How much can you earn from a rental property?
The sketchy late-night-TV gurus claim you’ll be blowing your nose with $100 bills.
The naysayers claim you don’t earn jack-diddly-squat.
Reality is in the middle.
My goal is to paint a hyper-realistic picture of how much you can earn from rental properties. And I’m going to achieve this, in part, by opening up my books.
Here’s a full breakdown, if you want to read a month-by-month overview. This article will focus on this previous month (November 2015) for a close-up look behind the scenes.
Before we jump into this …
Why am I Sharing My Rental Property Numbers?
As I’ve touched on above, I’m doing this for a few reasons:
- To answer people who claim: “You’ll be waking up at 2 a.m. to fix toilets.”
- To answer people who claim: “You’ll be richer than Warren Buffet and Kanye West combined!!”
- To hold myself accountable.
- To promote the value of transparency.
- To make money less of a taboo topic.
- To give you a realistic idea of BOTH the time AND the income that rental property investments can create.
“How is this Helpful?”
I want to be ultra-clear:
Before I publish an income report (this is only my second), I ask myself whether or not this information will genuinely help my readers.
That’s my litmus test for everything that appears on this website.
I’ve seen websites where people publish their top-line (gross) revenue on a specific date.
“Look! I made $10,000 in one day!”
Ugh.
These people are showing one isolated data point, without the benefit of context.
- They’re not showing expenses.
- They’re not showing the bottom line.
- They’re not showing the month-by-month rises and falls.
- They’re not contextualizing the information.
That’s not helpful. In fact, it’s downright misleading.
I don’t play that game.
My hope is that these income reports will accomplish the following:
#1: Help you make an informed decision about whether or not rental properties are right for you.
#2: Facilitate a mindset shift away from the extremes — both the naysayer extreme and the sketchy-late-night-TV-guru extreme.
#3: Pull back the curtain on the many, many expenses that unfold behind-the-scenes. Big revenue looks impressive, until you subtract the costs.
#4: Disrupt the myth that rental property investing requires “being handy.” I’m not swinging hammers, and these reports show how this decision affects both my time and my bottom line.
#5: Frame income into the context of time. I’m not interested in working 16 hours a day just so I can make money in my sleep. 🙂 These reports discuss both money and time.
#6: Provide consistent data. If you keep reading this website throughout the next year (and beyond), you’ll see profit volatility. I have great months, and I have sucky months. You’re going to witness both.
So — that’s why these articles exist. I hope I’m serving you well.
Quick Background
Are you a new reader? Here’s a quick background:
My name is Paula, I’m 32, and I live in Las Vegas. I own seven rental property units spread across five buildings, all located in metropolitan Atlanta, where I used to live.
When my partner Will and I first bought these properties, we made the classic novice mistake of doing most of the work ourselves. It quickly became a job, not an investment.
When we realized this, we devoted our energy to creating systems, building teams and turning this into a scalable business. We made ourselves redundant, and then we happily fired ourselves. 🙂
Today, we collect thousands every month while working less than one hour per week on our real estate business.
What do I mean by “thousands”? And what type of work do we handle?
Here are the exact details.
November Income: $10,732.51
Last month, we collected $10,732.51 in gross revenue after paying property management expenses (which gets taken-from-the-top, before the money hits our bank account).
Here’s how this breaks down:
- Unit #1: $2,750
- Unit $2: $1,490
- Unit #3: $1,295
House #2: $850.50
House #3: $1,273
House #4: $1,500
House #5: $1,574 (includes deferred income from previous month)
Ridiculously Tiny Interest Payment from Bank: $0.01
Total: $10,732.51
Here’s what it looks like (Please note that Unit #1’s rent is paid in four separate transactions):
Let’s keep in mind:
- Income is one-third of the story
- Expenses are another one-third.
- And TIME is the most crucial detail — especially if the goal is to create a stream of passive income.
Let’s take a closer look at this.
Time Investment: 2 Hours, 30 Minutes
Last month we spent a total of two hours, thirty minutes managing our rental properties. Here’s what this looks like:
- Triplex: One hour 30 minutes.
- House #2: Nothing.
- House #3: Nothing.
- House #4: Nothing.
- House #5: One hour.
Here’s exactly what we did during that time:
Triplex:
Remember that squirrel-in-the-attic problem I mentioned last month? He’s baaaack!
Last month, we hired a pest control company to chase the squirrel away. (We paid the bill this month.)
Their first attempt didn’t work, so we coordinated between the tenant and the pest control company for two more visits. Then we came to our senses and just put the tenant into direct contact with pest control company.
(Lesson: Look for every opportunity to stop being the bottleneck.)
Normally, I’m cautious about letting tenants have direct access to contractors. After all, I don’t want the tenant to link us to a financial commitment. But in this case, the pest control company charged a flat fee for a year’s service. In addition, they work with a lot of investors (we accessed them through a referral from another investor) and they understand the set-up.
(Lesson: There are contractors who specialize in working with owner-occupants, and contractors who specialize in working with investors. You want the latter.)
