Hey! I know you love numbers, so I’ll cut to the chase:
Last year, our rental properties earned $125,618.49 in gross income.
After expenses (including the mortgages), the properties netted $43,211.67.
This is our passive income from real estate in 2017. It’s the cash flow the properties put in our pocket last year.
And this is how we’ve reached financial independence through real estate.
This is not our only income. We both make money in many other ways (including from this website, the podcast, and the YouTube channel itself.)
But we know that we could do nothing — we could lay on the couch eating Cheetos in our underwear for a solid year — and this passive income would still appear in our bank accounts.
Thanks to this passive income, we have freedom from needing to work.
We’re a young, healthy couple with no debt except our mortgages. We live in a low-cost-of-living area with no state income tax. We don’t have fancy tastes.
We can breathe a sigh of relief, knowing we have a foundation of $43,000 in passive income.
And that influences the decisions we make, such as:
- “Should I accept this weird, wacky, wouldn’t-recommend-it-to-my-grandma company as a podcast sponsor?” (No. I walk away from plenty of offers.)
- “Should I choke this website with ugly banner ads?” (No. I wouldn’t do that to you.)
- “Can I spend the next three weeks traveling in South America?” (Yes. Because why not?)
It’s easier for me to talk about the properties than to write about them, so I made two YouTube videos.
The first video is a 2017 Year-in-Review. (Yes, I realize I’m releasing this in April 2018. Better late than never.) This describes the passive income from the rental properties, as a whole, across last year.
It’s 7 minutes long, and perfect for understanding the big-picture highlight reel.
(You can watch it at 1.5x or 2x speed, if you prefer. Click on the “settings” icon at the bottom-right corner of the YouTube video to adjust the speed.)
The second video gives a detailed, month-by-month breakdown of the income and expenses for the rental properties from June through December. It’s perfect for a getting a deep details-and-numbers perspective into our rental properties last year.
(And again, you can watch it at 1.5x or 2x, if that’s your style.)
I also have videos here and here that cover a detailed breakdown of the first five months of 2017.
… And this means you get a backstage, behind-the-scenes look at the EXACT numbers inside of our rental property investments.
How much did we make? Spend? Keep as passive cash flow?
Did we experience months that went deep into the red? (Spoiler alert: yes, and big-time! Watch the June-December video for the gory details.)
New to this community? If you have background questions about the rental properties, such as:
- How many properties do you own?
- How much did they cost?
- How much are they worth today?
… you can find all the answers in this ultra-comprehensive Real Estate FAQ HQ.
Thanks and enjoy!
Julie
Paula, I love this! Question: my husband and I are 55 and 53. Are we too old to get started in real estate investing?
Paula Pant
You’re definitely not too old! You’ll be able to enjoy the benefits for at least 40 years, I hope! 🙂
Think of it this way: 10 years from now, you’ll be 10 years older, regardless. Will you be in a better financial/life situation at that time? Or not? 🙂
Julie
Thank you! I signed up for the VIP list so I’ll know when your course is ready!
Didi
“We are never too old to set another goal or to dream a new dream” (C.S, Lewis)
We are never to old! Never!, until he next day of our death. I really loved your answer. Thanks Paula.
Accidental FIRE
Great job on the rentals but also on the YouTube videos. You manage to make what could be a bland topic full of numbers engaging. Kudos!
Paula Pant
Thank you so much!! That was exactly my goal … to make numbers entertaining!!
Brian Tremaine
I’m surprised my 5 holdings match your numbers very closely, $41k net income on $130k gross revenue on 6 properties. My dilema is my wife & I are in our late 60’s and have held these properties since the early ’80’s. The properties are all 100% depreciated. At my age I don’t want to be in a high leverage situation but my properties are worth a lot (Silicon Valley & Hawaii) and I don’t know what to do as an exit strategy. Any ideas?
FIRE everyone.
Am I the only one who didn’t understand his situation?
1 Are the houses paid off or do they still have a huge mortgage?
2 Is the concern that by selling them you will lose a good chunk to taxes due to 0 cost basis?
Naren Mistry
What’s your goal for the exit strategy?
