How One House Throws $5,000 a Year at Me

Want to know how we generate $5,000 per month in passive income from a rental property? This post is all about rental House #3.

Remember when we bought House #3? It’s now rented! Let’s see if this deal is hot or not.

Excuse Me, Did You Say House #3?

As long-time Afford Anything readers know, Will and I bought our third rental property in May. It’s a 3-bed, 1.5-bath single-family home in a good school district in Atlanta. The asking price was $125,000, and we snagged it for $94,000.

This needed the fewest repairs of any of our houses. Here are the “before” pictures. As you can see, the scope of work was small. Knock out a wall or two; bust up some concrete steps; install a skylight. Voila – instant awesome!

Check out the “after” photos, below.

Rental Property - Nice Living Room

We’ve painted the walls, refinished the floors, and spruced up the entryway.


Rental Property - Kitchen Photo

The former owners remodeled the kitchen, so these new cabinets and countertop were included. Score!


Rental House - kitchen skylight

Remember that skylight we were installing in the kitchen? Here it is!


Rental Property - Kitchen

Here’s the dining area. It’s a little narrow, but it works.


Rental house - new paint and refinished floors

You’d be amazed at how a few plants can help with staging.

The total cost of the renovations came to $6,000, which means our “total purchase price” (purchase plus upfront repairs) was a solid $100,000.

It now rents for $1,295 per month. Passive cash, baby! Right away, we see that this passes the One Percent Rule with flying colors.

(The One Percent Rule states that the monthly rent should be at least one percent of the purchase price. Move the decimal point two spaces left. If the monthly rent isn’t at least that high, buy a different rental.)

But let’s dig down deeper. How do those numbers check out?

What’s the Cap Rate?

First, let’s find the “capitalization rate,” or cap rate. This measures the net return that the house provides, excluding your financing arrangement.

Why examine this? Because it shows you the strength/weakness of the deal itself, in a vacuum. Remember, ANYTHING can be cash-flow positive if you buy it with cash. That doesn’t mean it’s a good deal.

The “cap rate” helps you examine the quality of the underlying deal. Once you decide whether or not the investment is worth pursuing, you can calculate how different cash/financing scenarios will affect your passive income.

How do you find the cap rate? It’s easy: Just divide the house’s price by its net income.

Gross Income: $15,540 per year

Management – 10 percent of rent – $1,554/year
Taxes – $1,100/year (includes trash service)
General Repair/Maintenance Fund – 1 percent of purchase price – $940/year
Utilities – The tenant pays everything! That’s one huge benefit of renting out a single-family home, as opposed to a multi-unit building. (In contrast, we pay $300+ per month to cover the tenants’ water bills in our three-unit building.)
Yard Work – The tenant handles it!

Total Expenses: $3,594 per year

NET Income (Income after Expenses): $11,946 per year. Yeah baby!

Right off the bat, I can see that this is a sweet deal. I’m netting almost $12,000 a year for a $100,000 house. That’s roughly 12 percent.

Crunch the numbers, and the cap rate is $11,946/$100,000 = 0.1194, or 11.94 percent.

I don’t know about you, but I think a near-12 percent return is pretty stellar. It’s not as sweet as the 17.8 percent return I’m getting on House #2, but hey, you can’t strike gold every time. ☺

So How Much Cash Goes In Your Pocket Each Month?

Okay, now we know the cap rate. How much passive income are we collecting?

We have a private loan in which we’re making interest-only payments at 7 percent. (Hold your horses! I know this might create chaos in the comments section. I’ll explain why we choose this below.)

Let’s look again at the numbers.

Net Income: $11,946 per year
Financing Payments: $7,000 per year
CASH FLOW after debt service: $4,946 per year! Wahoo!!

We’re getting $5,000 in passive income each year from this house! That’s one huge step closer to financial freedom.

Why did we get the financing that we did? Look again at the numbers. Look carefully. How much money did we pay out-of-pocket for this investment?

Zero. Zip. Zilch. Nada.

Without spending a dime of our own money, we set up a deal in which we receive about $5,000 in passive income per year. That’s AFTER paying a property manager to do the actual work, plus setting aside a “rainy day” fund for long-term maintenance and repairs.

In other words, we borrowed at 7 percent and used the money to snag an investment that pays 12 percent. This practice is called “arbitrage,” which might be my favorite word in the English language. ☺

“Why get interest-only financing?”
It gives us the most flexibility. We’re earning $5,000 a year in passive income, with no money down.

We can choose – CHOOSE – to use that $5,000 to pay down the principal on the house. (There is no pre-payment penalty). We can use the money to buy another house. Heck, we can blow it on champagne and strippers, if we wanted. It’s our choice.

“What are you doing with that money?
First we’ll buy a few more rental units. Then we’ll start paying down the loans. In other words, we’re reinvesting the profits back into the business.

