Last month, one of our rental properties looked like this:
Today, the same property looks like this:
Renovating this rental property took three weeks, cost $13,648, and increased our rental income by $3,450 per year. We worked roughly 38 hours, spread across those three weeks.
Want to learn more about maximizing rental income through renovations? Read on.
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Welcome to the June/July 2016 Rental Property Report.
If you’re a new reader, here’s quick background:
Will and I own seven rental property units, all located in Atlanta. (We live in Las Vegas.) These include one triplex and four single-family homes.
One of my goals is to eradicate myths and misunderstandings around rental property investing, like:
- “You’ll be a gazillionaire!”
- “You’ll be in the poorhouse!”
I hear erroneous assumptions on both sides of the spectrum. Both are equally worrisome.
That’s why I publicly disclose the monthly income, expenses and cash flow we receive from our rental properties. I contextualize this by documenting the amount of time we spend managing our rental business.
I hope this transparency can help people develop realistic expectations and make more informed choices.
If you’re a new reader, please read the FAQ HQ, which explains the background in more detail.
With that said — let’s get started!
In this report, I’ll detail June and July’s numbers, plus describe last month’s bottom-line-changing renovation.
June 2016 – Real Estate Report
Let’s start in June 2016. We collected $9,603.50 in rental income after paying management fees, when applicable. We also received a big insurance refund that we were expecting, bringing the total income on the books to $11,521.01.
Here’s the June income breakdown:
Unit 1, Triplex: $2,750
Unit 2, Triplex: $1,490
Unit 3, Triplex: $1,295
House #2: $850.50
House #3: $1,273
House #4: $1,500
House #5: $445.00
Insurance Refund from May: $1,917.51
Total Income: $11,521.01
“Hey, why’d the House #5 income drop?”
Ah, cool story —
During a routine inspection on House #5, our property manager noticed minor maintenance issues: clogged gutters; damaged closet doors.
She hired a contractor, gave him instructions, and oversaw his work. She paid him directly, deducting this from our payout.
Here’s the kicker:
She didn’t bother telling us in advance, per our request.
Result? The work gets done without a shred of our time, energy or attention. Score!
I learned this time-saving tactic in The 4-Hour Work Week. The author, Tim Ferriss, explains that he used to sell consumer products. He hired a customer support staff, but he logged countless hours advising his team about how to handle specific, one-off scenarios.
Finally, in frustration, he emailed his team to say: “Keep the customer happy. If it’s a problem that takes less than $100 to fix, use your judgment … Fix these problems without contacting me.”
He offloaded hours of emails as a result.
The lesson? Empower others, in order to optimize your time.
Will and I applied this lesson to rental properties, authorizing our property manager to spend $500 or less without our permission. The worst-case scenario is that she makes a dumb decision, wasting $500. The best-case scenario is exactly what unfolded above.
Over the long-term, our property manager might spend slightly more (or less) than I might choose. But the difference is likely to be a rounding error. I’ll happily pay a little extra to avoid getting sucked into trivial decisions.
Here’s what I’ve learned through this:
If you’re grappling with a decision, ask yourself:
- Do I want the likely-long-term-scenario?
- Can I live with the worst-case scenario?
If you answer “yes” to both, take the leap.
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Back to the June 2016 report.
June’s gross income is $11,521.01, after management fees and minor maintenance deductions. What about other expenses?
Mortgage: $3,524.03
Mortgage, Part II: $583.33
Umbrella Insurance: $58.75
Materials for House #4 Remodel: $1,888.23
Water: $164.16
Home Depot: $63.38
Handyman: $100
Total Expenses: $6,381.88
This means ….
Cash Flow: $5,139.13
Wahoo! The rental properties boosted our bottom line $5,139 in June.
How much time did this consume?
Will and I, combined, spent a total of 8 hours on our rental property business in June. We spent this time:
- Coordinating with our contractor about July’s upcoming House #4 renovations.
- Planning the kitchen remodel for House #4.
- Trip to IKEA to look at cabinet samples.
- Ordering IKEA cabinets online.
- Random phone calls with tenant.
- Reviewing monthly statements.
Bottom Line: In June, we spent 8 hours managing the rental properties and collected $5,139.13 in cash flow, after expenses.
July 2016: The Renovation Begins. (And Ends.)
Get ready for a shocker. You’re going to see something unprecedented in July’s report: negative cash flow.
We spent more than we earned.
Last month, July, the rental properties brought in $8,663.50 after management fees, when applicable. Here’s the breakdown:
Unit 1, Triplex: $2,915
Unit 2, Triplex: $1,490
Unit 3, Triplex: $1,295
House #2: $850.50
House #3: $1,273
House #4: — (under renovation!)
House #5: $840.00
Total Income: $8,663.50
What about expenses?
Mortgage: $3,182.64
Mortgage, Part II: $583.33
Umbrella Insurance: $58.75
House #4 Remodel: $11,760.68
Water: $151.84
Lawn Care: $27.00
Total Expenses: $15,763.74
Okay, are you ready?? Drumroll please ….
Cash Flow: -$7,100.24
We’re in the red, baby! Negative!
“Um, Paula, you’re excited about this?”
Heck yeah!
“Uhhhh …. why?”
Two reasons.
First, this wasn’t an accident. We planned this negative cash flow, and I’m proud of the result. We transformed this:
Into this:
(Things get worse before they get better.)
And finally into this:
There’s a second reason I’m excited to report July’s negative cash flow:
Frankly, it’s about damn time.