Etienne
1031 exchange the paid off high value properties into several lower value properties in good markets will significantly increase your cash flow.
Julieta
Paula just found you thanks to “physician on fire” blog, i’m having a blast with your blog thank you so much. I’m a mexican physician, since the interest Here in México rate from 8.5 to 12 a year on banks for a house, what I did was buy pre sales, right now i’m paying the second one and renting my first on airbnb, I’ve been leaening a lot and your site is helping me very much! Please write about pre sales condos! Thank you again for your time
Randy R Bloch
1031 into NNN lease or DST. You can avoid the taxes and make 6% without any landlord headaches.
Ramona @ Personal Finance Today
Looking forward to your course.
Really cool job, this money is already enough to be more relaxed when it comes to your money and what you can do each day with it. Really great job.
Paula Pant
Thank you Ramona!! 🙂
Nikki
Hi, Paula! I’m a long-time follower/lurker and love your videos!
I have one question for you (well, maybe a few questions…)! With the volatility that you see in your net cash flow each month, what is your approach to taking income out of the business? Do you have a specific amount that you transfer out of your business account into your personal account each month (i.e. “paying” yourself a set monthly wage)? Or, do you wait until the end of the year and pay yourself one lump-sum payment? Or does it all just sit in your business account until you need money for personal reasons and then pay yourself?
Thank you for all the information and for the great videos!! I always get excited to see another post pop up! 🙂
Paula Pant
That’s a fantastic question! First, I keep a buffer of 3 months of gross income (approx. $30,000) as an “emergency fund” for the properties. This way I’ve got a cash cushion to lean on, during those volatile swings.
(This is **in addition to** our personal emergency fund.)
Second, I let money pile in the account until I want to make a big-ticket purchase … which is usually either a major renovation or another house! My strategy for buying houses is to let-my-houses-by-houses. I call this the magic of compounding houses. 🙂 Eventually, enough money piles in the account that we can make a big renovation in cash or purchase another property free-and-clear. This is how we’ve been able to use cash for so much of our real estate investing.
Happy you’re enjoying the videos and new posts!! I’m going to do my best to keep ’em coming!
Paula Pant
D’oh, I misspelled “buy”!
Let-my-houses-buy-houses! 🙂
Nikki
I love it!! Compounding houses is a great tactic!! 🙂
REnewb
Congrats Paula! Great improvement over last year. Hopefully this what an average year looks like.
Paula Pant
Thanks!
One thing that makes these reports challenging is that after enough cash piles up in our account, we either use the money to buy another home in cash (like House #5), or we make an optional upgrade that will boost our income on an existing house (like we did here – https://affordanything.com/im-maximizing-rental-income-modern-renovation/ ) . I’m not talking about ordinary CapEx, I’m talking about deciding to reposition a home from Class B to Class A-.
When we make an optional upgrade, it’s counted as an ‘expense,’ so it makes the cash flow reports look much lower than they otherwise would be.
In reality, though, the business has cash flowed strongly, and we’re reinvesting the profits to boost the income further. If we put this money into buying another house, this wouldn’t affect the cash flow report. But when we put the money into upgrading an existing home, it makes the bottom line look lower.
I think most business owners will understand this — the same happens with Afford Anything income/expenses, when I reinvest my online income into upgrading the podcast booth, for example, or redesigning the website.
Gabe Sanders
Real estate remains one of the best ways to gain financial independence and wealth. One just needs to learn the proper way to achieve success.
Troy Bombardia @ Bull Markets
I think some people see real estate investing as a holy grail. It isn’t. Rent prices and real estate prices go down during recessions, so it certainly isn’t recession proof.
That being said, way to go! You’re doing very well for yourself 🙂
Rachel
The thing that jumps out to me about this – and please correct me if I’m wrong – is that $125k in income across 7 units comes out to about $1489 in rent per month per unit. That seems high to me. I know I’m in a low-ish cost of living area here, but a 3/1.5 in this market would go for about $800 in a mediocre part of town (C+), of course slightly more in a nicer part (I have a 3/2 I think I can get $925 for). It makes me think I’m going to have to have twice as many units to get the same cash flow. And that’s not accounting for vacancy and whatnot, so likely your average rent is higher than $1500/month, unless you have other income coming in from the units, i.e, parking, laundry, etc.?
