The Details of My Rental Property

for-rent-signEvery month I update the Investment Income page to show how my passive income streams are fairing. Included is the amount of money I make on my rental property. In this post I’m going to give you some background and crunch the numbers to show you exactly how I calculate my cash flow.

The property is a one bedroom condo in Northern Virginia, just outside of Washington, DC. It has a loft with a spiral staircase going up to a small TV or office space. I installed the staircase myself, replacing a built-in ladder that wasn’t easy to use, especially if I wanted to eat a soup dinner up there.

The kitchen floor and cabinets are dated, but perfectly functional. The appliances are stainless steel and about 7 years old, but still look and work as good as new (last time I checked). The unit has a stackable washer/dryer unit and a nice balcony overlooking a big courtyard. The bathroom is not brand new, but it’s in good shape with newer fixtures.

I manage the property without the help of any management service. I’ve done a few upgrades on the unit in between tenants to avoid problems before they happen. For the past three years of land-lording, I have had no majors issues come up, just a few minor disturbances. I keep a decently sized stash of cash set aside for inevitable problems. Today it stands at about $5000 and growing.

After the Bubble but Before the Crisis
When I purchased the unit, I thought I was timing the market perfectly because the housing bubble in the DC area had popped. Little did I know that the financial crisis was coming and values would decline further. I bought the unit for $290,000, but a year earlier it would have sold for closer to $320,000.

The original financing was structured as an 80-15-5, meaning, 80% of the mortgage in the primary loan (30 year fixed), 15% in a secondary loan (30 year fixed, 15 year balloon payment), and 5% down plus closing costs. This was a popular loan structure before the financial crisis because it allowed a borrower to sidestep paying private mortgage insurance (PMI). The financing was structured like this:

LoanAmountRate
1st Loan$232,0006.375%
2nd Loan$43,5008.500%
Down$14,5000%
Total$290,000

Paydown and First Refinance
After I moved in, my first goal was to pay off the second loan because of the high rate of 8.5%. It took me 23 months to pay off the $43,500 loan balance. I accomplished this by throwing extra money at the loan each month. Then toward the end of the loan, I paid off the final $15,000 from savings in one chunk, taking my savings account down to about $1000. My original payment including two loans, HOA, and taxes was about $2364.  After I paid off the secondary loan, my payment was $2030. Paying off that second loan felt spectacular!

Shortly after paying off the second loan, it became much easier to refinance the first loan because the PMI was no longer necessary. Plus, rates had fallen quite a bit. I was able to refinance the original first loan at 5%, 30 year fixed, down from 6.375%. I had also made a few extra payments on the first loan bringing the balance down to $227,000 for the refinance. This lowered my payment by $230 dollars. 5% was a great rate at the time and it made a huge difference in my cash flow.

Living in Sin
Right around the time of refinancing my first mortgage, I had been dating my girlfriend for more than a year and we decided for her to move into the condo with me. While this was a huge step in terms of our relationship, and it was a great move financially. We were well on our way to getting engaged when we first started discussing the move. Mrs. RBD said something like “If I move in, you’ll be planning to propose, right?” (not so directly worded of course).  A few months later we were engaged and we married a year after that.

With my future wife moving out of her apartment, she was no longer paying $1400 per month plus utilities for a one bedroom. We agreed that she would pay me $500 for rent until we got married. She took the monthly extra $900 and paid off her final student loans in the next five months.


In a short period of time, I stopped paying the second loan ($334), refinanced (saving $230), and started collecting rent ($500), a $1064 positive swing in just 4 months. My wife was also paying $900 less in rent, and she quickly paid off her student loans. All told, combining our lives into one condo saved us more than $2000 monthly. All of the new extra cash flow, plus what we were already saving, went into a fund to buy our first house together.

We knew that if we were going to grow our family we would eventually need to move. A one bedroom condo with a spiral staircase was not ideal for being pregnant or raising kids. So in the Spring of 2011, we bought a single family home just 15 minutes further out in the suburbs. The new house had a driveway, a yard, and was located in a good school district. We were able to buy this house without selling the condo and still put 20% down. The condo value had depreciated due to the financial crisis and selling it would have produced a loss. Since I had paid extra to the loans, it wasn’t underwater per se, but I didn’t feel like taking a big loss by selling. The value had fallen from $290,000 to around $250,000-$260,000. I had also put in about $12,000 in upgrades. I decided to become a landlord.

Landlording
After the refinance and increases in HOA fees and taxes, I was paying a monthly total of $1848 for the condo. When I found my first tenant, I could only charge $1625. For the first year of land-lording, I was losing $223 per month in cash flow. Not fun. After taxes and principal pay down, the numbers were closer to break even, but this still didn’t sit well in my stomach. My tenant paid on time and I liked him for the most part, except when his brother moved in for a few months. But eventually, he took a job in another city and had to move out. I went looking for a second tenant.

