December 2014 Cash Flow Statement

by FI Fighter on January 26, 2015

in Cash Flow

Leverage

It only seemed like yesterday when I acquired my first rental property. And now, just like that, another year has gone by! This is the last cash flow statement for 2014… Let’s see how we did!

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 December:

Cash_Flow_December_2014

Rental Property #1: Bay Area

Rental Property #1 caps off 2014 on another high note. No issues reported, and rent was paid on time. This is something that I’ve come to expect from this property, but something I don’t take for granted. I’ve been very fortunate so far, and lucky enough to have hit a home run with my first rental purchase.

Property taxes were due this month… The cash flow statement this month reflects the new tax assessment.

Total cash flow for the month was $447.15.

Rental Property #2: Bay Area

Rental Property #2 also had an incredible year, and was able to follow the high standards set by Rental Property #1. Similar to Rental Property #1, I’ve been reluctant up to now to raise rents on my wonderful tenant here. However, because I recently completed a cash-out refi (which will increase the monthly mortgage payments beginning in March), I will have no choice but to increase rates next year. The lease expires in May, so that will be the most opportune time to do so. Until then…

Property taxes were due this month… The cash flow statement this month reflects the new tax assessment.

Total cash flow for the month was $358.67.

Rental Property #3: Chicago

The first floor tenant (market rate) paid on time and was the sole source of income again this month.

The second floor tenant moved out in October, so one of the units has been sitting vacant for a few months now. This obviously has a huge impact on the bottom line…

I was informed by my PM this month that a tenant has been secured for Unit 2… Although I put in a specific request asking for a market tenant (similar to Unit 1), the PM went ahead and assigned me another Section 8 tenant.

My request was put in very early during the eviction process, but unfortunately, I’m assuming the PM forgot about it… Since I was so preoccupied with the new job, I made the mistake of not following up on the status of this unit every week…

Again, with out-of-state investing, it’s no walk in the park. If you are going to rely on a PM (and it’s not run by family/friends), you’ll just have to accept the fact that you won’t always be the #1 priority… The PM has hundreds of other units to manage, so you won’t always get the attention you expect (or deserve)… Further, just because it’s urgent for you, it does not mean that your issue will be addressed immediately.

These latest experiences just highlight the true reality of out-of-state investing for me… When I first started, I thought that by having a PM in place I would spend less time managing these units.

I was wrong.

I spend infinitely more time managing my out-of-state properties than I do my local ones… This is something to seriously consider if you are contemplating investing out-of-state; you will have another side job that you may not want.

Without income being generated by Unit 2, this property just about breaks even this month… It is slightly in the red.

Total cash flow this month for Chicago came out to be -$107.75.

Rental Property #4: Indianapolis

Rental Property #4 has been a solid performer for awhile now. The new PM does an excellent job of collecting rent on time, and usually by the 4th of the month, I can see it posted on my online portal.

Unfortunately, they do seem to keep nickel and diming me for maintenance issues. I was hit with another $100 maintenance bill this month for them to replace some air filters, and unclog some pipes.

Since I haven’t worked with the PM long enough to know if this will be a recurring theme each and every month, I am going to reserve judgement for now… I can’t say I’m too happy with the maintenance issues that seem to crop up so frequently… But on the other hand, their ability to keep me in the loop of all issues and consistently collect full rent on time is a blessing.

Finding a high quality PM is never an easy task!! In this case, if they can keep doing a wonderful job of collecting rent on time each and every month, I will be reluctant to change companies again…

As I’ve learned first-hand, evictions and vacancies are what ultimately hurt the most with rental properties. Although being nickel and dimed isn’t ideal, there really isn’t a way around this, unless you elect to self-manage the property yourself… PMs are business too, and they make money when you have issues, unfortunately.

Again, this is the price you pay for investing out-of-state…

Total cash flow this month for Indianapolis came out to be $418.18.

