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

July 3, 2017

It’s a great day to be alive!

Let’s give this article a soundtrack:

What am I so happy about? How about making $9,596 in six months with close to zero work!

Owning rental properties sure can be glorious. My portfolio is skating along nicely right now. Of course, it does take some setting up and you do have to put in a lot of time and energy in the beginning, not to mention it can be quite a hefty investment. If you’re starting a property business, you can get a business cash advance to help you cover the costs of any materials you may need or anything else, like legal documentation ad whatnot.

Let’s dig into how I got to this point and the latest numbers.

A Little Work Several Years Back

I earned $9,596 with little effort because I put in the effort to purchase the properties a few years back.

But it wasn’t a ton of work… I purchased turnkey, fully rehabbed properties on the other side of the country. I still haven’t seen them. Most the effort was getting educated and developing the right mindset to take action.

Then I sat back and relaxed.

I own two rental properties.

The first is in the Atlanta area, purchased in 2011 for $81,500. After closing costs, my initial investment was just $19,936.

The second property is in the Memphis area, purchased in 2014 for $93,000. My initial investment was $24,030. Many people who are looking to buy more than one property will consider a let to buy mortgage so that they can let out one property to buy the second. It can be a profitable venture but should certainly be considered in full before any decisions are made.

A little money, a little effort, but now I get to sit back and collect checks.

The Last 6 Months

The big news was finishing a cash out refinance on property 1.

The property appreciated so much, I was able to refinance it and get a check for $36k. Significantly more than my initial investment! BOOM!

See: Cash Out Refinance on a Rental Property – My Actual Numbers

I spent 6 to 8 hours on the phone with lenders, gathering documents, and signing lengthy contracts.

Even though I have this huge chunk of cash, I haven’t put it to work yet. It is just sitting in a savings account until I purchase my next rental.

So temporarily, this move actually hurt my bottom line. It cost about $2k in closing costs to access this money.

It’s all about the long game though. I’m setting up for even more profits in the future, as that cash equals the down payment on one and a half more rental properties!

More on this later, let’s look at the numbers first.

Property 1 Numbers

Even though the property just appraised for $130k, I decided to be conservative with a $123k value in my estimate.

That’s still up $6k. A thousand dollars a month straight to my net worth!

Add in $1500 more for the tenant paying down the mortgage, cash flow, and tax benefits.

In six years, the total return of this property has been $55k. On an initial investment of $20k. You kidding me!?!?

Compounded rate of return of 25% a year.

Property 2 Numbers

Appreciation here has been more modest, as expected. Memphis is an even more linear market than Atlanta. Flatter peaks and valleys.

The Zillow estimate actually went down, but I average it with Redfin and make small adjustments. The result is $1700 of appreciation in the last six months.

Big cash flow of $2k plus another $1k from the tenant paying down the mortgage and tax benefits.

In 3 years the total return is almost $17k.

Compounded rate of return of 19% a year. Not as good as the other, but pretty darn impressive.

Overall Portfolio Numbers

Those numbers don’t tell the whole story though. It is more accurate to do a cash flow analysis.

When you have an asset that spits off cash in addition to going up in value, it matters when you get that cash.

$1k received six years ago is more valuable than $1k received today. I can invest it and make extra money over that time. That’s what a cash flow analysis accounts for.

Usually it is done monthly or yearly. As a happy medium between accuracy and simplicity, I opted to look at 6 month chunks of time. I used a discount rate of 2% per half year (basically what I think the money should earn pretty risk free).

So what has the portfolio earned over the last six years?

30% yearly return!

I’ve earned $66k in that amount of time. Between the equity in the two properties and the refi cash waiting to be invested, the portfolio is worth $96k!

It Never Gets Old

Aren’t those numbers exciting? Who is having fun here?

Now for a dose of perspective.

The biggest driver of return has been appreciation. I don’t believe this current run is sustainable.

My Atlanta property has appreciated 8% a year over the 6 years! That is incredible, but over a whole real estate cycle, I would expect it to settle closer to 3%.

See: How to Visualize the Real Estate Cycle

I’m not worried about it though. Even with 3% a year appreciation, basically the same as inflation, an investor can make a killing.

How? You only have to put 20% down and get 100% of the benefit. Multiply that 3% by 5 and you get 15% a year return from appreciation alone. You certainly won’t hear me complaining about that!

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

That was a dose of pessimism, now one more reason for excitement looking forward.

Each individual property has done well, but there really hasn’t been any compounding effect yet. I want exponential growth!

The only thing remotely exponential so far was that I used the $7k in cash flow over the first 3 years of property 1 towards purchasing property 2. Not a big effect considering that was less than a third of the initial investment.