I’ve published our cash flow for almost a year. I haven’t posted a negative month yet. This doesn’t create a balanced story. The July 2016 report, finally, allows me to paint a fuller picture.
When we remodel a property, our cash flow nosedives into negative territory.
If you’re thinking about buying rental properties, I want you to take a long, hard look at this reality. Ask yourself:
- Are you comfortable holding investments that drop into the red? …
- … Or would this trigger panic?
There’s a pragmatic, mathematical aspect to that question: “Do you have enough savings to survive the lean months?”
But there’s also a crucial emotional aspect to that question: “Can you stomach this?”
Do you want to vomit at the thought of negative cash flow? If so, understand this about yourself before you choose an investment path.
That said —
Let’s dive into the renovation details. Welcome to July 2016, when Will and I spent $7,100 more than we earned.
Renovating: From “Meh” to “Whoa!” in One Month
Imagine every home sitting along a Renovation Spectrum.
At the far extreme of the Renovation Spectrum, you’ll find uninhabitable properties. At the other far extreme, you’ll find excessively-renovated beauties.
But things get interesting in the middle of the spectrum.
You’ll find viable properties mid-spectrum. These properties are fine. The problem is that they’re merely fine. That’s a synonym for “sub-optimal.”
Viable properties don’t perform at their peak potential. As a result, the owners leave money on the table.
You’ll also find optimal properties mid-spectrum. These properties are among the best rental candidates on the block. If a tenant tours five similarly-sized properties in the same neighborhood on the same day, they’re most likely to be “wowed” by the optimized (and excessive) ones.
To illustrate this —
Let’s climb into the Time Machine. Let’s travel to July 2013, when we bought House #4 as a bank-owned foreclosure.
Foreclosed properties often need immediate repairs. For example, we poured $10,000 into renovating our first foreclosure investment, House #2, to elevate it to basic living standards.
House #4 is different.
The national bank that sold this property — unfortunately — also “renovated” the home. Sigh. They shouldn’t have bothered. The drywall is splotchy. The front door squeals at every attempted use. The aging kitchen cabinets bear a thin coat of fresh paint; a veneer of restoration.
When we bought House #4, the property was viable. It was fine.
We saw room for improvement.
But we decided to wait. One reason: House #4 was already — ahem — “newly renovated.” (Imagine loads of sarcasm.) We also had tight schedules and wanted to save more cash. We decided to rent the property for a few years before renovating.
We rented House #4 for $1,300 per month, enough to meet the One Percent Rule. We found a clean, quiet, responsible tenant, who renewed his lease twice. After the neighborhood improved, we raised the rent to $1,500 per month. He renewed again.
But great tenancies must eventually end. Our tenant broke the news a few months ago: He’s buying a house.
That’s when Will and I chatted about our options.
Option A: Rent the property as-is. #Viable
Option B: Tap the property’s potential. #Optimal
We chose Option B. We needed two things: money and plans.
Money: Thanks to our many positive-cash-flow months, and our tendency to save, we could pay cash for the remodel. Done.
Plans: Planning this remodel required deep, creative thinking. We wanted to expand the kitchen. We wanted to re-imagine the space with a modern, open floorplan. We’d need to brainstorm ideas.
One more thing: We live in Las Vegas. The property is located in Atlanta. We’d need to design this new layout/floorplan/kitchen expansion from 2,000 miles away.
Challenge accepted.
How To Plan a Renovation (without Visiting the House)
First, we called our contractor. We asked him to visit House #4, taking measurements and drawing the current floorplan. He agreed, and texted me measurements, photos and drawings by the end of the week.
Armed with this information, Will and I sketched ideas on a whiteboard in my Las Vegas home office. After countless iterations, plus a few phone calls with our contractor, we developed this preliminary sketch:
The creative brainstorming-and-planning phase took around 8 hours, all in June. Meanwhile, our contractor organized local logistics.
By the time our tenant moved out on July 1st, we were ready to start demolition.
Bigger Kitchen; Same Footprint
It’s hard to describe the renovation in words. Here’s my best attempt.
We had two goals:
- Expand the kitchen
- Open the floorplan / modernize the layout
We targeted the wall that divides the kitchen and dining room. (In the photograph below, this is the wall with a doorframe and two drywall cut-outs.)
For reference: the dining room includes the carpeted space on the left side of the photo. The kitchen is located through the doorway, on the “inside” of that wall.
We asked our contractor to remove the top section of this wall. This created a visual connection between the kitchen and dining room. It also flooded the dark kitchen with natural sunlight.
Our contractor framed and drywalled the bottom half of this doorway, creating a continuous 36-inch wall between the kitchen and dining room.
Here’s how this looked with framing-only:
Here’s how this looked after adding sheetrock:
The contractor installed base cabinets along the kitchen-facing side of the wall. The former-galley kitchen now holds an “L” shape.
The result? We nearly doubled the kitchen’s cabinet and countertop capacity, expanding the usable kitchen space without changing its square footage.
Check it out:
Open Floorplan; Same Walls
We asked our contractor to frame the opening above those base cabinets. This created an open floorplan feeling, a visual connection between the kitchen and dining rooms. We installed countertop-matching granite to heighten the effect.
Our contractor also tore out the existing flooring in the kitchen, dining and living areas. He replaced everything with an inexpensive, durable tile that resembles hardwood. This holds several advantages:
- This visually connects the kitchen/living/dining areas, emphasizing the “open floorplan” feel.
- This relieves us from the stress/burden/cost of maintaining carpet or hardwood.
Beautiful and durable? Double-win.