Rental Property #5: Chicago

Rental Property #5 continues to do well, and I am fortunate to have both a high quality market tenant, and a high subsidy Section 8 tenant.

Rent was collected on time, and there were no maintenance issues this month. When these Chicago properties have no issues, the cash flow is tremendous!

The key for me moving forward is to figure out how to minimize expenses and to keep quality tenants around…

After all expenses, total cash flow this month was $1,123.34.

Summary

This month was a solid month for cash flow. After all was said and done, I ended up cash flowing $2,239.59.

Cash flow improved this month after a problematic November… It’s been a few months since I eclipsed $3,000/month, but hopefully things will get back on track after the new tenant on Rental Property #3 Unit 2 moves in.

For 2014, the rental properties averaged $2,773.76 each month in net cash flow. Overall, I’m pleased with the results, and I’m hopeful things will get better over time.

For 2015, I will have to get creative and find ways to keep the cash flow in tact… I’ve completed a cash out refi for Rental Property #2, so cash flow will suffer in the short-term as my mortgage payment goes up starting in March. As mentioned above, I will need to raise rents on that unit to offset the loss in cash flow.

Also, I’m in the process of completing a cash out refi on Rental Property #1. Similar story, I will need to raise rents on Rental Property #1 to offset another reduction in cash flow.

Readers may be wondering why I’m electing to refi at the expense of cash flow. For me, the reason is very simple — we are currently in an upmarket and I want to lock-in my appreciation gains.

However, I have no desire to sell any of my Bay Area properties (I used to). By performing a cash out refi, I will be able to reclaim all of my initial investment capital… and much more! Essentially, I will own and control two prime Bay Area properties but have none of my own skin in the game… I will be playing with the house’s money (no pun intended) moving forward.

With the cash back out for both properties, this will equate to ~$200,000 in NEW ammunition to invest with (although a large portion will be earmarked for cash reserves). Most likely, I will invest the proceeds into dividend growth stocks, as I will no longer be able to qualify for loans without a steady W-2 income. As you are well aware, at my age (and state in life), I’m not afraid of taking on debt, which will only increase with the refinancing. Rather, I’m fixated on acquiring as many assets as possible. Assets rise in value over the years… Debt will only decrease as my tenants pay down my mortgages. This is my dual prong strategy for building wealth (not cash flow).

So, to secure my financial future indefinitely, I am taking aim to stack as many assets as possible. To be more clear, one very important thing I’ve learned is this:

To build wealth, accumulate as many APPRECIATING assets as possible. The earlier you do this in life, the wealthier (and more thankful) you will be later on.

The key word is APPRECIATING… which I’ve just recently learned this year. Thus, my gameplan moving forward will change from my previous strategy of investing purely for cash flow (2013-2014)…

 

2014 Cash Flow Summary:

December 2014: $2,239.59

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

{ 19 comments… read them below or add one }

1 writing2realityNo Gravatar January 26, 2015 at 1:22 pm

FI Fighter, even in a down month, greater than $2,000 is still pretty solid.

Chasing appreciation, to me, is a fools game. I certainly wish you the best of luck as you head off into this new direction. Given your health issues, I would have thought you would have find a way to maximize your leverage in order to increase cash flow, not decrease it. Appreciation, even if it occurs, only helps fund life when a property is sold or leverage is increased.

This is also a theme with your equity stake in BABA – certainly fine for a growth investment, but not one for providing passive income.

I’m interested to hear your thoughts on this shift in direction.

Reply

2 FI FighterNo Gravatar January 26, 2015 at 1:47 pm

writing2reality,

Yes, I should clarify what I mean by appreciating… I am not talking about the “typical” appreciation above… 😉

When it comes to appreciating, it can mean many things:

1) Increase in property value
2) Increase in monthly rent
3) Dividend growth
etc.

Appreciation and cash flow need not be mutually exclusive. When I say appreciating, I am not saying go chase expensive properties that are negative cash flow, or to go buy stocks like BABA that don’t pay a dividend.

