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3 Rental Properties in 6 months Added $24,092 in Net Worth

December 26, 2019 3 Comments

Don’t believe everything you come across on the internet. Just this.

I spent zero time working on my rental properties the last half year. They are thousands of miles away and I have properties managers who collect the checks. Pretty darn passive even if there is a phone call every once in a while.

And in just the last six months my 3 property portfolio added another $24k! If it is hard to believe, I suggest you take a closer look, don’t just dismiss it.

A Quick Look Back

I am the proud owner of 3 properties I have never seen that are located thousands of miles away.

Here is how it went down:

July 2011 – Bought Atlanta area property for $20k investment
July 2014 – Bought Memphis area property for $24k investment
May 2017 – Cash out refinance on Atlanta property to pocket $36k (why and details)
September 2017 – Bought Memphis area property for $26k investment (search and details)

I think of my portfolio as a snowball gaining 30% more mass each year – yes, I am getting a 30% a year return. My role is to keep it moving with as little as work as possible. I’m pretty hands-off.

Added together, my property managers now collect $3245 in rent each month. My mortgage payments total $1918. With ~10% to the property manager, I’m clearing $1000 a month in cash flow if all goes well!

Let’s look at each individual property, then do a bit of analysis.

Rental #1 Numbers – Atlanta

This is the original money maker. Perhaps it was just lucky timing, but sure makes me wonder if I had more savings back then how many I would have purchased.

The online estimates I feel ran up a little too high. So I took the pessimistic view that it is only worth 95% what it says on websites like Zillow. Otherwise the return would be even greater!

And remember, this one I got my original investment out plus some already during my refi. Queso en el banco.

Rental #2 Numbers – Memphis

This is the prove it property. It proved to me the first one wasn’t just luck. It is in a less exciting city at not as perfect market timing. And it still works great!

Compared to rental #1, much more of the return here is from cashflow. It has returned $16.3k in 5.5 years vs. $19.2k in 8.5 years for #1. It showcases the multifaceted returns with rental properties.

Still plugging away at a 22.3% compounded annual growth rate. I’ll take it.

Rental #3 Numbers – Memphis

The little baby is growing up so fast. I have a theory that the first 2 years of owning a rental property you really don’t know how well it is doing. So sit back and don’t evaluate things for a while.

Well this one I also took a 95% estimate of Zillow et al. because it ran up too fast to be believable. Even with my hedge, it has still gained $21.7k in appreciation this year!

And it is also a continuation of the cashflow theme – $11.8k in just 2.5 years, even more extreme that the other Memphis rental.

Overall Portfolio Numbers

Twice a year I do this analysis. Twice a year I warn you that these results are better than projected. A 32.5% yearly rate of return! That is absurd.

I honestly think things might settle down closer to 25% a year given a full market cycle. I highly suggest you run a quick calculation – how does a 25% yearly return compare to your other investments? Where will you be in a decade or two?

The people who want to waive it off will say “well you have to risk adjust those returns, if you get that great of a return it must be because the risk is greater”. Don’t be that person. Take the time to explore it.

You’ll find these deals involve a little work which keeps big investors from snatching them all up. You’ll find that the financing over 30 years that is possible in the United States is really why these returns are possible for the every day person with just tens to a few hundred thousand dollars.

And hopefully you’ll find that it is worth the tiny hassle of learning, purchasing, and supporting a small portfolio of properties. You can do it. It isn’t that hard and may just pay you a million dollars over the course of 20 years.

What kind of minor inconvenience would you put up with for a million dollars?

Here are the complete numbers. I also ran a quick calculation – if the next 6 months I made zero cashflow and each property dropped 20% in value, my overall return would be down to a still impressive 24.2%. Not a bad worst case scenario.

Did 3 Rental Properties Really Just Generate $34,295 in 6 Months?

July 9, 2019 5 Comments

Wowza, that is a big number!

My favorite thing about doing these updates? I put up with a few minor annoyances for 6 months, then find out my reward. And it is massive.

Isn’t saving and investing about delayed gratification anyway? Whenever you hear someone dismiss real estate investing offhand, ask them how much money they’d have to earn to put up with the slight annoyances.

A Quick Look Back

I am the proud owner of 3 properties I have never seen that are located thousands of miles away.

Here is how it went down:

July 2011 – Bought Atlanta area property for $20k investment
July 2014 – Bought Memphis area property for $24k investment
May 2017 – Cash out refinance on Atlanta property to pocket $36k (why and details)
September 2017 – Bought Memphis area property for $26k investment (search and details)

Let’s look at each individual property, then do a bit of analysis.