This time around, I raised the rent to $1725 and actually had more interest in the condo than when I listed it the year before. I secured a new tenant, a nice young couple that has been paying on time and hassling me very little for almost two years now.

Around the time they moved in, interest rates were very low and I decided to refinance again. But this time, I wanted to pay down the loan as much as possible to make the condo cash flow positive. I had also paid extra on the $227,000 loan over the course of three years bringing the loan balance down to about $196,000. Then I put down an extra $20,000 in addition to closing costs during the refinance. My new 30 year fixed-rate loan was $175,000 at 3.75%. This is the loan I carry today.

Today’s Numbers
So now that you have the background, here are the current numbers on my rental property. I don’t follow any sort of formula from Real Estate Investing For Dummies or anything; this is just how I track it because it makes sense. I account for all costs on a monthly basis even though some are incurred once a year. This method I think keeps the cash flow in better perspective.

MonthlyYearly
Rental Income$1,725.00$20,700.00
Mortgage Payment$810.45$9,725.40
HOA Fees $410.48 $4,925.76
Rent Collection$3.95$47.40
Tax$228.13$2,737.56
Landlord Insurance $15.25$183.00
NAIL$5.83$69.95
Gross Profit$250.91$3,010.93
Maintenance Allowance$143.75$1,725.00
Net Profit$107.16$1,285.93

A few notes on this list. I use the Rentmatic rent collection service that costs me $3.95 per month, per unit. I’ve been very happy with them. Both me and my tenant log in once to set it up and I get paid without the hassle of checks.

NAIL is the National Association of Independent Landlords. I pay this membership fee yearly. They provide forms and assistance to independent landlords like me. I also use them to screen tenants by running a credit check. If I have any bigger problems with tenants, they are there for support.

I put aside one month’s rent per year into savings as a maintenance allowance.  This is in case something goes bad or I have some time with an empty unit. That equals $143.75 per month. When I subtract that number from my gross profit, I have a $107.16 net profit which is what I use on my Investment Income page.  In three years I have not spent the equivalent of one month’s rent on repairs, but that day may come. If not, I may use extra money to upgrade the kitchen some day.

In an earlier post about this property called Early Mortgage Payments: Math vs. Comfort, I talked about the potential of paying this loan down early. At this stage in the loan after 16 payments, I have only paid the minimum. The balance stands today at $170,682.50.

Taxes
I won’t bore you with details on my taxes for this property. But while I bring in $20,700 in rent every year on the property, I end up paying zero in taxes. The reason is my expenses are very high, especially interest expense, HOA, and depreciation. Doing taxes on your own is not difficult for a landlord, but the first time it takes a bit of learning. IRS Publication 527 is the best place to start for anyone who is doing taxes for the first time or is thinking about getting into landlording. When I do my taxes with TaxACT, I am able to easily enter my data and it does all the calculating and form generating for me. It was much easier than I expected my first year.

I anticipate in a few years that I’ll have to pay some taxes on the rental income now that I’ve refinanced, but probably not until the next time I increase rent. At this stage I like my tenants and will likely not raise rent on them. The market rent rate has probably increased by about another $100 since they moved in, but I’d much rather keep my excellent tenants for the time being than have them move out for an extra $100.

Conclusion
For my regular readers, I hope this transparency of my rental property gives you some more insight on my monthly investment income updates. For anyone considering buying a rental property, the real money is made by getting a good deal. Over a long period of time, money will cash flow in more and more, but it takes patience. Good tenants is key, and keeping a nice stash of cash in case something goes wrong.

Today the value of my property is harder to estimate because not a lot of units have recently sold in my complex. My best guess is it is near my original purchase price. If that is the case, I have about $120,000 of equity in the property. I spoke to a reputable bank about taking some of the equity out and they said I can take out anything beyond 75% loan-to-value. If indeed the value has gotten back to what I paid for it, then that would open up some cash to take out and put into a new property.  Stay tuned on that.

26 Responses to The Details of My Rental Property

  1. writing2reality January 27, 2014 at 10:04 am #

    RBD, nice work on laying out the history of the rental property! I think a this point I wouldn’t touch the existing loan at 3.75%. If you were to take additional equity out of the house, I would do it as a separate loan or transaction, unless it is significantly cheaper to do otherwise. Looking forward to seeing what, if any, other real estate moves you make going forward. The market you are in is tough for finding cash flowing properties unless you have a significant down payment to buy down the monthly debt obligation.

    • retirebeforedad January 27, 2014 at 10:11 am #

      WYOR,
      I’m not touching the 3.75% loan, that is for sure. But I may do a loan against the property or line of credit of some kind. I have more equity in my home, but I’d rather keep that equity separate from my rental actives. N. VA is a very tough market. If I do buy something, it will be a cheap condo of some kind in a good location. I want to keep my activities local.
      -RBD

  2. FI Fighter January 27, 2014 at 11:05 am #

    Very transparent, thanks for sharing your rental property story. It’s good to see it cash flow positive now, and I’m glad you were able to refinance into a much lower rate. That 3.75% looks pretty sweet these days!