What I mean, fundamentally, is an investor needs to buy high quality assets that are becoming more valuable over time… For instance, with stocks, you can argue that Coca-Cola (KO) or Johnson and Johnson (JNJ) are examples of appreciating assets. Actually, in those cases, the appreciating aspect is especially appealing because those stocks have not only appreciated in share price over the years, but the dividend growth has been spectacular as well…

With properties, the Bay Area is an especially strong market for appreciating rent (which leads to more cash flow) and property value… Wonderful catalysts for long-term wealth building.

I’ve learned from previous bad experiences, such as my investments with Transocean (RIG), Exelon (EXC), etc. that it’s just not worth chasing assets that don’t have an appreciating story… I mistook those investments as “value” plays which they were not.

If you can get both asset price and cash flow appreciation, that’s the best of both worlds. Not always possible, but definitely ideal.

For any future investments, I need to be convinced the asset I am purchasing will appreciate in some fashion… Of course this is never guaranteed, but in many cases you can take an educated guess.

In the end, buy something that has real value, which is always driven by demand.

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3 BeSmartRichNo Gravatar January 26, 2015 at 5:14 pm

Wow. Incredible! That was solid rental income that you are making. Wish you luck with your recovery!

Regards,

BeSmartRich

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4 FI FighterNo Gravatar January 26, 2015 at 7:01 pm

BeSmartRich,

Thanks! It was a pretty good months, all things considered.

Cheers!

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5 No Nonsense LandlordNo Gravatar January 26, 2015 at 6:55 pm

“I spend infinitely more time managing my out-of-state properties than I do my local ones…”

This is due to tenant quality, not distance. If you have a paper trail about non-section 8 tenants, find it. Why it was vacant so long waiting on a section 8 tenant is a mystery, they are a dime a dozen.

“I was hit with another $100 maintenance bill this month for them to replace some air filters, and unclog some pipes.”

Clogged pipes, unless it was a plumbing malfunction, should be a tenant responsibility. The same with filters.

As someone who cash flows almost $12K a month after all expenses, I can assure you it is all about tenant quality.

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6 FI FighterNo Gravatar January 26, 2015 at 7:10 pm

Eric,

You’re right it has everything to do with tenant quality… And for many out of state investors, the lure to go outside is to capture more cash flow…

Where cash flow is strongest, property values are not… A consequence of that is usually a lower quality tenant pool… Blue collar, working class, or in this case Section 8 which provides its own set of challenges. Not saying it can’t work, it just requires more attention and effort.

The Midwest properties I purchased provide more cash flow upfront, but require more work… They are a part of an overall portfolio that also consists of some higher quality holdings… Yes, I could have partitioned things differently as to not operate on both ends of the spectrum, but the allocation is what it is… Unlike stocks, it’s a lot tougher to liquidate real estate holdings.

Knowing what I know now, I will probably focus on higher quality moving forward in my REI career. There is still a place for some cheaper properties that generate cash flow, but my preference is to focus mostly on higher end rentals. The Bay Area is an extremely tough place to invest for cash flow, but it’s difficult to beat the tenant pool here: $100k+ income, 700+ credit scores, low maintenance tenants.

All the best!

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7 MaxNo Gravatar January 26, 2015 at 8:34 pm

Yikes this makes me a bit nervous with my plans to hear your experiences now. However, I’m going to move forward as planned so far so good.

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8 FI FighterNo Gravatar January 26, 2015 at 9:54 pm

Max,

When it comes to real estate investing, I’ve heard both success stories and horror stories from both local and out-of-state investors.

It’s tough to generalize, but both methods can work. As Eric mentioned above, success is primarily dictated by the tenants you have… For out of state, a strong PM is crucial as well.

Everyone has their own preference when it comes to asset allocation. In my own situation, I am trying to find the right balance between cash flow, appreciation, risk, and exit strategy.