But now?

Property 1 cloned itself and then some. The proceeds from just the cash out refinance will allow for the purchase of another rental property and a half. Add in the cash flow and it has earned enough for two more rentals!

See: Let’s Double Down! Cash Out Refinance on a Rental Property

Double the cash flow, double the mortgage pay down, double the appreciation, double the tax benefits.

Wish You Started 6 Years Ago?

Too late for that, the next best thing is to start right now.

Do you think I possess some special skill or luck that you wouldn’t be able to replicate?

How can you learn just enough, limit your downside, and purchase your first rental?

What’s holding you back from getting started or adding to your portfolio?

I want to hear from you!

If you want to dig deeper into the numbers, the full spreadsheet is available here.

What If I’m Not Picky Enough? Next Rental Property Update

June 22, 2017

Art is hard to understand.

I’m a logical person. Art is about feeling. It defies logic.

How do you compare a piece of art to another? Which one is “better”? Of course there are groupings by quality, but within the group, how do you rank them?

There are so many different dimensions you can evaluate on. What is important to one viewer isn’t the same with the next.

Are rental properties the same way?

I’m searching for my next rental property and I’m worried I’m not picky enough compared to other investors.

I guess it all comes down to what you prefer, right? Surely, there are no right or wrong answers when it comes to looking for a rental property? I’ve seen some gorgeous properties in the San Fransisco area (look here) but I’m also considering properties in New York too.

You need to find a rental property that not only you like, but potential tenants will like as well. Having a look at somewhere similar to these property management companies jacksonville fl, can help you when it comes to getting the right tenants for the property.

It is important that you know what to look for, as this can make the process easier to handle, and can cause a lot less stress for you.

The Search Starting Point

Last month I finished my cash out refinance. The Atlanta rental I’ve had for 6 years appreciated enough for me to start a new 30 year loan and turn some of the equity into cash.

See: Cash Out Refinance on a Rental Property – My Actual Numbers

I have $36k to invest in a new rental property.

First decision is the city. I already have investments in two cities (Memphis and Atlanta) and want to keep it that way for now – fewer property managers is a good thing.

Out of those two cities, Memphis makes more sense in 2017. We are a bit higher up in the real estate cycle right now, so I want a city that behaves in a very linear fashion – no big swings.

See: How to Visualize the Real Estate Cycle

Next is the neighborhood. Again, if the neighborhood I’m already in still makes sense, that’s where I’m going to begin my search. This isn’t as important because property managers usually operate across the whole city, but if I move to a smaller mom-and-pop company, location within the city will matter to them.

I’m Picky About the Rehabber

For someone doing passive out of state investing, the turnkey company is extremely important. This is the company who does the rehab work on the property you purchase.

My first level of filtering is achieved by working with a company like Jason Hartman’s investor network. They have relationships with the best turnkey providers in various cities and can send a warm introduction.

But you don’t have do to it that way. Other ways of filtering are using Turnkey-Reviews or BiggerPockets forums.

I’m not a believer in doing something like Roofstock or purchasing straight from an aggregator’s website. They do a certain amount of filtering and quality control, but it is a whole lot easier to decide the rehabber you trust than it is to judge the quality of an individual property from thousands of miles away.

My preference is a turnkey provider who has been operating for 10 years at 50 to 100 rehabs a year.

Experience matters. They need a certain amount of scale to have a full time crew and know what they are doing. I want a company that wants repeat buyers, not just in it to make a quick buck.

At a certain size, maybe 10 properties a month, I fear the quality goes down. Too many other projects going on. Too specialized.

I want that sweet spot.

My Worry – I’m Not That Picky About the Property!

Once I know the rehabber, neighborhood, and rent-to-purchase price ratio I’m targeting, the particular property doesn’t matter all that much to me…

Did I just say that on the internet? What will people think?

Real estate investors are usually all about the buying. Buy low, that’s where you make the money.

They will spend months searching through deals, waiting for the perfect property. They will put in dozens of low-ball offers for every one that is accepted.

I do the opposite. I set my standards and buy quickly when something meets the requirements. Of course, it’s important to make sure that the house is in fairly good condition before buying, but most other things can be fixed easily. For example, I recently bought a Georgian property that needed a new front door as the old one just didn’t suit the house. I found a website that had lots of unique door designs and managed to get a new door installed within days. Things like that can be fixed easily and I’m so glad that I didn’t let a door put me off the property. Things can be changed! You can’t change the neighborhood that it’s in though, so I pay more attention to that sort of thing. When I purchase the property, it’s important to do some checks around the site to make sure the house is safe. It’s also important to test for radon traces too by getting in touch with a radon testing colorado company, or another in your local area. Hopefully, that will remove any traces of radon, ensuring that the property will be safe for new tenants. Those sorts of things need to be checked before flipping the house and selling it on.