“Are you disciplined enough to re-invest that money?”
DUH!! If you’re not, get out of the game!

“Why not just borrow from a bank?”
I’d love to. But banks are sick of us.

“Are you worried that you’re over-leveraged?”
Nope. We use cash frequently, and we have kick-ass equity. We bought House #2 in cash. We paid for repairs on House #1, Unit B with cash. Relative to many real estate investors, we’re quite conservative.

“You allot $1,554 for paying a property manager. Why not manage it yourself?”
I do.

“Then why do you include a ‘management’ line-item?”
Because I pay myself for my time.

The management fee is active income I pay myself for the time I spend managing the property. It’s a radically different beast than the passive income I earn from the investment.

Rookie real estate investors conflate ‘paying themselves’ with ‘profit.’ You can’t pay yourself $0, pay someone else a a fair wage, and make an apples-to-apples comparison.

Every investment must allow me to make a profit after paying myself. That way, I can remove myself from the equation and the numbers will stay the same. Remember, the goal is financial freedom, not a lifetime job.

“Are you talking to yourself, in the form of italicized questions?”
Uh, yeah.

“In public? On a blog?”
Uh, yeah.

“You’re a dork.”
That’s not a question.

“You just proved my point.”


  1. says

    Looking good Paula! I wish I were a tenth as organized as you (it’s a work in progress).

    Would you be interested in sharing a little information about the interest free loan in a comment or another post? I’d definitely like to hear more.

      • says

        Paula, I did, sorry! Yet another example of why we can’t proofread our own writing effectively.

        I was asking about the interest-only loan. You implied that it’s not a mortgage so I’m just curious about what type of loan it is.

        • says

          @Kurt — There are 3 ways investors get private loans: 1) by purchasing houses that offer “owner financing” or “seller financing,” 2) by partnering with friends/family/associates, or 3) by registering with the SEC and advertising.

  2. says

    I’d like to hear how you got the no cost loan as well. I’d love to have more than one rental property, but we’re paying down debt, so have no income to put toward a 20% down payment. If we could do something like this that could pay down debt quicker, then invest in the house, I’d be all for it. I’ve always heard that you need at least 20% down to put toward a rental property.

    • says

      Many banks and traditional lenders require 20 percent.

      Some people, however, circumvent this through owner financing (e.g. the seller finances the buyer’s cost of the house). There are many real estate listings that say “owner financing” or “seller financing.”

      Other investors privately work out the terms with another individual who wants to be involved in the transaction.

      And yet other investors register with the SEC and advertise.

      In short, there are plenty of ways that investors raise funds … banks are not the only strategy.

    • says

      @Kim — The notion of interest-only scared me when I first heard about it. But then I realized I could choose to pay down the principal anytime I want. Maintaining the extra cash, though, will allow me to accumulate more houses now while they’re still cheap.

  3. says

    Nice internal dialog you’ve got going there are the end!

    Looks great, by the way. I can’t get over how cheap property is over there – definitely keep collecting those things like baseball cards; you’ll be happy in a few years.

  4. says

    Hey Writer, Blogger, Author..!

    I dont know who you are, I dont know what you do ! but then also I am reading all of your post from not less then 5 months. I like your articles, writing style, the way talk about money, your thinking about money and your goals also.

    I read your this post also, and I am very happy that you are on a track of financial freedom. I have read this concept in one book by Kiyosaki and I really like it, But the question to my mind was whether it is practical or not. But here you proved :)

    Nice.. Hope you will throw some more good and practicals articles. :)

  5. says

    One of the biggest eye openers for me when I got into real estate a couple of years ago was the ability to get “creative” and I am not talking choosing paint colors…

    Buying and selling properties can be structured in so many different ways that there are books written about it yet still so many people think that to buy a house you have to go to a bank, apply for a loan and hope to get approved…boring.

    Once you start learning how things REALLY get done in RE the possibilities are almost endless.

  6. says

    We bought our duplex with a $50K loan from Mr. PoP’s parents that is interest only for 5 years with a balloon payment in full at the end of the term. No pre-payment penalty. We figured worst case scenario we would be able to build enough equity in it over 5 years to secure traditional financing if we needed to for the balloon payment. But it’s looking like we’ll be able to pay it off a year early in full.

    Nice deal on the single family. But why do you pay the water on your triplex? Our duplex has two meters for each utility, so the tenants cover everything except garbage (which is on the RE tax bill) and lawn care (which Mr. PoP takes care of).

    • says

      @Mrs.Pop — I would LOVE to separately water-meter the triplex, so that the tenants could pay their own water bill. But that would cost several thousand dollars. (Not just $2K or $3K … double-digit K’s.) The payback period would take a long time, and I’d rather put that money towards buying other properties. So, unfortunately, we pay the water bill. :-(

      • says

        You could just figure the average yearly cost of water, divide it properly, and add it into your rent. You can simply up the rent, or specifically add water costs, but be sure to call it “additional rent”! That part is important.