How Much Time Does a Renovation Require?
The renovation spanned three weeks, from demolition to finishing touches.
We planned in June (8 hours) and executed in July (approx. 30 hours, although this is a rough estimate. More details below).
Before the work began, Will and I needed to decide how much involvement we wanted.
As background, we’ve worked with our contractor for years. We’re comfortable with his quality, speed, pricing and — most importantly — his integrity.
Thanks to our excellent contractor, we’re normally absent from most renovations. When we gutted-and-replaced the House #5 kitchen, for example, I communicated with him by text message from California. (You can read that story here.)
But Will decided to oversee House #4’s renovation in-person. I asked him to write about his experience for this blog post.
The following is his story, written in his words, unedited and unchanged.
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[This is Will writing]:
Normally, when I need to do a renovation or remodel, Paula and I will plan it out together and then we’ll just have our contractor do the work without much direct involvement from either of us.
This time was a little different. In this project, we wanted to reconfigure the space a little more than normal and also provide a very high level of finish. And when that happens there can be many daily decisions. Yes, working through these can be done by phone or text, but I needed to travel to Atlanta anyway for my day job, so I decided to stay longer and oversee the project in person.
Time tracking is a little tricky on this one. I’ll leave it up to you, the reader, to decide how you might consider the time spent. I’ll just tell you what my experience was like.
I’d wake up and drive over to the house, normally before the contractor arrived. That would give me time to review the previous day’s progress and think about next steps. If there were any corrections or changes to be made, I’d note them.
When the contractor arrived, we’d go over that day’s checklist and make any revisions to it based on his staffing for the day and his input. Then, the team would get to work and I’d go off into a back bedroom to do my other work for my day job on my laptop. If there was a question that came up, I could just pop in to the other room and advise. It also gave me an opportunity to review work as it was being performed to ensure it was in line with my vision of the final output.
Some days I would leave in the early afternoon. Other days I might stick around until the end of the day or even do a quick Ikea run for some cabinet component so that the workers would be free to continue working uninterrupted.
On average, I’d say that I probably contributed anywhere between 1-3 hours of my time per day for three weeks in an active sense. The project averaged five days per week, but there was a little variability due to the Fourth of July holiday and other scheduling necessities. I was also sick a few days, so I wasn’t always able to make it to the project.
(Quick note about being on site with the contractor- I was definitely conscientious of being a good client/collaborator with our contractor. We have a long and good relationship, so I was careful not to get into micro-managing territory and only intervene if something was actually important to the final outcome.
Still, it’s a reasonable question to ask why I chose to be so actively involved in the daily planning. The reasoning is simple: Since I was not executing the work, it was easier for me to step back from the project and see the next steps objectively. Time spent planning would take work off the contractor’s plate. I wouldn’t necessarily do this with all contractors, but in this particular case the arrangement worked well and he was glad to have the daily briefings.)
You’re not going to see the hour tracking reflect this project outside of pre-project planning time for the simple reason that I can’t honestly give a precise figure. On one hand, you could say that it was a full-time commitment for a couple weeks in July. Thing is, I was usually doing work for my day job while I was at the house, so that complicates the hourly calculation. And how do I count when I went to lunch, then brought back food for the crew? Were those working hours? In the end, I’m viewing this remodel as a voluntary-but-optional personal time involvement.
In terms of the passivity of this activity, I’d contextualize this remodel more like an initial purchase remodel. When we bought house #4, we knew we would be tearing out the kitchen within a few years, but due to our schedules at the time we decided to postpone it until now.
Final geeky remodel note: I’m never doing another kitchen again with anything but Ikea cabinets. First, they’re easy to install. You attach a steel rail to the wall; the cabinets hang from this rail. This means they’re automatically level. Also, they have an excellent warranty and they’re almost always in-stock. Contrast this with the experience of a typical cabinet setup, in which you either get limited and unfashionable in-stock choices from a big-box store, or you endure long wait times on custom units. (Did you mismeasure just a single base cabinet? You’ll be waiting weeks for a the right one to come in. Meanwhile, no installing that countertop!) You can’t return custom built cabinets. And levelling and hanging these cabinets involves a cryptic array of shims, studfinders and extended cursing. Anyway, my point is that I’m only using cabinets from Ikea from here on out. I can’t recommend them enough.
Anyway, here’s the time I logged in July:
- 1 hour going over some new lease details with a tenant in the Triplex.
- 2 hours updating and posting the new ad for House #4
- 2 hours conducting open houses at House #4
- 3 hours emailing and talking to prospective tenants for House #4
- 45 minutes planning and communicating with property manager about making upgrades to House #2 after the current tenants move out (slated for August/September)
- 1-3 hours a day for three weeks — Various hours managing/checking the contractors on-site for the House #4 remodel.
July Total Hours: 8 hrs, 45 min, plus various time during the House #4 Remodel.
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TL;DR – The Costs vs. The Benefits
[This is Paula again.]
Thanks Will! Let’s recap:
We kicked off and finished a major renovation on House #4 last month.
Cost: We spent $13,648 on the renovation in June and July. (We paid $11,760 in July and $1,888 in June.)
Time: Will estimates that he spent between 1-3 hours per day, for three weeks, overseeing the renovation.
- The low end of this range adds up to 15 hours (1 hour per day, 5 days a week, for three weeks).
- The high end of this range adds up to 45 hours (3 hours per day, 5 days a week, for three weeks).
- The average is 30 hours.
He also documented another 8 hours, 45 minutes on other rental property tasks. (I didn’t do anything in July.)