That really doesn’t match my identity put forth on Rental Mindset as an investor who gets a 31% yearly return. Am I not really a real estate investor then? Just a charlatan? Am I doing something wrong?

Maximizers vs. Satisficers

I enjoy nerdy books about decision making. Like Predictable Irrational.

In The Paradox of Choice: Why More is Less, I learned about identifying people as maximizers or satisficers.

The maximizer wants the best deal possible. These are the people who go to multiple grocery stores and look up Amazon prices from the store. It doesn’t matter how good the deal is if they can get an even better deal somewhere else.

The satisficer looks until they find a deal that meets their requirements. Their criteria are more modest. They buy knowing full well there might be a better deal elsewhere. They say this and move on:

If a maximizer and satisficer are shopping for the same thing, the maximizer will get the better deal.

It is apparent that the maximizer also paid a greater cost in terms of time. Depending upon how you value your time, this alone might tip the balance towards satisficers being the overall better decision makers.

But wait there’s more.

The maximizers got the better deal, but who is happier about the decision? Satisficers.

The maximizers are more likely to have buyer’s remorse. Even after they buy, they continue to comparison shop. Not just for a better deal on the item, but what else could they have used that money for?

But wait there’s more.

Decision fatigue is a real phenomenon – the more decisions you make, the worse they get.

So if you put a ton of cognitive load into comparison shopping laundry detergent, you are more likely to snap at your kids or fire off that snarky email to your annoying coworker.

The book helped me stop trying to maximize every decision. If you are cheap, check it out.

Satisficing on a Rental Property

The turnkey approach isn’t really for maximizers. There are always better deals out there if you put in more work, including finding the deal and rehabbing it.

Some people are interested in the more passive nature of turnkey investing, but have a mental block paying market rate for a house when discounts are available elsewhere.

They take issue with the turnkey provider making a profit off of them. Why should someone make $15k off flipping a property to them? Shouldn’t they shop around and find someone willing to do it for less?

I am firmly in the satisficer camp on this one. It is ok if the turnkey provider makes money as long as I get a good enough deal (what constitutes a good enough deal changes over time).

What do you think is the right approach here?

Is my lack of pickiness about the particular rental property actually a better decision making process?

Am I really a real estate investor if I’m not hunting out the best deal for months?

Turnkey Rentals in 2017: Why You Need to Adjust Your Approach

June 14, 2017

Old people do the silliest things.

Yes, maybe it once made sense to wear a suit everyday, but that’s not how it works anymore.

No, you don’t have to wait for the Sears catalog to get Christmas present ideas. That’s what top 10 lists on the internet are for.

The things oldies do are funny because they don’t match the times. Years of change happens, but at some point they quit adjusting their approach.

When it comes to purchasing a turnkey rental property in 2017, you are going to need to adjust your approach as well.

How it Worked for My First Two Properties

I purchased turnkey rental properties in both 2011 and 2014.

Turnkey means I go through a company who flips properties specifically to be rentals for investors.

In 2011 no investors were buying. It was an excellent time to learn how everything worked because people were more willing to work with a newb like me. They actually took the time to talk to me, in an effort to generate some sales.

Even in 2014 it was typical for the turnkey companies to finish the rehab before lining up the investor to sell it to. This let you see the final product. I could browse properties on Jason Hartman’s investor network website to see great options from multiple turnkey providers in the city.

But that’s not how it works in 2017!

My New Process

Properties are moving fast.

I have noticed that the turnkey providers are less willing to jump on the phone to discuss their operation. Yes, it is still possible, but you have to be the one following up – they aren’t struggling for sales.

Some of the deals still make it to the point of getting emailed out to multiple investors or posted to an investor network like Jason Hartman or Norada.

But you’ll really have to act fast if you want the deal. It might be scooped up within an hour, so you have to decide quickly if you are in:

It’s best to not compete with the masses. How can you avoid it?

Move up in the process.

The turnkey providers are flippers. It might take 2 months for them to purchase a property, fix it up, and sell it to someone else – or even less time in a highly desirable area – I hear that puerto rico turnkey properties are becoming increasingly popular. I want to know about the properties before everyone else.

This requires establishing a relationship with the provider and frequently checking in to see what is in the pipeline.

It’s a little more work and you have to call dibs before the rehab is finished. This requires putting up earnest money, but you still have the opportunity to back out if your research uncovers anything unexpected.

