March 2014 Cash Flow Statement

by FI Fighter on April 3, 2014

in Cash Flow

Leverage

Alright, another month and another cash flow report. Rental Property #5 closed in mid-February so I was able to complete my first full month of ownership in March. Adding more income streams to the mix is always fun, and I was very eager to see just how much cash flow seven units would contribute to the bottom line. Right out of the gates, Rental Property #5 was off and running, but unfortunately, some other issues popped up this month. Please see below for more details…

Here’s the report for March:

March_2014_Cash_Flow

Rental Property #1: Bay Area

Rental Property #1 continues to perform at an All-Star level. Another month, and some more cash flow coming in! Not much to report here except the fact that my insurance premium went up a few bucks this month. I paid for the entire year, which works out to $27.75/month. The old premium was $23.83/month.

Total cash flow for the month was $447.67.

Rental Property #2: Bay Area

Similar to Rental Property #1, this property also continues to perform at an All-Star level. I must say, I really did luck out with my two local purchases; I only wish I had the opportunity to buy more. Unfortunately, the market just rebounded too quickly, so I was fortunate enough as is to just be able to acquire two units. Similar to Rental Property #1, the insurance premium went up this month (I use the same insurance company for both properties). The new premium is $25.83/month, which is an increase from $21.42/month. Outside of that, there’s nothing more to report.

Total cash flow for the month was $344.76.

Rental Property #3: Chicago

Rental Property #3 is starting to get better. The first floor tenant is still stellar, like always, and continues to pay rent on time without incident. This tenant is a market rate tenant. Her lease is expiring soon, but I hope she elects to stay… Forever! 🙂

The second floor tenant made two payments this month ($188.00), and is starting to catch up on her rent. She still has a positive balance, but she’s definitely making improvements from before. 🙂 She is a Section 8 tenant, and her monthly rent comes out to be only $94. So, even when she doesn’t pay, it’s not the end of the world… The PM and I are working to get her caught up.

Total cash flow this month for Chicago came out to be $978.14.

Rental Property #4: Indianapolis

A quiet, uneventful (boring) month is EXACTLY the kind of month I’m looking for. When investing is “fun” or “exciting” (see below), it usually means things aren’t going so smoothly…

Rental Property #4 ran into some problems last month, and I almost had to face my first eviction. At the last minute, the tenant decided to show up at the PM office and make rent payment.

I was quite relieved! This month, I was hoping she would get back on track, but it was just not meant to be. The tenant decided to go AWOL again this month, so the PM and I were right back on the eviction trail.

From the PM:

She has been struggling for a while now to stay caught up so I wish I was surprised. She was trying to make it work, but I think she’s just given up. She didn’t provide anything other than that (information). I know it’s difficult for people like you and I to understand how someone could just let that happen without giving a backstory, but that is the case in this situation.

It will take a week or two to have the home in rent ready condition again but we will begin marketing the property immediately. I do not want to nail down a timeframe for you and misspeak, but your rent guarantee will ensure that you will not go without seeing a return. We take the hit on all of these costs to prepare the home for the new resident as well, so trust me when I say that we have tried to prevent this from happening.

Going through an eviction isn’t fun, but it is a good learning experience. I’m actively figuring out what to do to help prevent this from happening again in the future. To be clear, I’m not blaming the PM for this mess (they get this one free pass). However, I do find it necessary for me to put in the time to learn how the entire process of tenant screening works. If I don’t learn from this experience and it happens again in the future, then it’s both our faults. I’m currently working with the PM to setup the screening criteria for the next tenant.

Here’s how the process works:

We use the National Tenant Network to do all of our screenings for new residents and based on their score (which computes together several factors) we either approve, approve with a higher deposit or conditions or reject. We can adjust market rents if that is needed, and I can talk to our leasing team about that if we are seeing a home vacant for more than we like.

I want you to feel confident that you don’t have worry about these things…our job is to do these things for you and for you to see the return on the investment and the monthly disbursement.

An eviction also lets me test the PM and gauge their performance in handling the situation. In my case, I actually have nothing to lose because one of my conditions for closing was to secure a 1-year rent protection guarantee. So, the PM really has no incentive to want to go through an eviction; they’re the ones eating all the costs.