Paula Pant
Correct, the highest rent from a single unit is currently $2,915 (for a three-bedroom unit) and the lowest rent, I believe, is around $900. The most important factor for this — more so than the number of units you’d need — is the price-to-rent ratio and the cap rate for the properties you buy.
If you can find properties with STRONG p/r ratios and excellent cap rates, you won’t need as many properties. But those properties take a LOT of searching. I am not exaggerating when I say that searching for high-quality properties was a monumental task. It can be done, but it requires a lot of time and effort. But the payoff is worthwhile!
Maryanne G
Paula, I’ve been renting out 2 bedrooms in my 3 bedroom where I live, their rent covers my rent so I live for free. I’ve done this for 2 yrs now. I just found a 6 bedroom w/living room and office room, in my city for twice the price of what I pay for my apartment here. Theres opportunity to rent out 6 bedrooms, one of which has 2 rooms connected to it that can be part of a 3 room deal. Do you thi k I should rent it to standard month to month people, or do Airbnb? The initial investment would be alot more forAirbnb, but I could make more mo thly. What do you think? And have you thought about renting places and re-renting individual rooms? Then you dont have to own. I’d love to hear your opinion. Thanks, Maryanne
Erin @ Team Afford Anything
Hi Maryanne – you might have a better chance of getting an answer if you submit your question as a voicemail for Paula to answer on her podcast. You can do that here, if you’d like: https://affordanything.com/voicemail.
ACP
I love the formation of your real estate empire…but are you accounting for opportunity cost (see your rent/buy article) as well as net cash flow? Without knowing your net worth commitment to real estate it is hard to judge whether the 43K net return is average, good, very good, etc.
By my rough estimate based on your income (assuming a very good 8-10 rent to buy ratio) and subtracting likely mortgage level (from a previous post where you listed mortgage expense cost) you’ve somewhere between 500K to 1M in net worth tied up in real estate.
That amount in a REIT would return 20-40K per year (4% return on a residential REIT) or in a diversified stock portfolio (8% average return) would be 40-80K…both of those literally doing nothing at all, not even answering phones let along managing property. I’m not suggesting abandoning property ownership as leverage can amplify your capital returns…but typically to get real estate to beat a diversified portfolio from a total return standpoint you need dangerous levels of leverage or gains through economy of scale with dozens of rentals (though you’re getting close to your first dozen!).
Paula Pant
The total acquisition price for all the properties (purchase price + upfront repairs to get it rent-ready for the first tenant) came to about $690,000. I’ve posted a spreadsheet on the FAQ HQ page that details this (it’s the first spreadsheet as you scroll down, column D).
https://affordanything.com/real-estate-investment-cash-flow-report/
Current market value, you are correct, is over $1M.
That said, we couldn’t invest the same $1M into a REIT or any other index fund, because that’s not all equity. That’s the market value of the properties, 3 of 5 of which we carry mortgage on.
Also, this $43k is only the dividend, or income stream, that we collected from the properties. It does NOT include equity gains through mortgage paydown (which comes from the tenant’s rent), nor does it include equity gains from market appreciation (which I don’t like to emphasize, because I think it’s a mistake to be too market-appreciation-focused.)
Of course, asking “what’s the opportunity cost” is always a great habit. 🙂
ACP
Cool…but I wouldn’t ignore market appreciation, while fickle it can be a powerful force adding a percent of return long term (maybe more if lucky). That being said, sounds like you are about to break into the economy of scale phase of your real estate empire. Once you pass a dozen properties your income and asset growth should accelerate (at least based on analysis of landlord historic trends). That level also protects against a delinquent tenant or other disaster that blocks a property income for extended time periods.
I enjoy reading the blog and seeing your success.
Paula Pant
Thank you, ACP! 🙂 🙂 I appreciate it!!
Codrut @ AboutStrollersBlog.com
Hey, you should release that course sooner, maybe a light version of it at a cheaper price… I know you want it to look perfect, but consider that people are eagerly waiting for it 🙂
Paula Pant
I agree!!!! 🙂 🙂
And thank you!!
