Every quarter I update the Portfolio 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 rental 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:
Paydown and First Refinance of my Rental Property
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.
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.
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.
A few notes on this list. Now I’m using Square Cash to collect rent which is free, but I’m also looking at Cozy for a full service solution. The best part is 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.
I won’t bore you with details on my taxes for this rental 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.
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 rental 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 rental 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.
Want to automatically track your rental property values, investments and net worth? You need to join Personal Capital. I’ve been manually doing this for more than 10 years. Now it’s done for me with software. Best of all, it’s totally free. Automate your net worth.
Interested in finding innovative financial solutions that can help achieve your financial goals? Click here.
Favorite tools and investment services right now:
Credible* - Now is an excellent time to refinance your mortgage and save. Credible makes it painless.
Personal Capital - A free tool to track your net worth and analyze investments.*Advertising Disclosure: RBD partners with Credible which offers rate comparisons on many loan products, including mortgage refinances and student loans. This content is not provided by Credible or any of the Providers on the Credible website. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by Credible. RBD is compensated for customer leads. Credible Operations, Inc., NMLS Number 1681276, not available in all states. 320 Blackwell Street, Suite 200 Durham, NC 27701.