Total time: 1 hour.
In addition, we got a voicemail from a tenant saying that their glass shower door came off its tracks.
Coincidentally, on that same day, Will happened to chat with our former next-door-neighbor. (We’re friends). The neighbor volunteered to drop by and fix it. He finished in 15 minutes.
(Lesson: Be friendly with your neighbors. That’s not just an investing lesson, but a good value for life.)
Total time: 30 minutes, including time to catch up with our neighbor. (If we didn’t have such an awesome neighbor, we would’ve just texted our handyman.)
Houses #2, #3 and #4:
We did nothing. 🙂 Passive income, baby!
House #5:
We got an email from our property manager that the refrigerator is broken again. We recently repaired it, so this time we decided to replace it.
We asked the tenant to measure the opening where the refrigerator stands (30 inches wide). Then we hopped onto the Internet, ordered a fridge, and arranged for delivery and haul-off.
Voilà — done and done.
(Lesson: Don’t over-optimize. My former self — the “old Paula” from five years ago — would have tried to penny-pinch the situation. “Wait! We can scrap the old fridge for parts! I bet we could get $50 on Craigslist!”
Then I clarified my values.
What’s my goal: maximize money or minimize time?
My priority is minimizing time — and means accepting the “free haul-off” offer, even though it carries the opportunity cost of not scraping the old appliance for a few bucks.
If your goal is to enjoy more free time, don’t over-optimize. Let go of tiny opportunities so you can be open to bigger ones.)
Total time: One hour, at least half of which was unnecessary.
(I wasted 30 minutes deliberating between a 28-inch vs. 29.5-inch refrigerator. What a waste of time. I easily could have handled this in 30 minutes, instead of 60 minutes, if I had been more decisive. I’m guilty of over-optimizing; it’s a bad habit from my hyper-frugal days.)
Annddd … that’s it!
Two hours and 30 minutes of work this month. Not bad, eh?
Cash in My Pocket: $2,209.39
$10,732 of gross revenue makes a better headline.
But I want to call your attention to the number that REALLY matters — the bottom line.
My ultimate cash-in-pocket (from rental property investments) came to $2,209.39 in November.
That’s not much. But on the bright side, I only spent two-and-a-half hours earning this money.
That comes to a rate of $883.75 per hour. 🙂 (We’ll chat about this in detail below.)
Here’s last month’s Profit and Loss Statement:
Here’s the play-by-play:
Mortgages: $3,524.03
- Mortgages consist of principal, interest, taxes and insurance (PITI). The final three categories are pure expenses, but the first category — principal — is additional “gain” (it builds net worth).
- That said, our houses are in the early amortization years. Principal contributions are small.
Legal and Accountant: $2,023.75
- After we moved to Vegas, we paid an attorney to advise us on whether to structure our business in Georgia or Nevada. They told us to keep the registration in Georgia, but foreign-register the entities in Nevada. That cost $623.75.
- The other $1,400 is the fee we pay our CPA for dealing with our taxes. Better him than us. 🙂
Property Improvements: $1,195.34
- The new refrigerator came to $612.27.
- The other $583.07 came from us reimbursing ourselves for a stove that we bought for House #4 a few months ago. (We accidentally used a personal credit card instead of the business card, so we paid ourselves back and made a note of the transaction.)
Insurance: $903
- We own two houses in cash, which means there’s no mortgage (escrow) on those properties. This is the annual insurance bill for one of those properties.
Routine Maintenance: $874.00
- We paid $850 to get that damn squirrel out of the attic. #StupidSquirrel
- The other $24 is the cost of lawn mowing. (The triplex needed one last mow before the winter.)
Total Expenses: $8,523.12
Cash Flow: $2,209.39
Yeee-ow! Remember last month, when I walked away with $6,102.84 in my pocket?
Notice how this month, my income is around $4,000 less? 🙂
Income rises and falls by a massive margin. Be neither excited about the highs nor disturbed by the lows.
Let’s review:
- Income: $10,732.51
- Expenses: $8,523.12
- Cash Flow: $2,209.39
- Time: 2 hours, 30 minutes
- Hourly Rate: $883.75 per hour
Look at Time, Not Just Money
These income reports are modest. I’m not making millions. But I’m also working two hours per month.
I’m trying to illustrate the concept of passive income.
Sure, I only made $2,209 last month from rental investments. That’s not much. But it’s just shy of $900 per hour. And that’s pretty sweet.
There are many people who have never held any income-producing investment. I’ll sometimes hear them say, “Yeah, I’m tired of trading-time-for-money.”
That’s great. But how are you going to build a bridge from your current wage/salary situation to something … different?
I don’t want to encourage you to sustain an hourly rate mentality. Building a business with strong systems will take time upfront. But eventually, this business can elevate you above the trading-time-for-money framework.
The best way to illustrate this with numerical data is to show you my current insane “hourly rates,” and hope that you reach the conclusion that I’ve surpassed the wage paradigm.
By contrasting investment income with wage/salary earnings potential, I hope you’ll see that these exist in different leagues.