Carlos S.
I agree. I would buy the light version and later upgrade to the full version when it comes out.
Rachel
Hey Paula – I’m really looking forward to your real estate investing course! Can you tell me your thoughts about how to get information on rental markets and real estate investing outside of your own state? We are thinking of buying something in a neighboring state (Nevada or Arizona) but need to gather much more info on location and rental market. Thanks!
Paula Pant
That’s a VERY long answer, but if I could distill this into a few sentences:
– First, choose 1-2 cities or towns
– Visit those places in person. Drive around. Talk to investors, agents, managers.
– Based on that research, narrow your focus to a highly-specific geographic area (e.g. a specific zip code, or even a specific small subsection of a zip code)
Then become an expert in that zip code — search the internet to find the properties / players in that area.
That’s how to do it!
That’s a short answer to a question that requires several hours of instruction. But that’s the framework for how to make it happen. 🙂
James
Paula –
As always thanks for being transparent in the numbers. Regarding the mortgage numbers, can you expand on the terms (10,15,30,etc)?
Paula Pant
Almost every loan is 30-year fixed-rate, except for one, which is a private loan with interest-only payments.
Ade
Hey Paula, Your Real estate Course coming up — Would it be applicable to someone abroad as well? I’m keen to know my onions
Thanks
Paula Pant
It doesn’t cover anything specific to foreign investors, like currency exchange, or visa requirements, or tax reporting if you live overseas. But the broad, high-level thinking around how to analyze and find properties are applicable to anyone.
My suggestion – sign up for the VIP List (it’s free), and as the course nears completion, I’ll send more info about it, so you’ll have a better idea of whether or not it’s right for you.
https://affordanything.com/vip-list
Philip Stanfield
Hey Paula thanks for all the nitty gritty details! I’m still struggling to find the potential future rental properties. Beyond the mls where would you recommend I start looking for good deals?
Kel
I follow BiggerPockets as well as your blog (clearly interested in real estate and financial independence!) but receiving so many mixed messages regarding what to do/look for — most recently “we’ve done the math: you can’t make money on $30,000 houses. here’s why…” I’ve read “think pieces” from many alleged experts and my head is spinning.
All that to say – I can’t wait ‘til your course launches!
Rae
Not to say that’s not a good net, but, why did you only keep 1/3 of your gross, that seems low. We average 65% + retention and a 30% or less tax bracket.
Daniel Hering
Hey Paula,
I’m a nurse practitioner. I love my job but it does demand a lot of my time. I’d love to start investing in my first rental property in Las Vegas. I’m on your VIP list but in the meantime would you and your husband ever considering meeting up and discussing investment partnerships?
Jim
Thanks for the great post, I have 4 rentals but they are not cashflowing quite as well as yours. The income is $4450 per month, but my mortgage payments are $3900. They will however be paid off in 9 years. My interest rate is 4.5%. Perhaps I need to look into doing a refi, or just hang tight for 9 more years then my monthly income becomes $4450. Anyway, great post!
snowcanyon
Amazed by both your energy and your stress tolerance!
This (and your police action a few years ago) sound exhausting. I sold my happily cash-flowing property (no police actions, no vacancies) and am loath to return to the individual renter market. The headaches for me just weren’t worth the ROI; I might do commercial in future, but probably not residential. Just too much hassle and liability and the profit margins aren’t great.
The closer I get to FIRE, the more I appreciate my day job- hard to beat earning six figures a year working a day a week.
Jacques du Toit
Hi Paula
Great video – making financials very entertaining! And this is coming from someone with an accounting background 🙂
Is there any place where you break down the numbers per property, as opposed to the totals? I cannot seem to find anything on your website.
Erin @ Team Afford Anything
Hi Jacques – I’m not exactly sure what you’re looking for. Paula breaks down the numbers property-by-property on the second video in this post — the one titled “Volatile Cash Flow.”
As Paula mentions in the post, some of the much older real estate income reports can also be found here: https://affordanything.com/real-estate-investment-cash-flow-report/