May 2014 Cash Flow Statement

Another month, another cash flow report. I always look forward to writing up these reports and sharing the results with everyone. What you see will clearly show whether or not the early FI plan is working, or not.

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 May:

Rental Property #1: Bay Area

Rental Property #1 continues to shine, and keeps on looking like a real winner. When I first screened for tenants, I made sure to tell them that I was looking for long-term tenants that wanted to stay around for awhile. The current tenants are closing in on their two year anniversary and I hope they want to continue living here. Yes, I am still possibly considering pulling off a 1031 exchange, which might force me to sell at some point in the future, but I really don’t feel the rush to make any sudden moves. I have great tenants in place who pay rent on time, are self-sufficient, and don’t feel the need to contact me regarding every little issue. As a landlord, what more could I possibly ask for? It’s a two-way street and I will gladly return respect for respect. I don’t have any intentions on raising rent… It’s been a very fruitful relationship so far.

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. I was also fortunate to land a wonderful tenant, and although I could raise rents (the initial one-year lease has expired), I don’t feel the need to at all. Market rent has increased by almost $400/month in this location (Class A neighborhood), which is borderline absurd. For those who aren’t from around the Bay Area, this type of rent increase (in just one year’s time) may seem outrageous, but that’s really the nature of the beast around here. Any landlord who got into the Bay Area around 2009-2012 is sitting in a most enviable position. Not only due to the surge in rent (and demand), but also because of the insane appreciation…

I was extremely fortunate to be able to win two Bay Area properties during the last downturn in the economy, and if there is another market crash in the future, this will seriously be one of the best places in the world to invest back into. Yes, there are definitely better cash flowing markets out there in the country, and cash flow is what will ultimately allow you to declare early FI… but if you want to build massive generational wealth (or find a shortcut to early FI), the Bay Area is one of the absolute best places to do it in. The extreme volatility experienced through its real estate cycle creates an enormous delta between the highs and lows. In other words, you can make out like a thief in the night thanks to the potential for potent appreciation. You just gotta get in at the right time…

Total cash flow for the month was $344.76.

Rental Property #2 Numbers:

Purchase Price: $290,000

Current Rent: $2,150/month

Rental Property #2 (June 05, 2014) Zillow Valuation:

Rental Property #3: Chicago

The first floor tenant (market rate) continues to pay on time and is a fantastic tenant. She renewed her lease last month, and I hope she also sticks around for a long while.

The second floor tenant FINALLY made rent payment this month, although she was unable to wipe out her entire balance. She paid $187.98, and I’m not exactly sure how she came up with that figure…

Some bad news this month… I learned that the second floor tenant’s CHA subsidy was reduced from $1,064/month to $857/month. This means that the tenant is now responsible for an additional $207/month. Since this is my problem tenant, I’m not feeling too good about this change. Did this come as a surprise to me? Yes, most definitely. I’m surprised CHA reduced her subsidy, and logically, the only real explanation for that would be that the tenant was able to increase her earned income (pay raise), or reduce the number of dependents that she is responsible for. I’m still trying to sort all this out with the PM, because to my knowledge, neither of the aforementioned has happened. Because of this reduction in Section 8 assistance, my cash flow for Rental Property #3 takes a hit.

Point noted. So, although a Section 8 tenant may sign a one year lease agreement, the subsidy is subject to change at anytime. It isn’t necessarily fully guaranteed for that entire year…

Total cash flow this month for Chicago came out to be $853.63.

Rental Property #4: Indianapolis

Rental Property #4 is just getting over the eviction hurdle, and we now have a new tenant in place! I’m crossing my fingers and hoping I landed a good tenant this second time around.

Here’s the message I got from my PM in early May:

I was going to email you tonight but you always seem to beat me to it! Great news actually. One of our current residents really wanted to transfer to a new home. We found a renter for her current home and they wanted to move in as soon as possible which means she would have to move in as soon as possible. She wanted a better area and something newer. Your home was a perfect fit for her. She actually signed the lease and took possession yesterday. It was a quick deal…we had her transferring to a different home but she saw yours and made the switch.

At the end of May:

The new tenant has moved in! She moved in pretty quickly because she was transferring from another property of ours and we had a renter who wanted to move into her other home as soon as possible. Because of that, she agreed (and asked) if she could clean the home herself since that was all that was left. We agreed to allow her to take possession of the home without it being completely market ready and gave her the credit for the cost that we would have paid the cleaner. That is why there is a prepaid amount of $150.00 that will be carried over to next month. I’m glad everything worked out overall for you to have the home turned quickly and a new renter in place.

I have one year rent protection guarantee with this property, so I will be reimbursed that $150 cleaner fee next month… That explains why the cash flow is slightly less this month. I’m just happy the eviction process moved along so rapidly… A quick turn is exactly what I was hoping for.

Total cash flow this month for Indianapolis came out to be $383.18.

Rental Property #5: Chicago

The first floor tenant is Section 8, and the tenant portion is only $110. Section 8 covers $1,098, or the bulk of the rent. Just like with my other problem Section 8 tenant in Rental Property #5, this tenant has started to become delinquent, and missed rent this month… Now that I have more datapoints, I’m quickly learning that the quality of some of these Section 8 tenants in South Chicago leaves a lot to be desired. Granted, the CHA subsidy is quite high for this one, but it really does boggle the mind why some tenants can’t be responsible enough to pay rent on time… especially since their portion of rent is so minuscule…

The second floor tenants are market rent, and receive no Section 8 assistance. Their rent portion is $1,250. They paid rent a little late this month, and to my surprise, they chipped in an extra $25 for the late fee. Unlike with my Section 8 tenants, the market rent ones seem to take responsibility a lot more seriously.

It’s still far too early for me to know for certain, but right now, I’m having much better success with market rate tenants. In the future, I could always elect to not rent out to Section 8 tenants… Again, it’s still early, so I’m keeping an open mind as I continue moving forward. By no means am I trying to paint a negative brush on all Section 8 tenants… I’m sure there are good ones out there… I just haven’t been fortunate in that regard, so far.

After all expenses, total cash flow came out to be $1,123.34.

Summary

Total cash flow for May came out to be $3,152.58. I’m glad I was able to clear $3,000/month again, but I will confess that the reduced subsidy for my Section 8 tenant in Rental Property #3 definitely put a damper on the results this month. I am very doubtful the tenant will come around and start consistently paying on time, so this would mean a recurring hit to the cash flow each month. Well, that is until the tenant’s lease expires in August, which really isn’t too far away. I need to work closely with my PM to make sure I have a new tenant in place and ready to go by then. Until next month…

Keep on fighting!