Because nobody makes $883 per hour. Reality is far more nuanced. When I started investing in real estate, I made $0 per hour. Now I’m earning those dividends.
And I can ride this wave for decades.
How Much Did Your Properties Cost?
I updated last month’s article to answer several FAQ’s that came from the comments.
In a month or two, I’ll probably create a “Master FAQ” page that I can continually enhance.(I’m trying to avoid repeating myself in every update.) In the meantime, please check out that article for answers to several common questions. 🙂
I’d like to dedicate the rest of this article to answering one question that I heard several times last month: “How much did your properties cost?”
As usual, I’ll frame this into context.
Here’s exactly how much I paid for each property: (I made this awesome spreadsheet)
Let’s check out what these properties are worth today:
Over the past five years, I’ve grown $245,000 in additional equity — roughly $50,000 per year. But that’s just icing on the cake.
The REAL value of these investments isn’t the equity gains, it’s the cash flow.
“How Do You Find These Types of Returns?”
I think I’ve made a mistake.
I’ve dug in the trenches behind-the-scenes for years, hunting for investments with solid returns.
After I buy a property, I’ll write an article announcing the purchase.
For example, many of you heard me say, “Hey, we bought House #5! Check it out!”
But you didn’t hear me say:
“Hey, last week I looked at 100 listings online. I narrowed these down to fifteen that I toured in-person. I made offers on four.
“One of those offers was accepted, so I paid an inspector $400 to check it out. I spent an hour reading his report, followed by six hours of deep contemplation.”
“I found the inner strength to release my sunk cost fallacy. I decided not to purchase the property. Now I’m back to Square One.”
I didn’t want to pepper this website with articles titled “Here’s another house I didn’t buy.”
But in hindsight, maybe I should have.
Finding the right house is 90% of the game. This is where you win or lose. Spend lavish amounts of time and energy on this step. As I said in the “12 Essential Lessons” article: You make money going into the deal.
I cannot underscore this enough.
Buy the right property, and you can make a half-dozen mistakes along the road and still be okay.
Buy the wrong property, and no amount of management/tweaking/hoping will save you.
(By the way, I’m heading to Atlanta for the holidays. While I’m there, I’ll start looking for House #6, and this time, I’ll document every moment of the hunt. Stay tuned.)
So anyway —
You’re seeing strong returns in the above spreadsheet for a few reasons:
#1: I invested hundreds of hours into learning — through trial-and-error, networking, reading, listening, asking, etc.
#2: Each property represents many, many hours of behind-the-scenes sleuthing.
#3: I’ve purchased every property significantly below market value. My properties include two foreclosures, two short sales, and one estate sale. As a result, I get “immediate appreciation” at the closing table.
#4: In the past five years, I’ve remodeled seven kitchens. I’ve built or renovated six decks. I own 12.5 bathrooms, excluding my personal home (which brings the total to 14.5 bathrooms). That’s a lot of plumbing.
I’ve learned how to create home value.
Creating home value (the technical term is “forced appreciation”) is a skill, just like basketball and piano are skills. It comes with time and practice.
I made a mountain of mistakes when I managed my first renovation. Like many novices, I wandered into the rental property world without truly understanding the landscape. There are many real estate investors who own one or two properties, but can’t scale up. And the worst part is, they don’t even understand why they’re not making progress.
Some blame the system. Others blame the economy.
I prefer to direct blame inward — because this empowers me to change the situation.
I was on-track to becoming one of those people who couldn’t scale higher. But I caught myself. And I corrected course.
It took me half a decade to figure it out. But by the time I managed the seventh kitchen remodel, I had a tested, proven system.
Here’s the surprising truth that I learned:
It’s not about the “how to.” It’s about the “what to.”
Success doesn’t come from learning “how to build a deck.” It comes from learning whether or not to build a deck.
Success isn’t the result of knowing “how to remodel a house.” It comes from knowing whether or not to remodel that house.
Success comes from deciding where to pinpoint your time, energy and money.
People often tell me: “I want to invest, but I’m afraid of making mistakes.”
Here’s the thing:
It’s okay to make small mistakes.
As long as the Big Decisions — like choosing the right property — are correct.
____
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Thanks Paula!!!
I’m still not ready to take the plunge. Real Estate looks like it might be cheaper in Houston than Atlanta but there is no way I could get those kinds of rates on insurance and lawn care. Breaking down the time commitment was the most helpful part. Appreciate what you do!
Perfect! That’s exactly my goal: help you make a more informed choice about whether or not it’s for you. Real estate isn’t for everyone — and that’s great! There are many roads to success. 🙂
Quick note about the lawn care + insurance costs: The lawn care is for a teeny-tiny lawn (a little postage stamp of a lawn), and the insurance is for a super-cheap house. That helps keep those costs down. 🙂
I pay much higher insurance rates and taxes on my houses and still do okay. Don’t be afraid to not get started because the numbers aren’t amazing. We have really small margins and still do great. We don’t offer lawn care, etc and are markets are okay with that!