So … I’m not sure exactly how much time Will spent on rental properties in July, but a reasonable estimate is roughly 38 hours, 45 minutes. (Alternately, you could describe it as “three weeks” of hanging around.)
Benefit: Before the renovation, House #4 rented for $1,500 per month. We advertised the property for $1,895 after the renovation; we’ve received two applications.
Update: We found a highly-qualified tenant who was willing to sign a longer-term lease. We negotiated a rental rate of $1,795/mo in exchange for the longer lease term.
Bottom Line: We can reasonably estimate that this $13,648 investment, plus roughly 38 hours of work, increased our rental income by an extra $295 per month. That’s an extra $3,450 per year.
Not bad, eh?
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P.S. I’m creating a rental property investing course, aimed at helping new real estate investors succeed. The working title is “Your First Rental Property.”
Please join the free VIP List if you’re interested in getting updates about the upcoming course. Thanks!
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Looks great you two! I liked getting to read each of your viewpoints. Hopefully I’m not the only one that heard both of your voices as I read the post!
See you next month at FinCon 🙂
Looking forward to it!
Glad my voice came through. It’s my (written) debut on Afford Anything.
You did great buddy 🙂
IKEA really makes things soooo dead simple and when you consider that you never know what will happen to the cabinets, I think using them makes a lot of sense.
Holy crap guys, that looks amazing. I’m inspired! $13k is way less than I thought a kitchen remodel would be. It looks amazing, and I always love the thoughtful attention to detail you put in your posts, Paula (and Will)!
Keep grinding!
That is a very nice looking kitchen. Congrats on the bump in income. We are in the process of replacing the carpet and repainting interior walls for one of our rental. Had a not so ideal tenant, a minor set back.
The place looks great! I love your renovation. I didn’t believe you could do it so inexpensively, and I actually researched your materials and priced it out myself. So impressive! That’s the last time I will be skeptical of your numbers.
Hey Paula & Will!
Great job on the reno! It looks really good. I loved the info on the ikea cabinets. We’ve already rehabbed 2 out of the 3 units in our triplex w Lowe’s cabinets (crazy expensive and crazy delays to boot!). We’re thinking ikea replacements when Unit 3’s client eventually vacates. Can you elaborate on the “inexpensive, durable tile that resembles hardwood” that y’all used, (i.e. Where’d you get it? The brand?).
Thanks and congrats on a job well done.
Good luck!!
Hi JC –
Thanks!
The tile is from Floor & Decor, and the keywords are “wood plank” tile — the term for any tile that resembles hardwood. You can choose ceramic or porcelain. The cheapest is $0.99 per sq. ft, but realistically, expect to pay $1.29 – $1.99 psf.
Their website offers 121 different sizes/colors of wood plank tile, but check the closest physical store location to see what’s in-stock. We chose a darker color, to contrast with the white cabinets.
Yeah, Ikea cabinets are incredibly user friendly. The mere thought of having custom cabinets made now turns my stomach!
(Ok, that’s hyperbole, but not a lot of hyperbole!)
Seriously, you will not regret it… though you may regret not using Ikea sooner.
Paula mentioned it, but Floor and Decor is the place to go. Warehouse quantities, good quality, low prices and great selection. They even have a location in Greensboro…
We used a porcelain based tile that cost just around $2.00 per square foot. Now, that’s just the tile- grout, mortar, backerboard, etc are extra. But considering that it will last basically forever (especially compared with carpet), I think it’s a bargain. Tip: Porcelain is way more dense and strong than ceramic. It’s worth the slightly higher price.
The color on porcelain tiles also goes all the way through, so if they are chipped, the damage won’t be as visible.
Even better, they won’t stain like most ceramic will, which means much better protection from things like pet and child damage.
Awesome, that looks amazing. The wait between posts was worth it!
Do you think you can take a dive into a breakout of all the costs you incurred in the $13,648 renovation? I.e. what was the split between cost of labor vs. cost of materials (and demolition of the old space)? I’d assume the countertop would be one of the big-ticket items. I think readers would benefit with a ball park of how much certain items cost.
Also, great point about using IKEA cabinets for getting the job done. On thing I would be interested in – your perspective on what “acceptable” to buy from IKEA, vs. what you would pay premium for. In other words, saying “I’d use IKEA for cabinets, but I’d definitely recommend sticking with home depot for flooring”. Starting to sound like a future blog post!
Hey Josh!
Here’s a super-quick-Cliffs-Notes answer:
— Avoid ALL flooring at Home Depot and Lowes. It’s EXPENSIVE. I’ve found the cheapest tile at Floor & Decor.
— If you install carpet, Google the words “cheap carpet + [name of your area]” to look for factory direct outlets and overstock suppliers. We get carpet, padding, removal, disposal and installation from a warehouse called Carpet Cheap USA.
— Look for sink faucets, light fixtures, etc. from three sources: Overstock, Amazon, and Build.com
— IKEA cabinets all the way!! Their sink basins are good, too.
— The cheapest countertops come from Floor & Decor. Look for builder-grade granite styles, which include Baltic Brown, Santa Cecilia and Ubatuba. Buy a prefabricated slab. (If you REALLY want to cut corners, buy 16×16 granite tile.)
It’s interesting that you assume that the granite countertop was a big-ticket item. The countertop cost $298.16. That’s $149.08 per prefab slab. We used the bullnose as the bottom piece for the pass-through window.