Rental #1 Numbers – Atlanta

The OG. Hard to believe it was 8 years ago I purchased my first rental property, way back when I was 25 years old. What is harder to believe – that I was so young or that it is still the same tenant all this time?

There were a couple of repairs so far in 2019. First the insurance company drove by and told me I needed to fix the loose shingles and siding. That was a couple hundred bucks.

Then the water heater needed to be replaced. By Googling the brand they wanted to install, I was able to pretty easily negotiate $200 off the price. But it still was around $1k total with another plumbing issue they fixed. Ouch.

That hurt the cashflow, which already was compressed after my refinance in 2017 (and below market rent). But still a positive number for the first half of 2019. And once again the appreciation was massive – up another $9.4k in only 6 months!

Rental #2 Numbers – Memphis

This one is going well. There were a couple minor repairs, but that is fine since the tenant is entering her 3rd year. I’d rather keep the same person than go through the expensive turnover process.

Out of my 3 properties, this one is the most balanced in terms of return from cash flow and appreciation. In 3 fewer years, it has nearly as much cash return as the Atlanta property!

The Atlanta property has 3x the equity return, however this property still has a very nice 21.4% compounded annual growth rate. So even if you don’t luck into appreciation or wonderful market timing, you can still make a killing on boring old properties in boring old cities.

Rental #3 Numbers – Memphis

Still the original tenant for 1.75 years, which means the cash flow is going very well.

But what really helped the numbers are Zillow and Trulia adjustments. They seemed way low just 6 months ago, now they are finally above the purchase price.

The result is a positive return on investment for the first time for this property. A 14% compounded annual growth rate isn’t exactly exciting, but I expect that number to keep rising as we get further from the closing costs.

I think that might be pretty typical when purchasing a rehabbed property. The first couple years it appears to be a meh investment, but looking back 8 or 10 years looks incredible.

Overall Portfolio Numbers

32.1% yearly rate of return! In just the last 6 months the portfolio earnings (net present value) jumped up $34,295!

Here is the complete breakdown:

What About Risk Adjusted Returns?

I don’t love doing this review because I think it paints the wrong picture. It is easy to dismiss these results as lucky timing or risky.

And there is some validity there – without great timing these numbers wouldn’t look nearly as good. I expect somewhere between a 20-25% yearly rate of return through a whole up and down market cycle.

But the point I want to drive home is that these rentals are not risky. Holding any property for multiple decades reduces a lot of the risk, when the returns are largely just inflation. This is a play on leverage paid by someone else (the tenant). But to make that leverage low-risk, the asset needs to have tangible value (not greater fool value). Each of these rentals is below the cost of construction in areas with a jobs.

These returns are incredible because the risk is so low. Speculating in Miami, Brooklyn, or SF would have had much greater returns over this period, but with a completely different risk profile. Don’t group these cheap rentals in a city like Memphis in the same “risky real estate” category.

You could even argue these properties have more tangible value than the stock market everyone loves, making it is less risky.

But I want to hear from you – how do you evaluate the risk of rental properties compared to the stock market?

Here are the complete numbers

$8061 for an Hour of Effort – Rental Property Portfolio Update

January 2, 2019 4 Comments

Well how do you like that?

I like it just fine because my rental properties are humming along nicely. In fact, by my calculations I made $8061 in cash flow in just the last 6 months.

Let’s take a look!

A Quick Look Back

I am the proud owner of 3 properties I have never seen that are located thousands of miles away.

Here is how it went down:

July 2011 – Bought Atlanta area property for $20k investment
July 2014 – Bought Memphis area property for $24k investment
May 2017 – Cash out refinance on Atlanta property to pocket $36k (why and details)
September 2017 – Bought Memphis area property for $26k investment (search and details)

Added together, my property managers now collect $3185 in rent each month. My mortgage payments total $1918. With ~10% to the property manager, I’m clearing $950 a month in cash flow if all goes well!

Let’s drill down and look at each individual property.

Rental #1 Numbers – Atlanta

Just crushing it on the appreciation!

I took the average of Zillow, Trulia, and Redfin – according to those estimates this property along appreciated $16,200 in 2018. Wow.

These returns are pretty impressive, but they are largely on paper (excluding my cash out refinance). You see, when the market turns over the next couple years, some of the appreciation will quickly disappear. That’s ok because there is more to real estate – don’t forget about the cash flow!

