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)
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 $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
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
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?