My dream has always been to sit back like you and collect residual funds from rental properties. So glad you shared this for they are many people who have nothing but negative talk about owning rental properties. Love to see that it’s not an easy process but very achievable.
Thank you Petrish! 🙂
I totally agree! We own 7 soon to be 9 rental property and it has been VERY financially beneficial.
Thanks for your article. This is truly inspiring to see someone else working towards financial freedom like me!
Cheers
MrRicket
http://www.myricketyroad.com
Aha! There’s the connection between real-estate investing and stock investing I’ve always wanted to express! “Pay attention, since you make your money going in. Otherwise, you’ll lose money getting out.”
Yup, fine print’s kinda wild. Little touches like that are why I enjoy reading your blog. 😀
Hi Paula!
It’s great to see already how you have ups and downs, from a 6K month, to 2k, and how the real number will ultimately sit somewhere in the middle.
I’m 26, a homeowner since I was 22, and starting to really get into the idea of owning rental properties. Right now I’m just educating myself as much as I can so I can put a plan into motion in the next few years, spreadsheeting hypothetical scenarios away into oblivion.
I have a question regarding how you deal with the very large, big, ticket items and how you factor them in, such as a new roof? Even with a good home purchase and avoiding any immediate problems at the start, all of these things come around eventually. A kitchen remodel can increase rent, but working heat/water/roofs are expected, you can’t exactly charge extra for them.
When I’m trying to model fake scenarios and understand the financials of how it could all work, this is what I don’t know how to rectify. It looks like one item, no matter how necessary, can eliminate any hope of profits for many months at a time. Am I looking at this right and it’s just something to accept as part of the inevitable lows, or am I missing something?
Also, your comment about having to spend time/$ on evaluating your business location caught my attention. Many of us may already be aware of the tax implications of our typical 9-5 salaried jobs and primary residence home-ownership, but be completely lost as to what changes on the income & property tax side of things when it’s through a business. If you don’t already have a post on this**, it would be a topic I know I’d be really interested in. For me, it’s the scariest part when you’re trying to consider the financials of jumping in, since it’s what I know the least about.
If you get the chance to answer this, thanks!!!
**I’ve definitely binged on so many your posts, but I could have missed it!
Hi Annie,
I love the phrase “spreadsheeting … into oblivion.” That’s kinda poetic. 🙂
Here’s how I handle big ticket items:
As background: Big-ticket items fall under two categories. One is called capital expenditures (capex) and consists of elements like the roof, gutters, windows, siding, HVAC, etc. — replacements that are necessary but don’t increase the rental income. The other category consists of any aesthetic upgrades that can boost rent and/or lower vacancies, such as upgrading the kitchen cabinets and countertop, replacing white appliances with stainless steel, etc. (Technically both of these are “capex,” but for the sake of distinguishing between these in conversation, I tend to refer to one as capex and the other as remodeling/upgrades. You could also describe one as capex and the other as forced appreciation.)
A a general rule of thumb, assume one percent of the home value will get gobbled up by these big-ticket items. In other words, a $100,000 home should hold a budget of $1,000 per year, or $83 per month, for these big-ticket expenses.
Obviously there are huge flaws with this rule-of-thumb (home values fluctuate based on market forces, but the market doesn’t affect the lifecycle of a roof), so take it with a grain of salt. Investors tend to use this because it reflects the idea that a more expensive home will have (1) nicer finishes, and (2) a larger footprint, both of which will be reflected in the capex budget.
I wouldn’t think of it like this.
One of the flaws with looking at monthly, quarterly or even yearly profit/cash flow reports is that it can narrow our focus to a specific timeframe. In reality, real estate is the long game.
If you spend $25,000 on a roof, and that roof lasts for 25 years, then the roof costs $1,000 per year. Yes, it’ll wipe out your profits in the specific year that you pay that bill — but by the same token, you get a “free” (prepaid) roof for the next 24 years.
The better vantage point comes from zooming out and looking at the big-picture view. Windows cost $12,000 to replace and last for 24 years; this costs $500 per year. The carpet costs $2,000 to replace and lasts for 6 years; this costs $250 per year. Crunch those numbers down into the monthly view (in this example, $83/month for roof, $41/month for windows and $21/month for carpet), and you’ll see how much these big-ticket items cost every month.
That’s why I like the rule-of-thumb that encourages you to budget annually (or monthly) for these expenses. This forces you to account for these expenses even in years when you’re not purchasing these big-ticket upgrades.
I actually LOVE paying for big-ticket items, because it means I don’t need to worry about paying for that item again for decades. 🙂
Paula,
Thanks for sharing the details of your books. I forward to these posts. I like your philosophy on things and I really like when you support them with the numbers.
I’m still having trouble with how you track CapEx. I have 2 rental properties in the SC. I own the properties free and clear. I treat CapEx as an expense and I set aside $200 per month for it. So, for one of my rentals the monthly numbers would be the following:
Income ((Monthly)): $850
Expenses (Monthly):
Insurance: $71.58
Property Tax $108.20
Lawn Care $50
CapEx (monthly set-aside) $200
Total Expenses: $429.78
Net Income/Cash Flow $420.22
May be I’m missing the point but I don’t see where you are taking CapEx into account. Are you accounting for CapEx at the end of the year?
