November 2014 Cash Flow Statement

by FI Fighter on December 30, 2014

in Cash Flow

Leverage

It’s been awhile since I’ve injected fresh capital into beefing up the cash flow. The last two deals I won were appreciation plays far off into the distant future. And although I am very grateful to have landed those deals, I’m already realizing that my quest for cash flow is nowhere near complete. With just five properties (seven units), I still don’t have enough inventory to balance out the peaks and valleys. In other words, when a single property underperforms, it tends to viciously drag down the overall cash flow with it (as you will see in this report).

So, the only real way to bring statistical harmony into the fold is to acquire more units… Realistically, my timeframe to early FI is just too short to be able to continue buying up properties in the Bay Area… Going that route, at best, I could probably only acquire 1-2 units per year… And as many local investors know, finding cash flow in the Bay Area is exceedingly difficult these days!

A lot of things are still up in the air (such as my latest cash out refi and the closing of Rental Property SH #3), but after the dust settles, I may have to go looking out of state again for cash flow…

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 November:

Cash_Flow_November_2014

Rental Property #1: Bay Area

Rental Property #1 keeps on performing. Another month of solid cash flow without any incidents to report. It’s been an incredible year for this property.

Total cash flow for the month was $447.67.

Rental Property #2: Bay Area

Rental Property #2 has also had an amazing year, and November marked another perfect month. Consistent cash flow with no headaches… it can’t get any better than that.

Total cash flow for the month was $344.76.

Rental Property #3: Chicago

The first floor tenant (market rate) paid on time this month and has been a wonderful tenant since the beginning. I acquired Rental Property #3 in July 2013, and she has always paid on time, each and every month.

The former second floor tenant (Section 8) has since been evicted, and November marked my first full month of vacancy. No rent was collected… Further, the utility bill came due and I had to pay a $500 rent-ready fee to get the unit back up to stuff.

All in all, this was a pretty painful month.. What can I say? Vacancies hurt… a lot. It may seem obvious, but it’s so absolutely critical to a landlord’s long-term success — If you have a quality tenant in place, do EVERYTHING you possibly can to keep them!

If you think flat rate rental increases each year are bad, wait until you add up all the expenses it will take to get a new tenant in place who is equally as good…

A hundred times out of a hundred, I’m going to sacrifice some measly cash flow each month and go with the proven commodity. I’m not saying don’t ever raise rents, but I just don’t see the need to do so every year like some landlords do…

Total cash flow this month for Chicago came out to be -$712.71.

Rental Property #4: Indianapolis

Rental Property #4 has been under new management for a few months now. I’m still getting a feel for the new PM, so will withhold judgement until I have more datapoints.

So far, they have been very good at collecting rent on time. I usually see rent deposited by the fifth of each month, via their online portal. On the downside, November was another month in which I was hit with a maintenance bill. This time, there was a more serious sewer line problem, and it set me back $425. Yikes!

The PM did call me as soon as the issue occurred, and walked me through it every step of the way. They had a scope of work report as well… but it doesn’t take a genius to figure out that I’m being nickeled and dimed here… Unfortunately, when you are thousands of miles away, that’s the price (tradeoff) you make when investing out of state.

I hope things will get better over the course of time, but if not, I will have to find yet another PM… It’s still early, so I will give this company the benefit of the doubt for now…

Total cash flow this month for Indianapolis came out to be $93.18.

Rental Property #5: Chicago

Rental Property #5 continues to do well, and helped bail me out this month. With Rental Property #3 and Rental Property #4 experiencing some big problems this month, I really needed this Chicago property to perform.

As mentioned above, this is where the importance of total units comes into play… I only have seven units to help dampen the blow from any given underperformer… I really wish I had more properties so that each individual hit wouldn’t inflict so much damage to the bottom line…

After all expenses, total cash flow this month was $1,286.94.

Summary

This month has been the most difficult to date with the rentals. After all was said and done, I ended up cash flowing only $1,459.84. That’s a far cry removed from a $3,000/month, when all systems are go. 😉

As you can see, there’s a reason why I’ve always been conservative with my early FI math… My overseas budget is currently set at $1,000/month… Ideally (for right now), I would like to be able to net cash flow $2,000/month for a given year after all expenses… A month like this only gives me more reason to be even more conservative… Better safe than sorry, right?

Well, honestly, I can’t say that I’m too surprised. With rental properties, seldom do you operate at maximum efficiency… Problems are bound to happen, and this month is just a perfect example of that.

Hopefully, things will get better in a hurry. Once I get Rental Property #3 Unit 2 leased back up, the worst of that ordeal should be over…. Really, I can’t overstate the importance of having good tenants in place… You really have to value the good ones you have, because you can see from my own experience what happens when you don’t have one! That’s a big reason why I’m so reluctant to raise the rents on Rental Property #1 and Rental Property #2, even though those tenants are currently paying well below market rate.

Anyway, there are things I can learn from this experience as we move forward along. One things for certain, I need more cash flow! 🙂

If anyone knows where I can find a good cash flowing fourplex, I’m all ears!

Fight On!