Here’s some more info about evictions:

Evicted tenants do not get their security deposits back…namely because they owe us more money than the security deposit is for and typically have other costs on top of just the arrearage. The tenants are charged legals bills just as you are. In fact, they are charged a large bill because we charge an admin cost for the time and effort is takes to process evictions on our end. So yes, those charges are added on. Once the tenant is out of the home and we have final numbers to process their final account statements, we then submit those to our attorneys and a damage hearing is set for a future date (typically a couple of months out). If the resident does not dispute the final accounting statement, then a judgement is settled at the hearing and goes on their credit report and our collection agency then works for you/us to collect on the outstanding debt. If the resident pays any of that debt, it goes back to you.

Costs for eviction (no rent protection):

There isn’t a set price on what it costs to prepare the home…it depends on the condition at move out. We can sometimes gauge it from a pre-move out inspection, but all in all, we really can’t say until. It also depends on the deposit paid. The owner is only responsible for the cost of the turn above and beyond the security deposit. Evicted tenants do not typically take the time to clean or touch up anything before they move so basic expenses are cleaning the home ($130-150), cleaning the carpet ($110-150), touch up paint or full paint ($150-500 — this is the most variable expense), and minor maintenance like changing an air filter, mowing the lawn, etc. ($75-100).

Legal bills for an eviction will total $186 for the filing, and $13 additional if a writ is issued.

You are only charged a leasing fee once per a 12 month period, so in this case, there would be not extra leasing fees (tenant placement fee) after a new resident is placed in the home. You would just begin seeing regular management fees come out again.

I was charged this month for a writ bill:

A writ is provided by the courts for the landlord to take back possession of the home. It goes into effect at a certain time/date and can be used anytime during a set period of time (typically 30 days). We have the ability to exercise the writ anytime after it begins. It is also what is needed in order to call the constable and have her forced out of the home. This means that if she does not move voluntarily, the writ gives the landlord the legal right to remove any and all belongings that are on the property out of the property by our own means and costs and then the property is re-keyed and her possessions go into storage and we are no longer tied to them.

In spite of all this drama, I was able to collect $505.18 this month in cash flow.

The PM has a court order to take back the home on April 07 (I’m so glad Indianapolis is in a landlord friendly state!). Once the home is secured, 1-2 weeks will be needed to make it rent-ready for the next tenant. The PM has already begun to actively search for a new tenant.

So, am I turned off from this negative experience? I wouldn’t say so. I still believe that I picked out a quality property in a good neighborhood. Further, I have trust in the PM in place, and I really believe that this one incident is more an aberration than anything. I do have datapoints from other investors who are working through the same PM company, and so far they’ve been having a great experience. Evictions are unavoidable… It comes with the territory of being a landlord. On the bright side, it’s a good thing this is happening now while my rent protection is still in effect! 🙂

Rental Property #5: Chicago

Moving on from the drama that was Indianapolis, we arrive at Rental Property #5. From Day 1 of closing, this property was cash flowing, which is just the way I like it! The first floor tenant is Section 8, and $1098/month of the rent is subsidized. The tenant portion is $110/month. The second floor tenant is market, and their portion is $1250/month. Total rent for both units comes in at $2458/month. I was able to collect full month’s rent for March, and pro-rated rent for February.

After all expenses, total cash flow came out to be $1,524.45.

Summary

March marked the first full month where I’ve had five properties (seven units) rented out. Total cash flow for the month came out to be $3,800.20. Granted, a bit of extra change came in this month due to additional rents coming in for Rental Property #5 (pro-rated February). Nevertheless, seeing over $3,000/month in net cash flow is still a great feeling. Moving forward, I still plan on acquiring an additional rental property sometime this year; this will only help increase the cash flow even more. Getting to $3,000/month in net cash flow (after all expenses but assuming no vacancy/maintenance reserves) was one of my goals for 2014.