Frank,
That’s a great question. This is a cash flow report, not a profit-and-loss report (despite the title that’s baked into the bookkeeping software). Cash flow, by definition, doesn’t include holding cash reserves for future expenses. That’s accounted for within overall capitalization rate calculations.
If I held a monthly set-aside for CapEx, I’d then have to SUBTRACT costs like (1) paying for the stove and (2) paying for the refrigerator, both of which are documented in this month’s report. Otherwise, I’d be double-counting these expenses — once when I set aside the cash reserves, and again when I tap those reserves.
That’s why the point of these reports is to show cash flow volatility. Some months, capex will cause my free cash flow to contract into small numbers, even into the negatives. Other months, I’ll have no capex expenditures and walk away with ample cash flow. By documenting this month-after-month, my readers can witness that volatility and understand how to plan for it.
Paula,
Thanks for clarifying this for me. I really appreciate you taking the time to help me on my real estate investment journey. You rock!
You’re welcome, Fred! Thanks for reading and being part of the community! 🙂
I can’t tell you how helpful this post is and I’m definitely looking forward to the series! My husband’s high school and college job was rental property maintenance, and since then he’s always been interested in managing rentals. But we’ve never wanted to trade time for money in an inefficient sense. So thanks for sharing the real deal about this type of passive income.
Thank you Kalie! I’m glad it’s helpful! 🙂
I noticed that your first RE investment was a triplex but subsequent ones were singles, was that a change in strategy or just what the opportunities were at the time?
Hi Jim –
It just reflects the opportunities at the time. Most of the time, I looked for duplex/triplex/4-plexes — I’d prefer to own those — but I found better deals with single-family homes. Bigger selection = more diamonds in the rough. 🙂
Totally agree with Paula! I had originally wanted to buy multiplexes but I found single family had better returns in better areas with easier demographics. So I highly recommend you look at everything including the ease of tenant population management, renting out the house and maintenance costs. One of the things I found with my higher end single family rentals was the smaller margins also meant much fewer expenses when comparing to my friends who had multi-plex in tougher areas.
I have been looking for multiplexes but at this point single family homes have truly made much more sense.
Very interesting points about higher expenses in tougher areas, definitely something that isn’t obvious on the front end but makes perfect sense.
I suspected the change was the result of opportunities, just wanted to confirm it. 🙂
I first went the route of multi-unit rentals, too. But I found that single-family houses are easier to pick up in foreclosure, and they also seem to sell at a higher premium when it’s time for me to cash out.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
Hi Paula!
Thanks for such a great post. Quick question, what are you using for the accounting software in your screenshots?
Hi Bry,
I’m using a service called Less Accounting. Use the coupon code “Afford Anything” for a free month. (It’s normally $36 per month). Enter it under Settings >> Billing.
I like them enough that I contacted them to ask if they had an affiliate/referral program. They said no. Then I asked if they could hook up my readers with a special discount, and they said yes. So — you get a free month, and I get $0 from the deal. 🙂
Another option, if you’re shopping around, is Xero Bookkeeping. I’m testing them out (they have a free trial) based on the recommendations of several friends. The jury is still out, since I’m new to their software — but so far, so good.
One thing I don’t recommend is manual bookkeeping through a spreadsheet. I did this when I first started investing, and my books were a complete mess. The problem with using a spreadsheet is the lack of automation. Manually inputting everything is a pain, and if you overlook just one expense, the whole system gets derailed.
Hope that helps!
Hi Paula – I was curious if you had any additional feedback on Xero or Less Accounting. I’ve been contemplating a few services, but wanted to see if there was one that you might reccommend. If there is an affiliate link for you, even better.
Thanks!
i own a portfolio of high yield int. stocks…..over the last 11 years i have done ok……after
tax i come to about 3.2 yield net……
there are however some draw backs…stocks like KMI are down 60 percent and could scrap the yield
Amazing detail Paula. I’m not a real estate owner, or in the market for real estate even but I love reading about the actual income and expenses you experience. Thanks!
thanks for the transparency.
When I first saw the headline of over $10 grand in a month, I thought it was post all expenses! But still $2 grand a month is not bad at all. I think you’re right on the assumption that real estate investing is right in the middle of the late night tv gurus and the naysayers. The trick is as you said finding the right property, and negating the expenses that come down the road.
When I first got started into this, I didn’t factor in vacancy or capex into my equations. The first investment property I bought was extra inventory from a homebuilder that was trying to sell it at a discount. I bought it in late 2006, thinking I had “instant equity”. And……. the mortgage was only a “little bit more” than the projected rents, but hey.. I already had equity and housing prices were going up right? I couldn’t have bought at a worse time. The property was eventually rented at below projected rents; I had several tenants that were less than stellar, the a/c duct needed work twice, and I had several months of vacancy between tenants.