Longer post on this topic coming …. eventually. 🙂
The granite pre-fab slab really surprised me as well. In the past, I’d done a kitchen with large tiles, but then you have to be super-exact when you lay them, and buy this crazy expensive bullnose, and then at the end of it all, you still have grout lines!
So when I saw those slabs, I was sold. Incredible value.
Gorgeous remodel, and so smart to think about re-doing the layout of the kitchen at the same time! I’m amazed that you got that all done for about $13k, and doubly amazed that you’re making your money back that quickly.
How did you decide how much to rent for after the remodel? Or, maybe a better question, have you ever priced a rental too high, and if so, how did you figure out that it was priced too high?
I’m asking because I recently bought and remodeled a fourplex. (I posted about it if you want to check out before/after photos.) I cleared out all the tenants because I knew it was going to be a big, messy job, and I was doing a substantial rent increase, so I wanted to turn over all the tenants at once versus doing one at a time and trying to fill one unit with A/B-level tenants while the neighbors were all still C/D tenants.
Once the remodel was done, I ran some comps on pricing, and tried to price my units competitively enough that they would all get re-rented pretty quickly with quality folks. They all got snapped up within a week, which is great, but I think I probably left some money on the table. That was okay for that situation, because I needed to fill all four units in a hurry, but the next time I get a vacancy, I’m going to push for higher rent and see what comes in.
I’m just wondering what your basic philosophy is: push the rent as high as you think possible, and if necessary drop the price after a couple of weeks? Or do you choose something more in the middle, knowing that a long vacancy might cost you more in the end than a modest reduction in rent? Thanks! Love the blog and the podcast!
Nice renovation! Would like to hear if your trying to add to your rental portfolio and why or why not?
Great Blog and continued success!
Wow. That’s quite a post!
I did the same thing with my properties:
Bought low
Spent $10k on totally renovating each one
Upped the rent 40%
Filled them all
It’s a great strategy and has allowed me to retire early.
Best of luck to you with your properties.
Looks phenomenal. If you could ever drop a manufacturer name for the other materials used outside of the IKEA cabinets (ex. Tile that looks like hardwood), that would be great for your fellow landlords. Great post, thank you.
Tile is from Floor and Decor. They have a ton of locations throughout the US. See a previous comment for more on the specifics!
Great post Paula, thanks for this! I need to get a hold of your insurance rep because only paying $58/mo for insurance for 7 units is crazy cheap. I pay $100-150/mo per unit or house with State Farm. Also, one of our properties is our previous house that rents for $1500/mo just like this one. Everything is pretty nice, except the kitchen is even more outdated than yours in this post. We could spend 13K renovating it, but there’s no way the rents could increase by $400/mo to $1900, the market just won’t support it. I might be able to get an extra $100/mo out of it, but then it’s not really worthwhile as it would take 11 years to recoup the renovation expense. If the market will support it like yours did, it sounds like a great move. Thanks again!
Hey Nick, just to clarify that insurance is an umbrella policy, not homeowner’s insurance. Should have made that more clear. We pay most of our insurance through escrow, but for the houses we bought in cash, we just pay those as a lump-sum annually.
For reference sake, one of our houses that I recently paid the insurance bill on was ~$900 for the year to cover a house. That house is worth somewhere between 100k-140k market just to give you an idea.
I’m not trying to talk you into anything, but I’d point out that we did a lot more than the kitchen for that 13k. We redid all the floors in the living areas, spruced up the outside, etc. Shoot, I think we spent $100 alone on pinestraw!
Doing only the kitchen would have actually cost quite a bit less.
Hi Nick,
$150/mth for insurance seems very high. But then it might be a factor of where you are located.
I have a few units (apartments) and I pay $150-$160 per YEAR on each of these. The apartments are valued around $175K. On our personal property (value around $500K), we pay $1000 per year.
All properties are in Ohio and we use GEICO.
Aj, insurance on our most recent purchase, a modest four plex, is $3200/yr. Other quotes were around $3500. If it was $600 that would be amazing lol. I’ll give geico a call.
I just updated the article to clarify that I meant umbrella insurance, not homeowners insurance. Sorry — I should’ve specified that upfront. 🙂
Like Will said, most of our homeowners policies are included in the mortgage (PITI), except for the properties which we own free-and-clear, in which case we write giant once-a-year checks.
This is a great article. Thanks for sharing the story. Can you share the flooring tile details? Where can people buy this? And what’s the model? I really like the flooring.
Thanks
Hey Andy!
The flooring tile comes from Floor & Decor. The specific tile in House #4 is a 6″x36″ Birch Forest Noce Wood Plank porcelain tile. It costs $1.99 per sq. ft.
Thanks for the specifics on the flooring Will!!
What a great idea to empower your property manager and give a spending limit that doesn’t require consultation with you. During our recent remodel in our own home, (for a guest bath we’re renting along with a room) my husband and I didn’t talk about details at all. It was his project and I was happy he was buying materials and choosing decor without me. It saved so much time and we could talk about more interesting topics when we’re together!
Hey Paula! Gorgeous kitchen remodel! I can’t believe you did a “high-end” kitchen for just over $13k. My husband and I just bought our first condo in Chicago and we are doing a little updating. We painted our kitchen cabinets before moving in. It was VERY inexpensive but insanely time consuming. I’ve been all over the IKEA website and can’t pinpoint the exact type of cabinet doors you used. Also, great hardware on the cabinets. Is that also from IKEA? I couldn’t believe how expensive hardware was. When we looked in stores, the type I wanted were $4.50-$7 per handle! We found the exact same style on Amazon and got 35 pulls for just over $80! It pays to research. This post was great timing. We’ve been considering rental property and as a firt timer, I love your insight. Thanks!