 

2014 Cash Flow Summary:

November 2014: $1,459.84

October 2014: $2,479.99

September 2014: $3,008.02

August 2014: $3,265.64

July 2014: $2,778.24

June 2014: $3,129.87

May 2014: $3,152.58

April 2014: $3,381.28

March 2014: $3,800.20

February 2014: $2,467.62

January 2014: $2,122.26

 

2013 Cash Flow Summary:

December 2013: $1,892.55

November 2013: $1,317.70

October 2013: $2,271.81

September 2013: $1,932.28

{ 9 comments… read them below or add one }

1 MikeNo Gravatar December 30, 2014 at 7:53 pm

Thanks for posting the update. It’s good for other potential real estate investors to see the good and the bad.

This just came on my radar, but the asking price is probably 100-150K too high min. https://www.redfin.com/CA/San-Leandro/108-Dutton-Ave-94577/home/1550522

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2 FI FighterNo Gravatar December 30, 2014 at 8:17 pm

Mike,

Thanks for the link! That’s a great looking fourplex, and one I would LOVE to own! But I think you are right about the price tag… At $1200/month in rent for each unit, that’s still only $4800/month in gross rents… for $800k purchase, I just can’t see how it cash flows at all…

It’s pretty amazing isn’t it? Out in the Midwest, you can buy 20+ unit apartment complex for that type of cash…

But no one said investing in the Bay Area was easy…

All the best!

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3 JamesNo Gravatar December 30, 2014 at 9:54 pm

Nice update! It’s always good to see a realistic picture of what might happen, and also illustrating the case for having more properties to spread risk. Let’s hope January looks better.

Seems like the Midwest is the way to go here in Seattle as well, although maybe not to the degree that you see in the Bay Area. Of course, I’m still saving for my first property.

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4 FI FighterNo Gravatar December 31, 2014 at 4:14 am

James,

Thanks! I’m also hoping for a rebound in January.

In general, the Midwest is much more affordable than the coasts, but there are no free lunches in real estate, just like in life.

Land is abundant out there, and getting good, quality renters is a lot more challenging. In Seattle, or the Bay Area, it’s really easy to landlord b/c the demand far outstrips the supply. So, you get to work with a pool of highly qualified tenants who will always pay on time and who own pristine credit scores.

Nothing is without risk, but the odds of finding a top notch tenant are far greater on the West Coast.

But if investing in the West Coast was so easy… there would be no reason for out of state investors to stray from home. Barrier to entry is high, and cash flow is abysmal to start out with on Day 1, usually (talking in terms of present day).

One area I’m beginning to research and like is Portland… Very much similar to the Bay Area and Seattle, but properties seem to be a bit more affordable there.

All the best!

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5 No Nonsense LandlordNo Gravatar December 31, 2014 at 4:06 am

Great recap. As always, vacancy is the number one avoidable expense as a landlord. The problem many people have are deadbeats tenants that pay late, or less than they owe. Then, you have to make the call to evict over $300-400, or suffer a decrease in rent.

It is imperative to get solid tenants up front, especially when you have a PM. They make money either way.

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6 FI FighterNo Gravatar December 31, 2014 at 4:21 am

Eric,

Yup, you got that right! I’ve taken the no nonsense approach to landlording in the Bay Area (700+ credit score, 3x income), and the results have been tremendous… Rent for the four units are always paid on time and the tenants are high quality.

I wish it was that easy in the Midwest! it’s proving to be a lot more challenging so far, but higher risk, higher reward.

As I’ve learned, everything is priced for a reason in real estate…

Cheers!

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7 Mr. FrugalwoodsNo Gravatar December 31, 2014 at 4:21 am

Thanks for the comprehensive update! I really appreciate how you give the real view of what rental ownership is like, warts and all.

Do you feel like you are getting good value from your PMs? Do you get a certain amount of work included in their monthly fee? Or is it all extra as things come up?

In hindsight, do you wish you gone slightly more upmarket with your remote properties? Maybe accept a smaller cap rate but make it up in better tenants and less need for a hands-on PM?

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8 FI FighterNo Gravatar December 31, 2014 at 7:21 am

Mr. Frugalwoods,

You bet! Owning rental properties isn’t always fund and games… although I still feel like it’s worth the hassle.

In regards to PMs, in general, I don’t believe you will ever get “good” value for them. PMs are businesses too, so they have to make money and you as the landlord will be the one paying them.

But as long as the rentals are occupied and they are collecting rent regularly, quick to address maintenance items, that’s all that you can really ask for. The PM I have in Chicago is probably less inclined to nickel and dime you, since it was through the same turnkey provider that sold me the property. In Indy, I’m definitely feeling the squeeze!

Most PMs charge a fixed monthly rate between 8% to 10% of gross rents. Anything extra is a cost you incur on top of that. However, any good PM won’t charge you a fee if the unit is vacant.

In regards to upmarket, that’s tough to say… One way to approach real estate is to buy middle of the road properties throughout the portfolio… My approach is kind of an extreme ends of the spectrum way of doing it. One one side, I have high appreciation, strong demand, high resale value, and minimal cash flow. On the other hand, I have zero appreciation, more challenging tenants, and much higher cash flow (when units are performing).

Of course, my allocation is heavily steered towards the higher end properties. From a capital allocation point of view, most of my funds are tied up in Bay Area rentals.

All the best!

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9 Rat Race QuitterNo Gravatar January 1, 2015 at 7:00 am

I’m rooting for you with that Chicago property. You always hear people say not to invest too far from your own neighborhood. So when I read that you purchased that one, so far from home, I was hoping to see you buck that “conventional wisdom”. Still time, though…

Here’s to finding a better tenant this year!

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