The cash flow is back up too. The tenant has been in there for the full 7 and a half years I have owned it, which is great news, but unfortunately they fall behind on rent occasionally.

In 2017 they were behind, so 2018 when they got caught up, my cash flow numbers are doing great!

24.4% compounded annual growth – bada bing, badda boom!

Rental #2 Numbers – Memphis

Steady Eddie.

Appreciated another $2300 over the last 6 months. The best cash flow of any property at $4131.

Oh and I haven’t mentioned a couple other categories too – the tenant paid down the mortgage for me $1228. And I received another $931 in tax benefits according to my calculations (long story, see previous articles).

The all-star property #1 purchased at the depth of the recession has a 24% compounded annual growth rate over 7.5 years. Well this one isn’t too far behind: 21% CAGR over 4.5 years!

Rental #3 Numbers – Memphis

Ok you ready for a dud?

According to 2 of the 3 price estimating websites, this one dropped a ton in the last 6 months. Why? I have some ideas…

First, these are quick estimates. You really have to look at comps to get an accurate price estimate. Luckily, those websites include some nearby “recently sold” properties…

And those time seem to indicate normal prices. One a block away for $125k, not $83k…

You essentially have two drastically different property prices in the area – old ones with no work done over the years or flipped properties. Any flipped property that had a ton of work done will have a higher price tag (like mine).

My best guess is there is some ~1 year period where the last sold price really sets the price estimate. So I don’t believe there is anything drastically different now!

I’ll go with those numbers anyway. Down $12k in price, $4k in cash flow. Ouch.

Overall Portfolio Numbers

Despite the big drop in Rental #3, the numbers are great.

Compared to 6 months ago, my portfolio yearly return dropped from 30.1% to 29.9%. I’ll take it!

Net present value just hit $100k. That is impressive. Basically this is the amount OVER a “100% safe” investment like a CD returning 2% every 6 months (which is still better than you’ll actually find in a CD despite interest rates jumping up recently).

That is incredible to me. It certainly is worth the minimal effort it takes to learn this stuff, acquire the properties, and the occasional phone call.

Here is the half year cash flow breakdown:

The Highest Highs

I know I shouldn’t get too excited though – I’ve caught 7.5 years of a huge bull run of the market. I’m not a genius investor.

Let’s say I have a paper “drop” in value of 30% on my property values overnight. That should would suck, but I’d keep the properties and they would still cash flow.

What would that do to the numbers? Instead of a 29.9% yearly return, it would drop all the way down to 9% per year. Temporarily. And if it took a year to drop 30%, but with the other benefits of cash flow, paying down the mortgage, and tax benefits? 12% yearly return.

That’s better than what people expect out of the stock market! Then things will be back on the upswing before you know it, again raking in huge returns.

Not too shabby. What do you think?

Other Updates from Brian

I’ve been keeping busy with my other ventures, so not much action or plans for Rental Mindset for now. So rather than doing the typical email opt-in for extra content, I’ll just share the link to my full spreadsheet for the above calculations.

What have I been spending my time on? I still have my day job of kids coding tutoring and then spent much of 2018 creating an app in the environmental space. It is called Pledge Balance – the basic idea is that a lot of people care about the environment but don’t have a simple action to take. It is a pledge to balance the negative impact of your driving and flying with a tiny payment that goes 100% to the ?. My drive today was 17¢ to balance, which is invested in projects like planting ?. Just launched in beta for iOS, so I’m excited to see where it goes!

$5,162 in Passive Income – Rental Property Portfolio Update

July 1, 2018 13 Comments

It’s been a while, have you missed me?

The thing I love about investing in rental properties is the passive income. I’ve been sitting back making money.

In the time since my last article, I make $5,162 in passive income and an additional $9k in net worth (equity value).

Let’s take a closer look at how I got there!

Purchased Turnkey Rental Properties

I am the proud owner of 3 properties I have never seen that are located thousands of miles away.

This is all possible by the magic of capitalism. Small businesses exist to flip rental properties to investors and other businesses to handle the ongoing management. For a reasonable fee, they do most the work for me!

Here is the timeline:

July 2011 – Bought Atlanta area property for $20k investment
July 2014 – Bought Memphis area property for $24k investment
May 2017 – Cash out refinance on Atlanta property to pocket $36k (why and details)
September 2017 – Bought Memphis area property for $26k investment (search and details)

Let’s drill down and look at each individual property.