With that said, it is important (and always necessary) to point out the need to set aside a large portion of any net income for reserves. One of my primary goals this year is to build up a strong cash buffer. I’m going to keep diligently working on that throughout the year. Hopefully, the passive income stream keeps on snowballing and I’ll be ready to declare early FI sooner rather than later. In an ideal world, I’ll be able to hit $5,000/month in cash flow before checking out of the cube for good. Next month, I hope to have Rental Property #4 back on track…

{ 26 comments… read them below or add one }

1 Retire Before DadNo Gravatar April 3, 2014 at 4:42 am

FIF,
Nice month. Interesting to see the eviction process get started. The 1-year deal you have with the PM to eat the costs is nice. With 7 properties this was bound to happen eventually. Good luck with it.
-RBD

Reply

2 FI FighterNo Gravatar April 3, 2014 at 8:14 am

RBD,

Yeah, the 1-year rent guarantee is bailing me out at the moment. I get a free pass, but it’s really important I select the right tenant moving forward. I won’t have the luxury of screwing up again, and just like No Nonsense (below) likes to stress, the quality of your tenant will make or break you.

I want quality. I don’t care for rent increases… Just give me someone good and they can stay as long as they want. The cash flow numbers work wonderfully, so fixed rents for a few (many) years won’t hurt as bad as evictions/vacancies/turnovers.

Cheers!

Reply

3 No Nonsense LandlordNo Gravatar April 3, 2014 at 4:46 am

Great Job!. Never be afraid of an eviction. Do not let the PM nurse the tenant along just to put the turnover of a new tenant in your own lap.

Analyze the tenants credit score against my website criteria. A Section 8 tenant, by definition, has the income. They are only allowed to pay 30% of their income in rent, Section 8 pays the rest.

In MN, we are the most expensive eviction state in the nation. It is $320, just for Court costs. And if you are an entity, like an LLC or S-Corp, you need an attorney. Plus the papers have to be served, not mailed. And a Writ is $55, and that needs to be served by the sheriff, at ~$125. The plus side, is it only takes 3-4 weeks.

The vacancy is your main expense on an eviction. You cannot show the property while you are evicting. The plus side, is Section 8 tenants are a dime a dozen.

Reply

4 FI FighterNo Gravatar April 3, 2014 at 8:17 am

Eric,

I read your credit score post and it’s great. I love your business model of stressing quality tenants. I need to do a better job of that myself. With my own local properties, I can clearly see first hand the benefits of having strong tenants. Nothing beats being able to put a big fat $0/month in vacancy each and every month.

In the long run, quality always wins.

In this case, the tenant is market and not Section 8. Indy looks to be on the fast side of things, and the evictions fees don’t appear too outrageous. Still, I agree, best avoided so I need to focus on finding better tenants.

Take care!

Reply

5 No Nonsense LandlordNo Gravatar April 3, 2014 at 5:28 am

This tenant is not unique, it was probably very predictable. Most PMs do not have the slightest clue how to screen tenants, and that is their business.

On the next tenant, tell the PM you want a 620+ credit score, or better. Your rent is guaranteed, and they have to work for it. 620 is not a good score, but any means, but it will be a ‘C’ grade. Odds are, they will convince you to take a lesser tenant, demand another 12month guarantee for that new tenant, not a continuation of the original 12 months.

Only ~20% of the population has a score below 620. Understand credit score distribution. Understand the link between credit score, and risky behaviors. I turned our apartment complex from a Section 8 complex to a Class B complex, the story is on my site, and it was all due to tenant quality.

Keep a laser focus on tenant quality. That will make your life easier. Keep saving cash. You will need it. $3K per month is peanuts when you have a major turn.

As a comparison, I have ~$15k in cash flow, per month, not including maintenance, vacancy and my own management. I am a few months away from $1M in liquid assets, not including well over $1M in RE equity, ~$2.5M in net worth. And I am still not ready to leave my FT job….

Reply

6 FI FighterNo Gravatar April 3, 2014 at 8:26 am

Eric,

Great tips. Yes, I need to be more specific with my tenant criteria for the next screening. I also agree that a high credit score is a good indicator on whether or not the tenant will pay on time. My local tenants are 700+ and I’ve never had an issue…

In regards to cash flow, yeah, having more is always better… but it’s also relative, right? Someone making $100k/month in cash flow would probably feel inadequate with “just” $15k/month coming in. $3k/month may be peanuts to a lot of people as well, but I know co-workers from overseas who don’t make $500/month working 40+ hours each week…

How much you need really depends on how much you spend and the lifestyle you desire. My own endgame is Point Z on a cheap island (for at least a year). If that’s what I want, then I probably won’t be spending more than $1k/month. A $2k/month buffer would still allow enough room to not only save for reserves, but to also accumulate more savings…

Early FI also doesn’t imply that I will never earn income again… This blog earns income (not much), and there are other ways outside the 9-5 to bring in additional revenue streams.