Everything in that kitchen, except the appliances, flooring and counters, is from Ikea.
Cabinet doors are the Veddinge line, which is kind of a mid-grade line in terms of price. (The cheapest doors felt too cheap to me when I inspected them at the store during planning.)
Hardware is from Ikea as well. BTW, Ikea makes this weird little tool that makes locating your handle drill holes effortless. And it’s like $2. Make sure you get one of those- best money you can spend. http://www.ikea.com/us/en/catalog/products/90101778/
I didn’t break out our handle budget, but I know that those handles come in a 2-pack for around $7-$12 per set, depending on the length I picked. (I used taller handles on tall cabinets).
But, we didn’t have that many door faces- for this rental I only provided one drawer cabinet and almost every other cabinet had a single door rather than double doors (for a lot of cabinets you could pick either). That was just a planning decision that probably saved a bit of change.
Was the flight factored in the expense?
Hi Femmy,
As Will said: “… I needed to travel to Atlanta anyway for my day job, so I decided to stay longer.” He was required to fly to Atlanta for his day job, so his employer paid for the flight. He just decided to stay longer, at no extra cost.
Flights from Vegas to Atlanta cost around $300. If you’re comparing this to what you yourself might pay in the same situation, feel free to estimate $13,900 instead of $13,600. 🙂
Tip: If you’re investing out-of-state, and you have family/friends in a low-cost-of-living area, consider investing in rental properties near your family/friends. This holds two benefits: (1) You’ll have people whom you can stay with when you visit the area. (2) You’re more motivated to be there. You want to visit them, anyway! Two birds, one stone. 🙂
Thank you, Paula. Great ideas.
You left out being able to write the trip off 😉
I have recently started looking at real estate as an investment as I am sure have many due to the uncertainty with alternative investments. I signed up for your blog and really love the comments and straight forward, no-nonsense narrative, except for maybe the cats. In your original post you expected to clear $4722 per year. It has been 3 years and you put $13,000 into upgrade. Does that mean that you have netted $500 over the past 3 years?
Hi Bob –
I’m not sure I understand your question.
I bought this property (House #4) in 2013. Between 2013-2016, I’ve rented this property for between $1,300 – $1,500 per month, with no vacancies. I invested $13,600 into upgrades last month, July 2016. The resulting higher rent, $1,895 per month, will begin when the next tenant moves in (roughly September 2016).
You can read my income/expenses/cash flow for all properties in the monthly reports, which I started publishing last year. The FAQ page links to all the reports.
All rental income flows into one business bank account; all rental expenses are paid from that same business bank account. Some expenses are property-specific (e.g., cleaning gutters on a particular property), while other expenses are portfolio-wide (e.g., paying an accountant; paying an attorney; etc.) I don’t break down the returns “per house” because that’s a huge accounting hassle. For example, I paid my accountant $1,400 last year. Do I divide that out at $200 per unit? This doesn’t sound like a good use of my time. It’s easier to track the portfolio as a whole.
These reports show you how the overall rental portfolio is performing. If you want to look at more granular details, every monthly report describes exactly what the expenses covered. Does that help answer your question?
Thanks!
At some point, would you consider letting us see your rental agreement that you have tenants sign? Thank you.
@Fredericka — Landlord-tenant laws are state-specific. Your lease needs to reflect the laws in your state.
Nolo sells state-specific leases for $35, and they update these leases regularly as state laws change. (affiliate)
You could also hire an attorney to draft or review your lease, although that’ll be more expensive. (I think it’s well worth the price, though, and I recommend getting a good attorney on your team.)
I love reading these but you’ve done me a favor by letting me realize this isn’t for me. To each their own, I say!
Good!! I’m happy to hear that. That’s SUPER important to understand!
The “best” investment is the one that fits your taste/style/timeline/goals/risk tolerance. My goal is to help people make more informed choices. If you’ve learned about real estate investing and you’ve decided it’s not for you, that’s awesome!! It’s much better to know that about yourself upfront. 🙂
Wow 13k for all that sounds like a good deal. Glad you have a good contractor. That is a whole different post in itself finding a good one. 🙂
Im getting ready to start buying houses wholesale and fixing them up to rent and am super excited about it. Its a different strategy then what I have been doing so hopefully it works out.
I’m curious why you didn’t choose engineered wood for the flooring.
Although wood is slightly more expensive, I found installation costs for rectangular tile laid on an offset prohibitively expensive.
Although the existing carpet was only a few years old, tenants wear carpet pretty hard and this was in bad shape. I looked at several options when planning the project.:
*Replace carpet
*Install wood (A high grade engineered wood)
*Install some kind of tile
I did not consider engineered “laminate” wood flooring- That stuff goes down nice looking, but just doesn’t last in my experience. It’s like a sponge for moisture.
I decided against replacing the carpet because that’s an endless treadmill of costly replacements. Unless a tenant does something really egregious, this is normally just considered wear and tear, so replacing it comes out of our pockets.
I decided against wood because it scratches too easily- Pets, furniture, skateboards, whatever. It wears hard too.
Tile was my favorite in every way except style and up-front cost. But here’s the thing: I am also thinking about the lifecycle cost of these surfaces over the coming decades.
So when I found out about this wood-look porcelain, it was a no-brainer for me.
But I’m planning on holding this house for many, many years. It’s an investment.
I wouldn’t do this if I were a flipper.
But I’m not a flipper.
I’m a buy-and-hold investor, so I care about my long term returns more than my short term costs.
