After about a year of research and planning, I decided to pull the trigger on buying a rental house in fall of 2020. As with my stimulus check experiment, I figured it would be a fun and educational exercise to share the details of this investment with you, and we can track its performance over time.
The Purchase
- Purchase Price: $72,500
The house was originally listed at $75,000, but following the inspection I had done, my real estate agent successfully negotiated a $2,500 reduction due to the cost of renovations that would need to be done. - Downpayment: $14,500 (20% of the Purchase Price)
- Pre-Close Expenses: $420
An inspection and a flight to Minnesota to see the property and close. - Closing Costs: $5,447
Fees paid to the bank and title company, taxes for the remainder of 2020, the first month of interest and escrow for taxes and insurance. - Renovations: $5,572
Mostly the hard work of my wonderful friends and family (I didn’t charge myself for my work :P), some new appliances (fridge, washer, dryer) and random materials (paint, doors, smoke detectors, etc.) - My Total Out-of-Pocket Cost to Purchase and Renovate: $25,939
Rental Income (the fun part!)
- Rent (as of 2020): $780 per month / $9,360 per year
This is likely a bit less than my property could be rented for, however, I have some great tenants that I know personally and I am confident will take care of the place, and they also signed a 2 year lease. I am more than happy to have rent discounted a bit for good tenants and stability. - Estimated Vacancy: 2% per year (roughly 1 week each year)
This is a pretty low vacancy rate – the property is in a great location and the demand for rentals in the area is high. - Net Rent (as of 2020): $764 per month / $9,174 per year
Recurring Expenses (the not so fun part!)
- Mortgage Payment: $307 per month / $3,684 per year
$58,000 loan, paid over 30 years at a fixed 4.875% interest rate. - Property Taxes (as of 2020): $103 per month / $1,233 per year
- Insurance (as of 2020): $64 per month / $768 per year
Relatively high deductible of 5% brought this cost down quite a bit. - Estimated Maintenance: $121 per month / $1,450 per year
This category will probably make or break this investment. It’s an older house, and while we replaced a lot of things while renovating, there will certainly be more to come. The furnace will likely need to be replaced in the next few years which will cost a few thousand dollars and will eat up this maintenance budget real quick. - Total Estimated Expenses: $595 per month / $7,135 per year
Cash Flow and Total Return
- Total Estimated Cash Flow: $169 per month / $2,028 per year
Calculated by subtracting expenses per month from net rent per month. This would represent ~8% cash flow per year ($2,028 / $25,939). The cash flow this property generates should hopefully increase over the years as rent increases outpace higher taxes, insurance and maintenance. - Principal Payment (as of 2020): ~$71 per month / $852 per year
At the beginning of a conventional mortgage, the vast majority of the monthly payment is interest. As time goes on, more will be allocated to paying down principal which will increase my equity in the house more quickly. - Property Value Appreciation: $121 per month / $1,450 per year (or 2% of the purchase price)
Probably a low estimate given that the last time this house sold was in 1999 for $30,000. This means that over the last 20 years, the value of the house has gone up an average of 4.5% per year. That said, the principal payment and property appreciation is not as meaningful to me as the cash flow as I have no plans to sell the house any time soon. - Total Estimated Return: $361 per month / $4,332 per year
Represents ~17% return per year ($4,332 / $25,939), which is fantastic compared to the average stock market return of 7%. There are some big risks with a real estate investment like this, such as costly repairs or long-term vacancies. If everything works out as outlined above (spoiler alert: it will not), I will be elated.
2 Month Cash Flow Performance Update
It has been a little over two months since I closed, and here is where we are at:
- October 2020: -$21,045 (Purchase and renovations)
- November 2020: -$4,574 (-$4,894 renovations + $780 rent – $460 mortgage/insurance/taxes)
- December 2020: $172 ($780 rent – $460 mortgage/insurance/taxes – $148 repairs)
Here’s to hoping 2021 brings more cash flow positive months. I’ll keep you updated on any major developments, and we’ll check in a year from now!
Stay tuned.
#MoneyGoals
Pictured: Deep into the renovations, early November 2020.