I like the out of state investments for immediate cash flow today and the Bay Area properties for future appreciation and future cash flow possibilities.

I’ll be sure to share more of my own thoughts and strategies as my REI career progresses over the years… It’s still a work in progress and like I always want to make clear, I don’t have all the correct answers.

I’m always learning and growing just like everyone else.

All the best!

Reply

9 PassivePlayerNo Gravatar January 27, 2015 at 8:43 am

I also live in the Bay Area, Peninsula to be exact (the highest prices of the Bay Area).

I have a couple questions. Your mortgages seem awfully low in comparison to the rents, unless you are buying somewhere in san jose or fremont. And even then I would have to assume these are interest only loans, is this the case?

Also, Your cash flow is before taxes, although you can’t plan for maintenance and turnover, taxes are a sure thing. I think you should automatically take out 45-50% depending on whatever tax bracket you’re in, state and federal combined.

Lastly, saying you refinanced to pull cash out and have no skin in the game.. I’m not sure where to even begin. Did you live in the Bay Area during 2008? Home prices dropped 50% and rents dropped 30-40%. I can assure you, until you actually sell the property, you haven’t locked in any capital gains, like you say in your post. “Don’t count your chips while you’re sitting at the table”. Just because you did a cash out refi doesn’t mean you took your chips off the table, on the contrary, you added more chips.

Overall, I am impressed with what you’ve been doing, but the way you talk scares me a little bit that you don’t full understand real estate investing. You’ve been invested during the best market cycle the Bay Area has seen, and have only been in during the upswing.

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10 FI FighterNo Gravatar January 27, 2015 at 9:29 am

PassivePlayer,

All my own loans are 30 year fixed, no interest only loans.

Yes, you can’t avoid taxes… although with deductions and depreciation and a low income post-FI, you should be able to reduce taxes greatly… Right now, it’s not a huge problem b/c I still have a W-2 income. But even post-FI, or pretirement or whatever you want to call it, I plan on making side income as well.

Yes, prices dropped after the crash of 2008, and that’s how I was able to get in the real estate game… I bought near the bottom… Although property values plummeted, I find it hard to believe rents dropped by as much as 40%… definitely didn’t happen where I live and I don’t know anyone else whose rent got slashed near half either…

By “taking the chips off the table”, that’s exactly what I did. Yes, I understand I have more debt… Yes, my mortgage payments will also increase, but I can offset that by raising rents… But my initial investment has been returned back to me… I put in ~$80,000 for Rental #1 and ~$60,000 for Rental #2. I will be taking back out ~$100,000 on each rental…

That’s my initial investment and more returned back to me to deploy elsewhere…

I’m not saying debt is not without risk… My strategy is not something I would ever recommend to anyone else, but it’s what I think is best for my own situation… And I’m not planning on buying a new car, or yacht or anything with the funds… Cash reserves and most likely dividend stocks is where the funds will go.

I started off as a dividend growth investor in 2012… Had I never liquidated my dividend portfolio, my guess is that it would be worth about $200k today…

The cash out refi would essentially let me recapture that dividend portfolio yet still have ownership in 2 Bay Area properties… Cash flow on those will be light, but I would still have 25% equity in them, or over $100k in each one…

Again, it may not make sense to everyone, but had you told me in early 2012 that I could own 2 Bay Area properties and keep my entire dividend portfolio in tact, I would have taken you up on that offer in a heartbeat.

Cheers!

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11 Asset GrinderNo Gravatar January 27, 2015 at 10:03 am

Good job with the juggle. As long as those checks keep coming in it will be all good. I hate repairs 🙁

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12 FI FighterNo Gravatar January 27, 2015 at 3:32 pm

Asset Grinder,

Thanks! It’s great when the checks come in and not so great otherwise… Now that I have free time, I’m planning on teaching myself some DIY to save on repair costs 🙂

Cheers!