This property was eventually inhabited by an amazing on-time paying tenant for the last two years, and I refinanced it a couple of years ago via the HARP program (I had no idea my mortgage was owned by Fannie Mae until someone told me to look into it). It still is cash flow negative because I refinanced at a lower rate without putting any money into closing costs. It’s just not as cash flow negative as when I first bought it. I had no idea about the 1% rule or the 50% rule that I found out about on Bigger Pockets.
That said, I bought two more rental properties that meet that 1% rule and these are cash flowing nicely, which help negate the negative cash flow from that property bought in 2006; the net result being positive cash flow.
I think it’s so important to bring transparency into the picture. We all make mistakes, but the key takeaway is to learn from them. I absolutely believe that one can make money from real estate; and to do it consistently. But you have to do the homework. The numbers have to work. You have to have reserves. It definitely is not easy.. but you can make money doing it.
When I started investing — when I bought the first triplex — I also didn’t factor vacancy into my projections. Oops.
And worse, I didn’t factor the cost of labor for any repairs/maintenance (I assumed we’d handle all the work ourselves), I didn’t factor for management (I assumed we’d manage it ourselves), and I valued our time at $0. Whoops!
Back then, I also didn’t know about the One Percent Rule, or the 50% rule of thumb, or how to calculate cap rate, or any of the other equations and data that I’ve learned in the years since that first investment. I’ve learned a lot since then.
My hope is to spread this information so that more investors — especially first-timers or ‘accidental landlords’ who have one or two poorly-performing properties — can develop the skills to shine.
Congratulations on learning the ropes and buying two more properties that meet the One Percent Rule. That’s fantastic! 🙂
Paula, O.K. – You convinced me, properties are the way to go. My Curmudgeon Newsletter is now
defunct, I had no idea how cheap these people are ! Your $2,209 a month works for me for two hours work. My wife can put in the time, she may balk but over time she will be O.K. with the extra work. Doggone you are a smarty. While in Atlanta for Christmas, in your spare time you have my permission to pick up a few extra properties for moa.
When I married, at the altar I promised my wife she would always fart through silk. I now need this extra income to fulfill my promise. I know you believe in romance so thanks for the help.
Thanking You in advance and “Merry Christmas”.
Frank Albergo
Estero Fl.
Haha! Frank, I look forward to your comments. Each one is always better than the last. Merry Christmas! 🙂
I may have missed the earlier article on your management company. What criteria did you use for selection? What is a reasonable rate to pay? The most expensive may not be the best….etc.
Fun articles!
Hi John –
That would require an entire blog post to answer, but in a quick nutshell: (1) get references from trusted investors; (2) look for people who specialize in the specific neighborhood and housing class that characterize your properties; (3) if you invest across multiple neighborhoods, use different PM’s for each neighborhood; (4) hire multiple PM’s and keep only the best.
Here’s a review I wrote of a good book on property management — the first half is about DIY management and the second half covers hiring criteria.
If you are so inclined, I would definitely be interested in a post about the property management side of the business and how you incorporate that into your strategy.
Thanks for what you do.
Hey Paula,
Thanks for a great post! I always look forward to reading your blog posts and your insight on real estate investing. My question to you is do you look for properties with tenants in them where the situation is “Turnkey” or do you prefer to find your own tenants after acquiring the property?
BTW: I haven’t seen you on Periscope lately. You should scope when you are in Atlanta looking for the 6th property. Maybe take us behind the scenes on what might be a potential investment or properties you would stay away from.
I am an investor with 7 soon to be 9 properties (closing end of next month). I personally prefer finding property under value (short sales, foreclosure, repairs needed etc), fixing the issue and than installing my own tenant. This allows me to not only find my own tenants but also get instant equity through finding great deals.
What would be the average annual repair cost of an apartment in a big condo building? Seems to me that it should be a lot lower than 1%. I doubt the roof will ever need replacement. Who is in charge of replacing the windows if broken, let’s say during a hurricane? The HOA, or the individual owner? Is there any rule of thumb for these properties? 1/4 % , 1/2%, perhaps?
Also, can you do an article on rent increases in the future?
Thanks!
Kudos to you for being so sharp! I wish I had been as smart at your age.
I love reading these posts. They are interesting and yet very in-depth. Awesome job! It is crazy how much income can fluctuate though and I’m glad you note that you spent tons of time and work without making any money in the beginning. I think this is what people forget when they think they can “get rich quick” by owning property.
I think it’s been 8-10 months since your last house purchase, and it seems like the Atlanata market is HOT right now. Do you think you will look outside ATL for the next house if you can’t find a great price, or do you prefer to keep everything in the same general area?
Hi Paula,
Thanks so much for writing these blog posts. I particularly love the analytical take on real estate investments (yay math!)
My fiancé and I decided to purchase a duplex in a desirable Atlanta neighborhood. We live in the 2bed/2bath unit and rent out a 2bed/1bath unit. We were drawn to the flexibility that it would offer. We don’t need much space and in a few years we could either (a) buy a new single family, rent out both units; (b) convert into a single family home; or (c) sell the duplex and buy a single family home. Would love to explore option A, if finances allow.
