exponential growth of my rental portfolio.

By reinvesting the cash flow, my properties can feed the buying of more properties, which increases the cash flow and speeds up the ability to buy the next property.

I still have some proceeds from the cash out refinance and I just cashflowed $805 in one month. Pretty soon I’ll have enough for the next rental property!