    When I’m looking to buy properties, I typically put 5% for maintenance items and another 5% for vacancy. Using this “formula”, I strive to find deals that give me 20% cash on cash returns… Even though the true return may not be as good as advertised, I like to aim a little higher so that if the real returns are like 15%, I’m still well ahead and cash flowing. Another financial crisis (at some point in the future) is something I worry about since that can easily slash the property value in half. The way down is always quick and painful.

    Thoughts on where/when to invest in the next property?

    • retirebeforedad January 27, 2014 at 11:16 am #

      FIF,
      I prefer to invest locally because I want to manage myself. The area I live nearby is very desirable to live in with high and steady income tenants available. I may buy something with a 5% cash on cash rate and be patient with it. Deals are scarce, but values will appreciate. I also know some urban planning catalysts that could increase values for certain properties (new public transport, new developments near properties etc.). I’ll need to put a good chunk down too. Lots of factors to consider. With lower rates now things are tighter. Thanks for stopping by.
      -RBD

      • writing2reality January 27, 2014 at 1:17 pm #

        One thing I always have looked at when evaluating properties (a fun project I like to do in my spare time) is to over-account for maintenance and vacancy, while including a property management fee expense, even if self-managed. For any number of reasons it might not be feasible for you to manage one day, so by building in property management fees, you can ensure you’ve covered those expenses should they incur. Not to mention you will effectively be paying yourself as a property manager while being self-managed.

        Ultimately, if there is one area of my investment analysis I like to be overly conservative on, it is projecting real estate rental returns. As an additional note, I don’t included appreciation in my analysis, as that is certainly far from guaranteed.

  3. Joe January 27, 2014 at 12:38 pm #

    RBD, Did you set up a LLC?

    • retirebeforedad January 28, 2014 at 7:55 am #

      My advisor said an umbrella was a better choice for my situation.
      -RBD

  4. Fast Weekly January 27, 2014 at 6:53 pm #

    Thanks for the update RBD. It looks to me like you made lemonade out of lemons by being diligent, practical, and giving yourself time for the market to stabilize. Good work buddy. I forget, now that you have the hang of landlording……are you interested in taking on another rental unit?
    -Bryan

    • retirebeforedad January 28, 2014 at 7:54 am #

      FW,
      I always say I’ve never regretted paying off a debt. In this case, had I not paid down my mortgage early, the refi’s would not have been nearly as productive. It took sacrifice. 8.5% was a no brainer. But I still think its good to pay some extra on mortgages, although less when you have a rate under 4%, that is for sure.
      -RBD

    • retirebeforedad January 28, 2014 at 7:56 am #

      Oh, and yes, I’m looking into another unit.

  5. Martin January 27, 2014 at 11:41 pm #

    Great story and very detailed review. I had the same process in buying our condo. I bought it when I was single for 290,000, down from 312,000 plus the seller agreed on paying closing costs (they were desperate to sell). I was buying in 2008! I though what a great deal! $40k equity right there! Well, it was still too early as prices dropped by half later during 2008 – 2009 and even today I am still under water.
    And then my wife moved in (and with kids the condo is suddenly too small and I cannot sell it unless I do a short sell).
    So now I am converting my investing into a business and hopefully soon I will be able to subsidize my income.
    Thanks for sharing your story.

    • retirebeforedad January 28, 2014 at 7:52 am #

      Martin,
      Thanks for sharing your story too. Price drops like that feel horrible. Hopefully we don’t see another real estate crisis in our lifetime, or at least until all is paid off. The one upside of a huge crisis like that is that the next one is probably far away. A lot of people are still underwater and the mess is still getting cleaned up.
      -RBD

      • Martin January 28, 2014 at 10:15 am #

        RBD, I am afraid that with FED policy the next crisis is not that far away. Now crisis are almost every 7 years… so we might see another one soon. We just need to get ready for it.

        • retirebeforedad January 28, 2014 at 10:21 am #

          Martin,
          I hear you. I wrote this piece Should We Expect a Crisis After Bernanke Leaves the Fed?, not necessarily predicting a crisis, but that is the norm when the Fed chair switches. I was referring to a housing crisis. I think this past housing crisis was bad enough that another one is not imminent. It really crushed things good. Inflation, asset bubbles, or another crisis is always possible. I just think it won’t be as big as the last. The Fed has a mess to clean up, that is for sure.
          -RBD

          • Martin January 28, 2014 at 10:26 am #

            RBD, well, I am afraid that everything is so tied together that next financial crisis will shake the housing market along with it. Even today’s housing recovery isn’t anything spectacular. We will see :)

  6. Leigh January 28, 2014 at 11:15 am #

    I think this is exactly why a lot of people say to not buy property when you’re single! My HOA has a pretty strong rental cap, so I will very likely sell when I want to move out. I’m totally okay with that because I bought my place at 23 and it’ll probably still be a few years before I get married. I’m sure it’ll work out fine and I’m also totally okay with taking a loss, especially if it was cheaper than or comparable to renting over the same time period.