  7. says

    That’s a really good rate of return! When you think about the notion that one could also get future appreciation on a property that was bought at a rock-bottom price, this adds up to a really good picture.

    What I really like is that the scope of effort put into the rehab/staging seemed quite modest. That’s the thing, as long as the level of effort is low, it becomes more than worth it.

    • says

      @Squirrelers — This was an easy, easy house to rehab; it’s the closest thing to a “turn-key” house I’ve ever bought. That was a nice relief after buying two houses that need a lot of work (and touring hundreds of other homes in shoddy condition).

    • says

      @Rich — Good catch! We have consolidated insurance for multiple properties. (There are a handful of companies that will insure a landlord’s portfolio of properties “in bulk.”)

      I’ve been trying to figure out how to report the numbers for umbrella overhead expenses that apply to all properties, such as meeting with a CPA, meeting with a real estate attorney, purchasing umbrella liability insurance, and purchasing rental property portfolio insurance.

      Internally, we consolidate the numbers for all our properties to see how well our rental business, as a whole, is doing. But of course, house-by-house reports, like this one, wouldn’t count the cost of hiring an accountant or having the leases looked over by an attorney. I’ll probably have to write an annual “umbrella overhead” post on this blog to reflect our businesses’ non-house-specific overhead.

      • says

        I admire your success. How much do you pay on average for insurance for each property? In my area, insurance takes a big bite out of profits. I have 5 rental properties; 4 single-family, 1 duplex. For each property, I have a separate landlord insurance policy, flood insurance policy and windstorm insurance policy (windstorm coverage is separate from fire/casualty in most Texas locations). I looked into a commercial policy to cover my rentals but the premium seem to be higher than the total amount of separate landlord policies. Any suggestions for me to streamline my insurance policies and lower the cost of my insurance? Thanks.

    • says

      @RichUncle – When I started investing, my goal was five houses. But in hindsight, I think that was the wrong goal, for two reasons:

      #1: The number of buildings is less important than the number of units (a single-family house is different than a 4-plex or a 6-plex).

      #2: The real goal is how much passive income I can create, not how many houses I own. I want enough houses to create about $65,000 – $75,000/year in passive income.

      Right now I own five units in total (a 3-plex and two singles). If I can buy six more units, at an average rent of $700/each, and then I pay off the loans on all the properties, I’ll get $77,000/year in passive income, assuming that my overhead equals 35 percent of the gross rent. (If overhead is 40 percent, I’d get $71K/year). So … that’s the goal.

  8. says

    Why would you want to pay off the mortgages instead of using the equity and cash flow to continue expanding your portfolio? Why wait so long to reach your goal? Continue to leverage your portfolio and set your goal to 22 units and have the cash flow, equity, and diversification that makes you safer then having 11 units.

  9. says

    Hey, I read your article and really liked what I read. Are you open to showing me how to duplicate what you did? I left my e-mail address. Let me know if we can talk. Thanks.

    Lynn White

    • says

      @Lynn — Sure, I’m happy to email any of my readers. You can read many articles on this site that describe how I buy, fix and rent houses, and I’ll send you an email right now to see if you have any specific questions I can help answer.

    • says

      @Terry — First, I suggest getting a second job. You need to boost your income. Do you have any skills, like painting or carpentry? Can you babysit? Can you drive a car (delivering pizzas)? Can you teach English as a foreign language? These are all “side gigs” you can do in the evenings and on the weekends.

      If you take on a side job that pays $10 per hour, and you work an extra 12 hours a week, you’ll make $120 per week (about $100 after taxes). If you save all of it, you’ll have $5,200 after a year. Do this for two years, and you’ll have enough for a 20 percent down payment on a $52,000 condo or house.

      I don’t know what part of the country you live in, but in many parts of the nation — such as the metro Atlanta area — you can buy a small-but-nice home for $52,000.

      Your monthly payment on a 30-year home loan will be $243.85 per month, assuming you have a 4 percent mortgage interest rate and pay 1 percent in property taxes. If you keep working an extra 12 hours per week at $10/hr, and applying all of that to your mortgage, you’ll be able to pay that off quickly.

      • says

        hello iam in the military and have about 50k saved up iam stationed in north carolina do u think it is a good idea to buy a condo for cash and rent it out or get like 100 thousand loan and buy something for 150. 33% down

        • says

          @army man — More information needed. Without knowing the numbers on those investments, it’s impossible to do the math. But many condos have restrictions that forbid people from renting out the unit, so check into that before you buy.

  10. says


    I enjoy reading your posts, especially the real estate ones. I congratulate you on your successes. I am just curious if you ever worry about the risks of leveraging too many properties.

    Keep the posts coming!


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