It feels like we’ve been hustling non-stop for the last 8 months. First, we hustled to renovate the unit in preparation for finding tenants ASAP. Then we hustled to try to try to push an appreciation and go after a refinance prior to the anticipated interest rate increase. Oh and all along, Murphy’s Law has been working against us (stove got eaten by rats, HVAC broke, roof leaking). Oy vie!
Do you have any advice for owner-occupiers? There was a fair bit of deferred maintenance on the property and fascinating renovation/design choices. (Our HGTV renovation show name would be the ‘DIY Horror House’). We are interested in having a nice space to enjoy, but we don’t want to pour in too much money with fancy renovations.
Also, in the coming months it would be great if you could write about the tax implications of owner-occupied units or straight rental units, and how that might influence the decisions you make about your rental unit (repairs vs. replacement).
Thanks!
Kate
Love the articles. Would you please take us on a step by step series of article of what/why/ how you look at a property. The obvious, not so obvious. What is important in remodeling a kitchen, bathroom, etc.?
Thanks, Brent.
This is really insightful, thank you for posting it!
Even though a lot of expenses cut into your profit, it’s still a ton of money!
Hell, $2200 is still more than I take home from my day job working 40 hours/week.
When you purchased your homes, did you put a down payment on each of them? If so, how much?
Hi Lindsay,
Thanks! If you follow the links in the article to each specific property, you’ll be able to read the story of the purchase of every property, which includes all the down payment, financing and analysis details.
Thanks!
Hi Paula,
I love your transparency. I believe this exactly what folks need to see. All too often main street media portrays successful people in this Hollywood fantasy and never show the actual work that goes into being an entrepreneur. I imagine if I asked someone to come work for me and that I would guarantee to pay them $100,000, but at the end of the year, they may do it. But, if I told them that there was no guarantee, they would probably use words I never heard before.
I am currently working on my own plan where I utilize more of my income for investments than I do for non-essentials. I am an Option trader and I basically do what you are doing, only my profits aren’t as large. My goal is that I will be able to utilize all these profits to break into the real estate investing market, as I believe that it one of the few investment options that will always be in demand (people have to live somewhere). It is awesome that you share this information so I can avoid pitfalls that you unfortunately hit, and I can’t thank you enough.
Congrats on another successful month!
Peter
Hi Paula,
I discovered your blog a few days ago after listening to your interview on the radical personal finance podcast. Since then I think I’ve read almost half of it. I’m loving the idea of passive income, for obvious reasons.
Is there a book or two you might recommend for someone who knows very little about real estate investing but is interested in getting started?
Thanks!
Hi Ben,
Thank you! I’m glad you love the website! It’s funny you should ask about books — I’m publishing a blog post this Monday, Dec 14 on my 14 favorite books. 🙂
Please tell us that $1400 for a CPA is an annual fee.
Yes, it is! 🙂
Wow. Amazing post. I love that you focus on positive cash flow and not capital gains. Something that very few investors over here (Australia) understand.
We are currently under contract a buy a duplex which will close mid January. We decided against another one as for some reason neither of us was comfortable with it. Not sure if you ever follow your gut but we are hoping that our research has paid off and that this one will be the “right” one. No current bad feelings just the anxiety of dropping a ton of cash into one investment. If all goes well we should cash flow $1,000 per month. Fingers crossed everything goes according to plan, or at least close to the plan as I know something always comes up.
i am a real estate agent in hoboken NJ, i sell over 75 properties a year and been doing this for over 5 years. ive helped many clients find great investment properties but i could never recommend a website to get them on the right path for “real” information….im happy to see one “real” real estate investor like you put something like this together that is TRUTH and no BS, so many clients get caught up in the “you can make X but please come to my seminar first” lol. i will recommend this article to my novice and experienced investor clients and i really appreciate you for taking the time for writing a thoughtful and in depth look at what it really means to be a true real estate investor
i look forward to reading more of your articles and following your success 🙂
Thank you Dean! 🙂
Investment in Real-estate brings you 5% of income on year basis, this is law and works everywhere.
After five years in renting business I realized that only profitable way to renting is to rent empty apartment.
Give 4% lower rent price of market average, but sign contract with occupant that he will leave apartment in same condition as it was on first day or he should pay fee, 4 months rent.
Hi Paula, found your blog yesterday and stayed up late at night reading 🙂 Great posts!!
I have 2 questions on this post, related to: Success doesn’t come from learning “how to build a deck.” It comes from learning whether or not to build a deck.
1. When you said the what matters more than how, is that because the how can be outsourced to a contractor easier than you can spend your own time doing the remodeling?
2. How can I learn the “what to do” items that you were talking about? Should I be looking at interior design courses? Or home architecture? Or any books or other good sources?
thanks for your time
Joey
Hi Joey,
Welcome to the community! Great questions.
1) When I said “whether or not” matters more than “how,” here’s what I mean: You have limited time, energy and money. You must make choices about how to spend these limited resources in the highest-and-best manner.