Have you ever used the new heavy-duty vinyl (“allure”?) planks? Reputed to be virtually indestructible with a really nice wood look. I’m thinking about chipping of the ceramic in a rental.
I also wonder about the long-term durability of Ikea vs. custom. What’s your experience?
In transitioning away from carpet, we’ve done laminate, wood tile, and wood vinyl. The vinyl is my favorite. It’s a little more expensive than laminate, but we expect it to last longer. It turned out really nice, and we got lots of compliments at the showings. However, it can get dents…I suppose everything has a vulnerability.
Paula, Will,
nice job ! it would be good to conclude your article by stating that this is considered ” Value Adding” to Investors. with the upgrades, this usually allows you to increase your rent, and it is safe to say that you will not have to do anything to the kitchen again for another 10-15 years ( appliances usually), unless a tenants damages things. These Value adds should be spaced out and done over time, do too many right away and it will take you a while to recoup your investment. Also you may want to suggest that as you collect rent, put some aside each month for just that type of remodel, this way you do not have to try to finance it. Great article though, showing how and why you did the remodel.
Hi,
I’m new to property investment. Can anyone tell me whether these properties are great deals ?
1. Sandy Point, located in the heart of the Kawartha chain of lakes on Pigeon Lake and boasting over 8,000 feet of prime shoreline on approximately 1,440 acres, represents an outstanding opportunity to develop a prime site in arguably one of the most popular destination resort areas and 4 season living in Southern Ontario. Located just outside the City of Peterborough, about one and 1/2 hrs. from Toronto.
The site is gorgeous. Mature trees throughout, with wooded areas.
The lakefront enjoys unobstructed views, both west and south exposure. The shoreline gently slopes to deeper water.
There are different residential subdivision development options, including large estate severances, or an investor could simply hold this magnificent property for future disposition and/or subdivision residential development. The values of prime lakefront and estate lots with water access have risen to historic highs. New lakefront homes depending on location, lot size, square footage, interior layout, design and fixtures starts at over a million dollars and up.
The existing expansive older Lodge, original owners home, located at the lakefront, could be renovated into a magnificent estate owners home.
Asking: $15 Million.
2. Class A Office building, located in Maryland USA with significant upside.
Approx. 330,000 sq. ft., 17 stories, with 25 % vacant.
3 story glass covered atrium lobby. 5 high speed elevators. Full service bank and Cafe, ground floor.
Fiber optic infrastructure for voice lines, high speed data and internet.
Current cap rate return of approx. 7% on existing income. Please note that income has yet to be confirmed.
New billion dollar MGM Casino to be built one block away, scheduled to be completed in 2018.
Rail to Boston in the works to be increased from one to 6 trips per day.
Price: Around 18.5 Million or about $55 per ft. of building.
That is a significant rent increase – it will take less than 3 years to repay the cost of the remodel and you’ll have less headaches along the way with higher quality tenants. Time spent now for less hassle in the future is what passive income is all about!
I’m also really impressed by the low cost of the contractor. Even with all your help planning, I would have expected it to cost more than that.
We are in the middle of a re-model on a unit so I didn’t get to this post until today! I appreciate so much that you show the reality of the work that goes in and the negative cash flow when you take on a project like this. You are adding value in the right places and it definitely shows! And glad Will snuck in on this blog post too!
For any of you reading – if you are interested in rental properties or even if you already have them – I am in the test group for the Rental Property Investing course Paula mentioned. I’ve “met” Paula and Will through the course – and even though it is still a work in progress, they are creating an amazing course that will be incredibly valuable!
When is the next call in show? I would love to call in to the show.
Love the detail Paula and also getting the chance to hear Will’s perspective during the project too. You both have some great experience and I just want to say I really enjoy reading your posts. If I ever even start considering buying a rental property afford anything would be my first stop haha! Again great job, and thanks for the detail!
Hi Paula! Been reading your blog for over a year now and it has been a super useful resource/source of encouragement as we have gotten our own investment property enterprise up and running. Keep the good stuff coming!
Your discussion of “optimal” versus “excessive” raised a question for me and I’d love to know what you think. Did you use any metrics (math…hard numbers…) to decide whether the cost of your renovation would be worth its probable return, or was it more of a “this feels about right” sort of thing? (Or maybe it was a “the cheapest update we can do” sort of thing.). I have this feeling there was some number crunching involved that would make a great blog entry.
Thanks!
Would you be willing to share the contact information for your contractor? My sister and her husband just moved to Atlanta and are wanting their kitchen re-done. Yours came out great!
Thanks for being so open about your rental experiences. We have one rental, but have been thinking about adding more. It’s nice to hear the good and the bad from a real life perspective.
Looks amazing and such a great post! I love how you outline your costs and time spent, even if the time is a rough estimate. It will be fun to see how much more you will be able to earn over the long run after these improvements.
It’s great to see the investment of rental properties pay off. There are a lot of costs and factors that some people might not think about. For example, how you brought up that not every month is going to be positive that it’s a real possibility some months will be negative. This is a great article and provides real insight on rental properties. Thanks for sharing!
Where did you learn how to invest in real estate? I know it’s not rocket science but I live in San Diego, and I just assume I cant positive cash flow a property so I just dont think of this type of lifestyle.
However, in reading your posts I was wondering what areas you are in, and what did you learn upfront to buy your first investment property?
I’ve been binge-reading your blog, Paula. Set up a Roth IRA today, restructured my 401K.
SET!
