Rental #1: One-Year Update

February 22, 2016 · 15 comments

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This week is officially one year since we put our first tenants into Rental #1, and as promised in my 6-month update, I am going to provide a detailed update of our financials for the full year. Before I jump into the financials, here’s the basic recap of our year:

  • Our tenants moved in the end of February 2015, and when we offered to renew their lease for another year, they asked if they could go month-to-month starting March 1 of this year. They are looking for a house to purchase for themselves, and I agreed to allow them to go month-to-month with a $50/month rent increase and 60 days notice prior to terminating their lease. I’m hoping they stick around for a while longer, but the bright side is that the closer we get to summer, the easier it will be to rent if/when they leave.
  • We had about $1200 in maintenance costs over the past year, including a couple HVAC issues (new thermostat/broken compressor) and replacement of the dryer, which we knew was old and was near end-of-life.
  • We probably put in about two hours of time/effort on the house this year. That was mostly email and phone calls with the property management company and paying other bills (HOA, utility, insurance, etc). So, this was nearly a passive investment for the year.

Here is what our Profit and Loss Statement (P&L) looks like for the first year:



A few financial notes before I jump into the financial metrics:

  • This represents 12 months income at $1450/month, plus a few extra days that were pro-rated for early move-in. The data would be more accurate if about $50 was deducted from the gross income line for those extra days. That said, it was easier to just let the numbers be off by a percentage point than to go back and alter my books – this is more than evened out by the fact that there was a $200 electric utility expense from prior to move in that was paid after. So, my numbers are actually a bit better than indicated.But, it’s close enough.
  • There is no CapEx in this report, as CapEx doesn’t show up on a P&L – and because we didn’t have any CapEx last year. That said, most CapEx (roof, exterior, etc) is covered by the HOA, so that number will be proportionately lower long-term (though there’s a monthly HOA cost in our expenses).
  • Property management fees include an entire00 first month tenant placement fee ($1450) – given that the tenants are staying more than a year, this number is disproportionately high.

Our Net Income was $8756 – on a total cash investment of $79,374, that represents a cash-on-cash return of about 11.03%.

My goal is typically about 12% cash-on-cash return, but this number will fluctuate over the years, and this is certainly within my acceptable range.

Our total expense ratio (including rent loss and CapEx) for the year is about 49.83%.

While this number will fluctuate over the years with changes in CapEx, vacancy, additional turn-over costs, amortized tenant-placement costs, etc., for the first year it falls squarely in line with the “50% Rule.” While not every house will fall this perfectly into that range, it’s a good way to double-check that costs aren’t too out-of-whack. That said, I expect expense ratio to be a little higher when averaged over the long-term, as CapEx and vacancy tend to be more costly after the first year than in the first year.

I ran a quick IRR analysis of what my compounded return on this investment would be if I sold today at market price (including selling costs), and got somewhere around 18.4%. Not that I’m considering selling today, but I’m guessing that number will go down over the next couple years — but I don’t have a better place to put the cash, so it’s not a good option.

Anyway, that’s our 1-year update…I’ll continue to update as time goes on and when interesting events occur…






15 responses to “Rental #1: One-Year Update”

  1. Henry R says:

    Hi J,

    Did you get any push back when you advised your tenants you will be increasing the rent by 50 per month? Also I’m curious as to what reason you may have given them for the increase.
    Thanks
    Henry

  2. J Scott says:

    Hi Henry,

    I actually offered to allow them to renew for 1 year at the same rate ($1450/month). They said they didn’t want to sign a one-year lease, so I gave them two options: 6 months @ $1450/month or month-to-month @ $1500/month. They chose the month-to-month option. I think I was pretty fair about this.

  3. Henry R says:

    Hi J,

    Thanks for the response, yes that seems fair to me as well. I didn’t want to guess as to why you raised the rent. All in all seems as though you are doing very well with this rental. It’s very nice also. I’ve been reading your updates when you where diving into your first rental property.

    I know you will be successful.

  4. shantanu sinha says:

    Hello Scott,

    This is the process almost followed up in every country.

    The increase in rent is obvious raised along every year. Hope your tenants would ready to bare this upon.

    Thanks for sharing these among.

    Shantanu sinha

  5. Shanequa says:

    It looks like you are managing the house yourself. Why did you decide to do that instead of hiring a property manager?

  6. J Scott says:

    The property is being managed by a property manager.

  7. Jacob says:

    Hi Scott,

    Thanks for sharing this information. It’s nice to get real numbers as real-life examples.

    But is there a way to know the costs before going through with the investment? Do you know what your expenses will be ahead of time and how much you expect to make? I saw that Mashvisor (mashvisor.com) gives that kind of information so people know what income and costs to expect. Bigger Pockets (biggerpockets.com) offers similar information with their calculators. Are these good tools to use so I know what I’m getting into? Does that mean I need to have a lot of cash on the side before I can start flipping houses?

    Would like to hear your thoughts, thanks.

  8. Jaimee says:

    Thank you for this information, this really helped alot! As a real estate agent, this is very helpful.

  9. John says:

    Love the article. Definitely an interesting topic.

  10. Jason says:

    Very helpful article. I’m new to this topic and this definitely helps me learn!

  11. McGuire says:

    Very informative. Thanks for the great read!

  12. McGuire says:

    Wow! What a great article. You always give me so much insight.

  13. RentAppeal says:

    Love the angle you take in this post. I’ve been an avid reader of your blog posts and hope you continue to provide great information

  14. Prem says:

    I think paying a full month’s rent for leasing up is too much. if ur living in the same town, i suggest posting your property on postlets, or craigslist., have a openhouse on a weekend(2-3 hrs). If the house is in a good neighborhood, you should get lot of traffic and rent it without any help from PM. I have done this couple of times, and i know it works. i usually had 1 open house with 2-3 additional 1 hr slots to show the property.

  15. J Scott says:

    Prem –

    Most reputable PMs aren’t going to let you do your own leasing and then be willing to manage the property for you. While I could easily rent the property myself, I’m not interested in managing the property, handling maintenance issues, dealing with turnover and move-in/move-out inspections, etc.

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