But that’s what it takes in 2017. Even though it is competitive, the numbers still work. You can still hit the 1% ratio on a quality rehabbed rental.

How Have You Adjusted?

Has your strategy adjusted in 2017?

How about how you operate your strategy?

Any tricks or tips you can share on how to move up in the process?

Money Is a Problem to Be Solved

June 8, 2017

Do you know anyone who let’s the smallest little problem go on for weeks?

Rather than just fixing it and moving on, they keep complaining about it every time you see them.

“Yes Aunt Linda, you already told me about your squeaky door. Would you like me to go down to the store and get some WD-40?”

Then they don’t accept help or even advice. It is almost like there needs to be something in their life to complain about. If they quickly fixed the issue, they’d just have to identify some other problem to fixate on.

Money is often the focal point.

When you get right down to it, money is just another problem that needs to be solved.

How Most People Think About Money

Money comes in, money goes out.

Two parts of the equation, yet most don’t think of it that way. Spending gets the majority of the focus.

There is only so much that can be cut. It takes money to live, even if you are able to eliminate thinking like “I work hard so I deserve this new iPhone”.

Photo: Dan Taylor-Watt

The other end of the equation has no limit – the money coming in.

The average person believes they earn what they earn and that is that. Maybe they work a retail job and get paid a set hourly wage. Not much can be done right? Well, that doesn’t have to be the case! Plenty of people have a side hustle that brings in another income. Whether it’s using the best survey sites to participate in paid surveys or simply selling old belongings, any income is still an income.

If You Think About Money Differently…

If you treat money as just another problem to be solved, you will be able to think outside the box.

You’ll know spending isn’t the only variable that can be tweaked (although it is still important). Income can be changed as well.

Let’s take a look at a profession with an extremely fixed pay scale: teachers.

Photo: Matthew

A teacher knows exactly what they will make not only this year, but 10 years from now. It is set in stone, based on their education and years of experience.

A small side hustle can have a big impact on the money problem. Not able to save even 10% of your income? How much extra work will it take to earn 10% more?

It doesn’t have to be an extra job. It can fit into your schedule.

When driving for Uber or Lyft there is an option to set where you are driving and pick up riders going the same way. You could do one ride on your way to work and one home. Or on the weekend when you are heading to the next town over to meet a friend.

It can be a hobby you enjoy doing. Love ugly Christmas sweaters? Make them year round to sell on Etsy or eBay during the holidays when all the hipsters wish to one-up their hipster friends. Alternatively, just sell any of your old belongings you no longer want; there’s a buyer for pretty much anything out there. Try classifieds sites like LeoList first, then maybe you could move on to building your own e-commerce platform.

Photo: Lynn Friedman

If you like working with wood, make anything out of a wine barrel, rich people love that stuff.

Photo: Doug Fisher

Or it can be running your own small business that utilizes your skills. Tutoring, summer classes or camps, or anything to do with weddings (where prices have absolutely no reasonable boundaries).

Also, did you know that you can even get paid for surveys, lots of websites provide a service where you give your opinions in exchange for money! Yes, it is that easy! For example, if you use a particular business and have a bad or good experience then writing about it in a survey and getting paid for it seems like a no-brainer.

Once you start thinking of money as just a problem to be solved, the possibilities are endless.

Gateway to Passive Income

Passive income is the ultimate fantasy. Do something now and money just keeps coming in? Wow!

Don’t start with passive income first, it is a graduate level course. Get rich quick schemes will be a waste of your time.

Once you have some savings piling up, you can put it to work for you.

The default option is in stock market index funds. But there is a disconnect there. Yes, it may go up, but do you make the connection of your money earning more money?

My recommended way to get into passive income is purchasing a rental property. It is tangible and easy to understand.

Photo: Håkan Dahlström

You pay $20k for the property up front, the tenant gives you $1k a month, and you cover all expenses including hiring a property manager (around $800 a month total). These are actual numbers that are attainable no matter where you live.

No magic. You live in a house or an apartment and understand how renting or a mortgage works already. The tenant applies for the property, they go through checks like the apartment credit check, then either get accepted or rejected. It’s not hard. Housing is something everyone needs.

Once you have experience making your money work for you, you’ll see opportunities all around you. Vending machines, truck rentals, expensive equipment rental.

Before you know it you’ll be ready for the graduate level passive income course. And financially free.

It All Comes Back to Mindset

Think of money as a problem to be solved to unlock more solutions. Get a side hustle to control the income side of the equation.

Think of passive income as putting your money to work for you. Get a rental property to see it in action and prove it is possible.

How have you shifted your mindset about money?

Main photo: Steve Snodgrass