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13 Even StevenNo Gravatar January 27, 2015 at 10:20 am

I’m not very familiar with Section 8 requirements, but can you object all together? I would think that it is your right as a property owner.

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14 Midwestern LandlordNo Gravatar January 27, 2015 at 2:12 pm

FI Fighter,

Bottom line, in 2012 you made a great decision to invest in real estate. Just look at your average rental property cash flow for 2014 of $2,773 / Mo ($33,276 annually). In order to create this income stream utilizing a stock investment account (assuming the 4% rule), you would need $831,900. That’s what I love about income producing real estate; it speeds up the process for all of us that don’t want to work until we are the typical retirement age. This does not include the additional benefits including principal reductions, appreciation, tax advantages, etc.

Obviously real estate investing is not for everyone. There are people that I know that do not want to have anything to do with being a landlord. To each their own. If it does not fit one’s personality, then they should not do it. And of course, there is some risk. Leverage risk, management risk, tenant risk, neighborhood risk, etc. However, there is also risk relying on a company for living expenses when they can let you go at any time for any reason.

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15 FI FighterNo Gravatar January 27, 2015 at 3:41 pm

Midwestern Landlord,

I agree with you 100%. Real estate is not for everyone but it is an incredible investment vehicle that has helped many achieve financial freedom.

My viewpoint is completely aligned with yours… Using the 4% rule with dividend stocks, you would need a very sizable portfolio indeed to realize the same type of cash flow…

The use of leverage allows everyday people (like me) to control assets that I would otherwise have no means to control… Coupled with low interest rates, and the cash on cash returns through leverage are really what make these type of cash flow numbers possible… It’s definitely not without risk, like you said, but that’s the risk you take in trying to shortcut the path to early FI.

Once you add in the other huge benefits of REI: principal paydown, tax breaks/depreciation, etc. it makes it a pretty easy decision for those willing to accept the risk…

There are many paths to FI… Real estate is just one of them.

Cheers!

Reply

16 LarysaNo Gravatar January 27, 2015 at 3:18 pm

Hey, I bit of the off-topic here. I’ve tried to send you a message, and got back the error “Mailbox quota exceeded”

Reply

17 FI FighterNo Gravatar January 27, 2015 at 3:25 pm

Larysa,

Sorry about that! I’ve been having lots of issues with my emails as of late…

Let me see what I can do. Please try again later tonight, or tomorrow. If issue still persist, let me know.

Thanks!

Reply

18 Gen Y Finance GuyNo Gravatar February 1, 2015 at 2:36 pm

FI Fighter,

It looks like you have a very nice Real Estate Portfolio. I have a few questions:

1) What is the maximum amount of leverage (debt) you are willing to take on?

I personally would be uncomfortable at anything beyond 4X by annual income (earned or passive). Also, you mentioned that you will no longer have any W-2 income. What kind of reserves do you have in the bank in the event things don’t go exactly as planned?

2) Do you have any other sources of income outside of your real estate portfolio?

I do like debt for the leverage that it gives. I personally think you are better off leveraging up after large market down turns and then focusing on cash-flow as the up market ages and eventually turns lower.

Curious on your thoughts?

Cheers!

Reply

19 FI FighterNo Gravatar February 1, 2015 at 2:50 pm

Gen Y Finance Guy,

Probably about $1MM or so. I’m aiming for somewhere in the ballpark of $200k prior to walking away from my corporate job… However, as I’ve mentioned before, I do plan on earning income in the future, even without the W2 income.

Right now, most of my passive income is from real estate. A small portion from index funds, dividend stocks. Also, a small portion from online, via this blog.

Yeah, I agree… It’s tough to time everything exactly, but when I first started leveraging it was near the bottom of the cycle… Back then, it was possible to get both cash flow and your odds of future appreciation were strong… For now, I’m done with leveraging since we are now back in an up cycle…

I do believe that you can make gains in any market, but much more in a down cycle, which is the one I prefer to invest in.

I’m slowing things down for sure now…

All the best!

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