To each, his own 🙂

Glad to hear you are doing so well on your own journey. ~2.5M, that’s rock star status!

Take care!

Reply

7 No Nonsense LandlordNo Gravatar April 3, 2014 at 10:24 am

Cash flow is relative in terms of income, but your risk is not that much different than mine. I have more units, but our mortgage total, and our mortgage payments, are nearly the same. You have a higher total balance, my payments are slightly higher. My annual needs are close to what yours are, and probably quite a bit less. I do not have rent or a mortgage payment. And I have considerable guaranteed income as I get older.

When a unit or two stops paying, or needs a remodel, you have to weather the storm. The risk of any single unit going bad is higher for you due to tenant quality, and each unit a larger percent of the cash flow.

Figure out what the total cost of this one small mishap would have cost in terms of actual money, if you did not have a rent guarantee. And figure in you need to be able to weather that hiccup handily, without impacting your life style – or your mortgage payments.

Since this was a private market rent, and it stopped paying almost immediately, why did the PM even take the tenant? Ask what her credit score was, and her eviction history. What did they see in her that would make her a great tenant? A pretty face and a smile doesn’t cut it. I would guess this is not her first rodeo.

If the PM took in a tenant that did not have 3.5x the rent, or a sub-600 credit score tenant, they are not doing their job. If that was the case, the rent default is the PMs fault, not the tenants. But they got burned in this case, not you. A leopard doesn’t change their spots, not overnight anyway.

Just make sure your next tenant has a chance of paying the rent. I sent the link to the Indiana court site in an email, be sure to bookmark it and use it to verify Indiana tenants. (btw, Indianapolis is a city in IN, not a state…) Make your PM do their work, not bring in the first tenant that wants to rent. That is typical for a PM, I have written a post about that.

I screen over 200 people per year for our complex. I reject many tenants over the phone for my own units, and usually a few that actually apply. And I am seldom vacant. I see a lot of backgrounds. I have done a lot of research on credit score statistics. I cleaned up a complex where even the cops would not venture in without double or triple back up. So I know it can be done.

You have a great start. Focus on risk mitigation.

Reply

8 FI FighterNo Gravatar April 3, 2014 at 9:37 pm

Eric,

Great tips and thanks for the advice. I got the e-mail and will take a look at the link. There’s a lot I can learn and do better with in terms of tenant screening. I need to be more selective, and will take more time in picking out the next tenant. If the property sits, the PM will be out of pocket, not me. I need to get this right…

Cheers!

Reply

9 B.BorgNo Gravatar April 3, 2014 at 6:00 am

Reading through your posts I’m curious how you went about finding these turnkey companies? Websites, direct referrals from other investors? Thanks, love the journey!

Reply

10 FI FighterNo Gravatar April 3, 2014 at 8:34 am

B.Borg,

I was referred to these companies by a turnkey marketer. They pointed me in the right direction, but unfortunately it was a terrible overall experience.

You have to be extra careful with who you meet on there. If someone is reaching out, going above and beyond trying to “help” you, it’s probably b/c they want something in return…

Good luck!

Reply

11 writing2realityNo Gravatar April 3, 2014 at 10:22 am

Congrats on a tremendously strong month FI! Certainly reserves will eat a good portion of that as you’ve noted but most impressive is the PM in Indianapolis right now. Seems very responsive and on the ball. Plus with a fairly inexpensive eviction process and landlord friendly state, this should allow for very quick turns should an eviction be necessary, thus avoiding months and months of lost rent.

Keep up the good work, with cash flow like this it won’t take too long to build the reserves and stock away some capital for the next one.