Yes, building a deck might result in lower vacancies and/or higher rent. Yes, you might get a return on that investment. But what opportunity cost comes from that decision? By building a deck, are you forgoing the chance to make a down payment on yet another rental property?
Anyone can learn how to build a deck, but developing judgment is the quality that separates successful investors from others.
2) As far as the “what to do” — e.g., how to build a deck — I like Home Depot’s line of books (at the beginner level). Home Improvement 1-2-3 is a good overall primer, and they also have good specific books on Wiring, Plumbing, and Kitchens & Baths. I’d recommend starting with these book for a basic overview, and then turning to YouTube for specific, pointed questions (such as “how to install a repair flange.”)
Thanks Joey!
I would like to see how much rent you collected from the first tenant (versus the rent you are currently collecting.) I think that would be a more accurate reflection of your investment analysis.
Hi Theresa —
When we bought the triplex, the first tenants paid $2,550 per month, plus in addition we also lived there “for free” (no out-of-pocket housing costs). That breaks down as $1100 (Unit 1), $750 (Unit 2) and $700 (Unit 3). (Those are the rates based on the first leases that we personally signed; not the grandfathered rates of the existing tenants at time-of-purchase).
These rates came BEFORE we put $150,000 of renovations into the building, updating it into a Class A property rather than the Class B- property that we had originally purchased. After the renovation, we were able to raise the rent to today’s rates. So when you analyze the property, factor the “acquisition price” at $225k at time-of-purchase, and $375k today.
The original rental prices for Houses #2, #3, #4 and #5 are all listed on the original blog posts that announce the purchase. There are links to all of those articles in this blog post, located in the bulletpoints just under “November gross income.”
Cheers,
Paula
It goes to show that real estate is the way to go for truly passive income. Even though you have expenses eating your profit, some of the expenses are annual 1 time costs. Im looking to increase dividend income this year which is fully passive, and eventually dive into real estate in order to grow passive income. $2200 for 2.5 hours sounds really sweet to me. Good luck next month.
Hi!
I’m a single mom recovering financially.
I’m happy to report I’m 3 months from being rent free.
And at that point I’ll be happily living with 50% of my income.
I’m renting and I have been feeling iffy about being a home owner like I did during my marriage, and I found you! (Don’t worry I wont sue you if I’m wrong)
I am currently renting (ahhhhh) a small studio for me and my son and we call it home. Rent is a comfortable $700 in Fort Lauderdale, water included. Nice uh?
So what I don’t feel iffy about is considering the purchase of a rental property (my first ever!)
Do you have any tips on how to chose one and how to be in the best position to turn a profit or at least break even?
Thank you thank you
P.S. My name is Paula too :p
Oops debt free, not rent fre!
If the property management company doesn’t take care of squirrels or replacement of refridgerators, what do they do for the money you are paying them? A short explanation would be great and a longer bond post would be awesome as it seems others are wondering about them, too.
@JudyMae — Our Class C properties are managed by PM’s, but we self-manage the Class A properties. The squirrel problem is happening in a property that we manage ourselves.
As for the refrigerator:
We wanted to put a larger refrigerator in that space, since that creates a bigger “wow” factor. (The previous fridge was too small and unimpressive.) Under normal circumstances, we’d email the PM, tell them to get the dimensions of the opening from the tenant, and then place the order. But since we had the tenant’s phone number anyway (and we have a good relationship with that tenant), it was faster and easier to just contact her directly.
This transparency is refreshing, to say the least. It’s also really cool to see it all broken down like this. Great post, and congrats on your success – $800+ per hour isn’t too shabby 😉
Hey Paula – Found your blog via J Money at Budgets Are Sexy, and am now pouring through your articles. Great stuff. And you live in Vegas, too? Even cooler. Keep up the good (inspirational) work.
Thanks PJ! 🙂 And yeah — I LOVE living in Vegas!
Hi – New reader currently binge reading through your blog posts. One question that stood out for me in this post, and something I haven’t seen you write about yet, came from your comment below.
“…to advise us on whether to structure our business in Georgia or Nevada….”
I took this to mean that you have your properties held in a LLC, is that correct? I’d be very interested in hearing more about your decisions to go that route if you’re willing to share. Hopefully it’s a topic you already have on your radar and I’ll just have to be patient!
Hi Paula,
Thanks for your eye-opening website with full details of your income and expenses.
If you don’t mind sharing, what I would like to know is
1) what is your downpayment on the triplex,
2) the amount of loan you took
3)interest rate of the loan and
4)the monthly installment
5)what is the loan period.
6) Can foreign property investors participate in this kind of investment?
Thanks very much and keep up the good work!
Hi, nice truthful blog!…im curious if you are aggressively trying to pay off mortgages or do you take all profits and allocate toward future downpayments? If you think you are doing well now imagine not paying mortgages!?
Do you have advice for renting out 3 bedrooms in a single family home in NY?
I will live in the basement, while room mates live upstairs in single family ranch. I am planning this for the new year 2018. What are your thoughts?