    • retirebeforedad January 28, 2014 at 11:27 am #

      Leigh,
      Yeah I hear you. Had I bought a 2 BR we could have stayed longer. I figured I only needed a 1 BR when I was single. In the back of my mind I thought 2 would make sense in case I met someone, but I didn’t want to jinx it! I hope to hold mine at least until its worth more than I put into it. But I may hold until retirement or into retirement. Haven’t decided yet.
      -RBD

      • Leigh January 28, 2014 at 12:30 pm #

        Oh, wow! I rented 1+den apartments and I own a 2 bed 2 bath place by myself. I’m not sure I could have lived in a one bedroom place with a significant other! I could see myself living in this place with one kid up to maybe 5 years old, so the only way I would worry about moving out of this place soon is if I was dating someone who also owned a place and their place was the one we would be more likely to move into.

  7. Katherine January 29, 2014 at 2:15 pm #

    Thank you so much for detailing it all out! I’m looking to start buying properties in four to five years (got to get that college education!) and then living in them for two years before I start renting them out. This post really helped me to understand some basics and support systems. I’m a little apprehensive of renting due to dealing with tenants, but property managers can be pricey. So you detailing about the additional systems you have really helps!

    • retirebeforedad January 30, 2014 at 8:08 am #

      Katherine,
      Thanks for stopping by. No hurry if you are still in college. Get rid of any college debt, save cash, and buy your first place with renting it out in mind. Get a good price on the property. Landlording is fairly easy once you figure out the taxes and find a good tenant. Lots of cash on the side is key too if something goes wrong.
      -RBD

  8. JC @ Passive-Income-Pursuit February 2, 2014 at 3:05 pm #

    Considering that it wasn’t purchased to be a rental property the numbers look pretty good. I’m curious how refinancing to take out some of the equity would change the cash flow numbers. While it’d be great to access that equity it might not be worth it from a cash flow perspective unless you can raise the rent enough to cover the increased mortgage payment. Thanks for the insight into your rental as that’s high on my list of plans to do this year. There’s a few opportunities that I’m hoping to get a chance to look more into once I get back home in a week or so. I’m hoping to get a post written up about one of them shortly. It’s a pretty odd situation but the numbers look pretty good given some different scenarios.

    • retirebeforedad February 2, 2014 at 3:10 pm #

      JC,
      I hope my example helps. I need to run some numbers on taking out the equity. I may make more sense to shell out cash for the new property without taking equity from the other place. But that would clear me out pretty well. Good deals are hard to come by near me, so I’m treading carefully on another property.
      -RBD

  9. No Waste February 10, 2014 at 3:54 pm #

    Looks like a cash-on-cash yield of around 3.8% after you eliminate the mortgage.

    Are you planning an end game strategy assuming the property increases in value at a rate greater than inflation?

    A balanced equity/bond portfolio should give you a real return that’s much better than 3.8% over the long haul without any of the land-lording headaches, I would think?

    • retirebeforedad February 10, 2014 at 8:25 pm #

      No Waste,
      Thanks for stopping by and commenting. This condo was not meant to be an investment when I bought it. The purchase was based on where I wanted to live and the style of the place. So the numbers aren’t great admittedly. I do look at the numbers in the case of selling, and they are also not great. Broker fees would bring it down 20k or so, if I could get 290k. For now I have great tenants so I am getting back as much as possible, building up a rainy day fund. In the future I could upgrade some things to get a better price. So to answer your question, I’ll reevaluate the sell equation when the tenants move out. If I can sell at break even or make money, I’ll be tempted. That said, the unit is in a great location with a strong potential for a public transport investment nearby (metro), and its near a decommissioned industry property that will be redeveloped in the next 5 years. Both should be very good for appreciation if I stay put. But there is never a guarantee of course.
      -RBD

  10. Integrator February 15, 2014 at 3:40 pm #

    Informative post. I think the numbers on my condo rental (currently home) look almost identical for P&I, Taxes and expected cashflow. We’re down to our last $90k on the mortgage, which I want to accelerate the payoff on before our 5/1, 3.12% arm resets itself in another couple of years.

Trackbacks/Pingbacks

  1. Monthly Money – January 2014 - February 19, 2014

    […] now have a rental that we can turn into a cash flow property. I picked up a few things from  this post from RBD about the need for a maintenance fund and how to handle credit checking from this post. […]

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