Rental #1 Numbers – Atlanta

The appreciation just keeps on rolling on this one. It ran up in value so much that last year I refinanced to put the equity to use by purchasing property #3.

Over the last 6 months it has appreciated another $4k!

The cashflow is going just ok. The tenant has been in the property for over 7 years now, and has fallen behind on rent again. Once the next payment comes in, the cashflow numbers will look much better.

I’ve had several short phone calls with the property manager over the last 6 months about the late payments. The current plan is to file for eviction to really grab the attention of the tenant, and to get a payment plan down in writing. I’m not concerned because we have been through this already with the tenant and know they want to stay in the home, but also want to protect against the worst case!

The overall numbers continue to be very strong – it has a compounded rate of return of 23.5%!

Taken individually, that is great. But since I was able to reinvest the returns into more properties, the portfolio’s return is even better.

Rental #2 Numbers – Memphis

My Memphis properties lean a little bit more towards cash flow over appreciation. But actually both are going well!

Over the last 6 months the $1875 in cash flow, thanks to only one ~$200 maintenance call. The tenant signed a new 2 year lease as well, which came with $150 off for doing so (but made back through rent increases each year).

It is appreciating nicely too. Nothing insane, but going at a 4% a year clip right now. Through the ups and downs that might average out to closer to 2%, but leveraged 5x that’s still pretty solid!

Look at that – 4 years at 20.5% a year! And climbing, 6 months ago it was 20% a year.

Rental #3 Numbers – Memphis

This is the latest addition, and it is closing in on the 1 year mark.

The tenant is in place and starting to generate some solid cash flow. The value is now above the purchase price by a little bit.

There were a few hundred dollars of maintenance expenses, and the property manager got the record keeping messed up a bit, so we had some back and forth. But overall pretty smooth and very little time spent.

Still a negative overall return, as I dig out of the hole of the closing costs. This is to be expected though, my rental properties are a long-term play.

Before we go on to looking at the overall portfolio value, let me explain one new change this year.

Tax Benefit Changes

When it is your own personal portfolio, you get to do the accounting however you want. What you report to the IRS is standardized, I’m talking about your own scoreboard.

I pretty much just made mine up. I have a couple friends who are accountants who will likely cringe at some of these details.

First, I decided to use a 2% discount rate every half year. Monthly record keeping is overkill. Every year would be fine, but I like to check in on things more often than that. So I arrived at this non-standard measure.

Then I decided to include tax benefits as part of my cash return number.

The return is broken into two categories: cash and equity. Cash is the benefit I get now from tenants paying the rent. Equity is the return on paper from appreciation and paying down the mortgage.

There are additional benefits of rental properties that don’t neatly fit into those categories. One is the tax benefit from the fake expense of depreciation. On my taxes for each of the properties, I get to say I had a ~$3k expense that I didn’t actually pay. Pretty cool! What’s that worth?

That depends upon what I pay in income taxes.

Under the new tax plan, my marginal tax rate fell from 28% to 24%. So the benefit I get from not paying income tax on ~$3k per property fell a little bit as well.

Note: If you end up selling the property, you have to pay back the benefit from depreciation. This covers it well. There are ways around it though, like a 1031 exchange or eventually passing on to heirs. At worst it is an interest free loan, but since I don’t plan on ever paying it, I include it as a full benefit.

Overall Portfolio Numbers

Drumroll please…

My rental property portfolio is worth $110,020!

Here is the complete breakdown of the cash flows. Not shown are the discount calculations or the $10k cash remaining from the refinance.

Basically I’m crushing it still. The overall rate of return went up from 6 months ago and is back over 30%. It briefly dipped below with all the closing costs of acquiring a new property.

In fact, it would be up even more if I used the numbers on Zillow today – I actually pulled the numbers a couple weeks ago.

The Bottom Line

Ultimately whatever Zillow says doesn’t really matter though.

You can’t get too excited about the exaggerated highs, as there will be lows someday too. You are never as good as they say you are or as bad.

And for anyone who is thinking “everyone’s a genius in a bull market”, my return would be a whole lot more impressive if gambling in high price markets like San Francisco. This whole cash flow rental property approach is based on riding out the inevitable swings in the market.

I’m confident this approach works well over decades – therefore, who really cares what Zillow says. It sounds like I’m making excuses for bad results, not someone who is earning 30% a year!

What do you think? Think you can do it too?

If you want to dig into the complete calculations, click here