The holiday season is now just around the corner, so I will start having to think about what gifts to give my tenants this year. Overall, it’s been a pretty solid year for cash flow, as each rental has managed to stay in the green. For that, I am most thankful! At the conclusion of the year, I will tally up all the numbers and calculate the total return for the year.
Not everything is peachy though, as I am currently battling an eviction and will have to address a vacancy in the upcoming months. Nonetheless, I should be able to weather this storm, as the overall portfolio helps compensate for any transient non-performers.
The results are presented “as is” for each month. If something breaks and I need to spend money on repairs, those charges will show up as an expense for the corresponding property. If there are no issues, no expenses are reported. So, although I do set aside a portion of the net income for vacancy and maintenance reserves (which will inevitably happen), I don’t account for them in this report.
Here’s the report for October:
Rental Property #1: Bay Area
Rental Property #1 Continues to fire on all cylinders. Another month with no news to report. If anything, the tenant has started to pay rent earlier, as the last few payments have arrived before the first of the month. No complaints from me; that’s something I can get used to!
Total cash flow for the month was $447.67.
Rental Property #2: Bay Area
Similar to Rental Property #1, this property also keeps on performing. These two Bay Area units have set the gold standard for the rest of my investment portfolio to live up to. Easier said than done.
Total cash flow for the month was $344.76.
Rental Property #3: Chicago
The first floor tenant (market rate) paid on time this month, per usual. She paid towards the end of the month, which is typical, but is kind enough to tack on the $25 late fee.
The second floor tenant (Section 8) is being evicted, so this is the last month I will be receiving CHA subsidy for the unit. Her final $857 Section 8 payment came in, but it was essentially nulled out by yet more legal fees, to the tune of $750. The second floor tenant hired a defense attorney to represent her in court, and I had to pay the attorney fees after all was said and done. The good news is that the eviction is now complete, as she vacated the unit at the end of October. So, I can finally move on from this mess as we start getting the unit rent-ready starting in November!
Yes, there will be more fees to come — rent-ready and tenant placement. So, as you can see from my own experience, an eviction/vacancy can really hurt your returns. Going into out-of-state investing, I used to budget aside 10% of gross rents to cover for eviction/vacancy, but as I’m learning, that number is too conservative. Realistically, (I’ll know at the end of the year when I run all the math), I’m guessing that an owner should set aside 15% as the bare minimum. Luckily, these Chicago 2-flat properties cash flow well enough where you can basically break even if one unit is vacant.
Total cash flow this month for Chicago came out to be $139.69.
Rental Property #4: Indianapolis
Rental Property #4 is now under a new PM. This was my first full month using the new company, and right off the bat I had to deal with a minor repair item! Not a great way to get started, but that wasn’t even the bad news for this month.
The property tax bill came in this month (due in November), and the property was re-assesed at a much higher number (~$2000 total over an entire year; around 2%). Further, since I’m an out-of-state investor, I don’t qualify for any in-state or homestead deduction benefits. The new tax bill is about double what the previous homeowner was paying! I’m going to have to look into this more carefully and figure out if there is anything I can do to petition the tax hike.
My escrow account was set up using the previous year’s tax numbers… which is altogether misleading since this isn’t going to be anything close to what I’m paying, moving forward. I had asked the seller repeatedly about property taxes, prior to purchase, and everyone (including the lender) assured me that future taxes (even for an investor) would be pretty close to the previous year’s number… Yeah, right…
Unfortunately, I didn’t do enough due diligence, so starting next month, the new tax hike is going to eat into my bottom line. Pretty frustrating, I must say, but my own fault. Luckily, I do have some buffer on this property…
Here’s what the new numbers should look like, factoring in the higher taxes, 15% for vacancy, and 10% for maintenance reserves.
The above returns aren’t going to set the world on fire, but they are decent, especially since they don’t factor in things like principal paydown and depreciation.
The calculation of my cash-on-cash return is not so straightforward (in case you wanted to run the numbers yourself), since the loan was only for $86,000, but the purchase price was $95,000. I worked out an agreement with the seller where I would cover the appraisal difference up to $88,350. My total cash in the deal was $29,000.
Going into the deal, my preference for out-of-state investing was to maintain at the very minimum 10% cash-on-cash return. Preferably, closer to 15%… but that was probably wishful thinking, even two years ago. As you can see, reality doesn’t always mimic what you see on paper, which is why it’s so very important to add extra padding in your calculations.
With that said, in today’s environment, it’s going to be tough to find > 10% cash-on-cash returns in most markets (on quality properties). And that’s a strong reason why I’ve stopped aggressively pursuing out-of-state rental properties. The returns aren’t there anymore. In my mind, once the returns drop below 10%, the risk/reward profile is too great for my own comfort level.
Total cash flow this month for Indianapolis came out to be $357.53.
Rental Property #5: Chicago
Both tenants paid on time this month and Rental Property #5 is doing excellent right now. The income produced in Chicago really is incredible when both units are occupied and the tenants are paying on time. I really couldn’t ask for anything more from a cash flow standpoint.
After all expenses, total cash flow this month was $1,190.34.
Total cash flow for this month came out to be $2,479.99. When each property is collecting rent, I typically clear $3,000 in a given month. Since I had to pay for legal expenses for Rental Property #3 Unit 2 this month, the cash flow took a hit. Next month, I will have a vacancy, so the cash flow will be down again. These types of months are good datapoints for me, as they give a more realistic indicator of what the true cash flow looks like.
At this point, it would be pretty tough for me to declare early FI and be able to say with full confidence that I have enough cash flow coming in each month to never have to work again. I don’t believe that to be the case, which is why I’m still working hard and hustling… Granted, I haven’t been too focused on cash flow since winning Rental Property #5 in February, as I’ve been caught up more with chasing appreciation deals these past few months.
But now that the side hustle deals are completed, I’m going to have to get back on the cash flow train if I’m going to realize my dream of getting to early FI. The tough part is figuring out where to invest capital, moving forward…
More partnerships? A 3-flat in Chicago? Dividend growth stocks? I guess anything is possible, so stay tuned! 🙂