I read your blogs about the 1% rule and how to calculate when a property is a good investment. Also signed up for your early-bird list for the real estate investing course. Learning, learning, learning.
AWESOMESAUCE!
However, I inherited some money a year ago ($110,000), which (most annoyingly) sits in a super low-interest bank account. I don’t want to tie it up in a long-term investment because I am looking to buy 2-4 apartments with this money (in PHX market, making down payment, getting fixed-rate mortgage for the rest) but don’t know if now is the right time, as we are in a seller’s market.
Any advice on how to proceed at this time?
THANK YOU!
Paula,
I’m glad you posted this because I’m starting to understand more about real estate but I’m not quite understanding some of the basics – like why do it. For example, in your post, you say to follow the 1% rule and then the 50% rule. Taken together, that’s a 6% annual return on investment and that’s no where near enough for me to do it. More specifically, if I invest $100K in a property, I should shoot for renting the place at $1,000/month. That is $12K per year rental income and since half of that will be lost in upkeep over the long haul, then the long term income is $6K per year or 6% of my original $100K. The problem with all this is 6% return on an index fund investment should be a no brainer and is 100% passive. So why invest in real estate with all the work and headaches? I’m not readily seeing the attraction.
@Fred –
Would you invest in a blue chip, low-volatility index fund with a steady history of 6% annual dividends?
In the scenario that you outlined, that 6% is the Cap Rate, not the Total Return. The cap rate is only one slice of your total returns. It’s the formula for your unleveraged cash return on the value of your asset. It doesn’t include any equity growth.
The cap rate, in other words, is analogous to the dividend you’d receive on an index fund.
If you receive a 6% cap rate + 3% annual asset valuation growth (meaning that the property keeps pace with inflation), your cumulative returns would be 9%.
That’s on top of any additional equity growth that comes from the tenants paying off the mortgage.
You also get significant tax benefits. Those returns would be largely offset by depreciation, and therefore not treated as taxable income. And if you sold the property through a 1031 exchange (avoiding depreciation recapture), you could defer taxes for your lifetime.
Thanks for sharing those details! Yes, risk appetite is an essential factor to consider. Higher the risk appetite, greater the returns. By the way, I love the way you’ve renovated the entire place! It’s simple, gives the feeling of space, and trendy!
Hi Paula and Will! Great blog and excellent writing skills!
I have one question for you: do you incorporate your properties or you keep them in your name, and if yes is it each one separately?
Thanks!
Hi Luc –
We have a mix of both — some properties held in an LLC and some properties held in our personal name. We originally tried to use a separate LLC for each property, but that got too complicated, so we simplified down.
I binge read Afford Anything posts like people binge watch Netflix. Ok, now that I’ve confessed that, I have a silly question. I know you’ve both mentioned Ikea cabinets for kitchen remodels (totally agree by the way, love Ikea!). I’m wondering if you pay your contractors the hourly rate to put these together? I’m guessing with your “hands off” approach you don’t build these yourselves 🙂 Just curious if you still find these to be more cost effective with the added build time.
Ok, back to bing reading!
Hi Jessica –
Sweet!! I love binge-reading … glad to hear that you’re binging on these!
Yes, I pay my contractor ($25/hr) to assemble the Ikea cabinets. I’ve even paid him to GO to Ikea to buy the cabinets. 🙂
I’ve found these to still be cost-effective for a few reasons. (#1) these are easy-to-assemble; (#2) the contractor doesn’t need to mess around with leveling the wall cabinets (he can hang everything on a rail); (#3) they’re in-stock, which means I don’t have project delays, and (#4) if we accidentally buy the wrong cabinet, we can return it to the store (something we couldn’t do when we were placing orders).
Thanks for asking — and thanks for binging! 🙂
Hello Paula,
Nice before and after picks! Looks like you got the rental income working fine. Renovation is nice and your illustration says it all. Made the mistake of over modeling an rental in a bad area and cried when my renters destroyed my work! Thanks for the nice article and memories of my first rental.
Nothing to criticize but only appreciating your awesome post. As an investor I am motivated to reach my investing next level with the rules. Thanks.
Hi Paula! Thanks for sharing your experience. I have to say this is my first time coming across your blog and its great.
My husband and I are in the process of buying our first fixer upper for rental, but we’re a little concern about the renovation costs. Can you share a detail cost breakdown of one of your projects, the 13K budget renovation would be great.
Nice job! I’m very impressed with how little you were able to do it for.
Hi Paula
Thanks for sharing your experience. I am reading a lot of the older posting.
A couple questions:
– For class A property that you manage, how do you do move out and move in?
– Do you hire someone to do it? or you fly in for that?
– Any recommendation/tips on looking for long term contractor?
– For big remodeling job like this, is it per hour? or fixed price?
Thanks
Coco
Nice Job. Kitchen really made a change. The detailed post is really great for reader to understand how and why certain things were done.
Wow, your renovations look really great. I wish my kitchen looked that good! This was interesting to read although I don’t think I could get into real estate myself. Too chicken.
Wow this is very helpful! I hope to one day expand my page with my personal experience of using what you are showing! My boyfriend and I are both currently in construction and have HIGH hopes to start renovating real estate!
Right now my niche is personal finance and investment for financial health and I think these breakdowns really help people save and further exactly that! Thanks for being an inspiration!
Those before and after pictures are amazing! Very lucky to find such a good contractor. When it comes to renovations, the right contractor is the most important, as well as funding.
Some lenders from credit unions as well as community banks offer loans specifically for home renovations. The check is paid directly to the contractor-which is another reason why you really need a great contractor.