Reply

12 FI FighterNo Gravatar April 3, 2014 at 9:29 pm

writing2reality,

Thanks, I appreciate the support! Yes, the PM has been very responsive throughout this ordeal, and I’m establishing a good relationship with them. I just really hope we don’t run into this problem again in the near future.

Yup, once I get the cash reserves squared away, I’ll start looking for the next deal. It’s still a ways off, but that’s ok. I’m going to enjoy the local sunshine (weather is starting to pick up) until then 🙂

Cheers!

Reply

13 Dave @ The New York BudgetNo Gravatar April 3, 2014 at 2:16 pm

Awesome month! I actually think if I had $3,000 in cash flow per month, I would be close to hanging em up – even in NYC my expenses would be covered by that! Hoping to get there as soon as possible.

Reply

14 FI FighterNo Gravatar April 3, 2014 at 9:31 pm

Dave,

Yeah, on the surface the $3k/month looks pretty sweet. However, that’s only made possible when each and every property is cash flowing at potential. Sadly, it only takes one vacancy or big ticket repair item to wash most of that away. That’s the motivation for getting to $5k/month… To build some added buffer.

All the best!

Reply

15 The First Million is the HardestNo Gravatar April 3, 2014 at 3:23 pm

That sucks you’re having to evict a tenant (for you and for them!), but it’s gotta be nice to see you still have positive cash flow in spite of that trouble!

Reply

16 FI FighterNo Gravatar April 3, 2014 at 9:32 pm

Jay,

It is unfortunate, but it’s better now when it’s on their dollar and not mine. I just gotta make sure we get a great tenant in there for the next turn. I don’t want to face this problem again…

Take care!

Reply

17 JasonNo Gravatar April 3, 2014 at 3:50 pm

Hi there FI

3k per month is a great month, congratulations! Keep on trucking and you’ll be able to FIRE in no time!

Reply

18 FI FighterNo Gravatar April 3, 2014 at 9:35 pm

Jason,

Thanks for the support! Crossing $3k/month is a great feeling. Just gotta keep at it and eye on the prize! 🙂

All the best!

Reply

19 AnnyNo Gravatar April 4, 2014 at 1:06 pm

How inspiring! I got burned by out-of-state landlording before, but thinking of trying again, thanks to all the excellent info on your blog.

Reply

20 FI FighterNo Gravatar April 7, 2014 at 8:03 pm

Thanks Anny! I wish you the best of luck in your investments!

Cheers!

Reply

21 ArjunNo Gravatar April 8, 2014 at 1:15 am

A $3800/month cashflow is great but what about income tax on this amount? Am I right in saying that you’ll end up with about 80% or so of this amount after income tax? Just trying to understand all the expenses here.

Reply

22 FI FighterNo Gravatar April 9, 2014 at 8:17 pm

Arjun,

Taxes are variable based off of depreciation/deductions on each one. You can check out my latest post, “REITs vs. Rental Properties” to see how the numbers worked out for one of my rentals.

Cheers!

Reply

23 EvanNo Gravatar April 9, 2014 at 7:37 am

Wow $3K from a “passive” (a 4 or 5 on your scale) source is amazing! Are those numbers after PM fees?

Reply

24 FI FighterNo Gravatar April 9, 2014 at 8:17 pm

Evan,

Yes, PM fees are accounted for on all properties. For #1 and #2, I manage those myself, so no direct bill there… just my own time and efforts 😉

Cheers!

Reply

25 RefinerrNo Gravatar April 10, 2014 at 8:48 am

Congrats on the awesome cash flow!

Thanks for posting such a detailed explanation on the eviction process. My family has rental properties but never considered investing out of state so they’ve never talked about landlord friendly states or even what CA even is considered to be. I really like your approach – seems very methodical and well planned! You can’t avoid a bad tenant like you said but you can lessen the pain as much as possible.

Reply

26 FI FighterNo Gravatar April 12, 2014 at 5:42 pm

Refinerr,

Thanks! I think CA is typically viewed as being more tenant friendly, but I don’t think it’s too bad…

Yeah, bad tenants are unavoidable. I think having more units helps, and each bad experience doesn’t add up to as much damage.

Best wishes!

Reply

Leave a Comment

 

{ 6 trackbacks }

Previous post:

Next post:

Copyright © 2012 FI Fighter