Rental House Update

Not the Actual House

Not the Actual House

My former tenants moved out of my rental house in early October of 2014. I thought, surely, I’ll find some new tenants before the month ends. Nope. Then I thought, surely, by Thanksgiving I’ll have some new tenants moved in. That wasn’t the case either.

Finally, by Christmas, I had some new tenants lined up. Whew, that was a big weight off of my shoulders. I’m over the sadness of lost income, and now very thankful for the new occupants I’ve moved in. I provided an incentive for them to sign an 18 month lease, ending in the summer of 2016 when it is much easier to find new tenants.

Here’s the breakdown:

Rent: $1325

Mortgage: $886.48
HOA Dues: $285
American Home Shield Home Warranty: $47.25
Home Owner’s Insurance: $33.13

Net Income = $73.14 / Month

This isn’t much, but it is a great starting point. Let’s dive a little deeper into the mortgage payment. Each payment has a portion that goes to paying down the principal loan amount and the other part goes toward interest, the bank’s profit. In the beginning the large majority of your payment goes toward interest. As you’re able to pay down the principal amount, and step up the amortization schedule, more and more begins to go toward paying down principal, and less towards interest.

When I first purchased the house in April of 2009 I put only 3.5% down. Over the years, I paid my monthly mortgage and $50 extra each month, then after paying off my student loans I opened up the floodgates and started throwing all the extra cash I had on the mortgage until I hit 35% equity. Now with each mortgage payment $315.92 of that is going towards paying down the principal loan amount. This also means that an even larger portion of my payment, $342.95, is going into the bank’s pockets. In time I hope to pay off this mortgage and take back that portion of the profits.

If I were to add the principal reduction plus the positive monthly cash flow I’m netting,  then I’m at $389.06 per month in net gain. Or in other words $4,668.72 per year.

Over the years I’ve accumulated $40,742 in principal reduction, mostly from the extra cash I threw at it after paying off my student loans. Additionally I’ve put roughly $13,000 into the house by replacing carpet, wood floors, repairs etc.

In terms of return on capital investment $4,668.72 / (40,742 + 13,000) I’m at roughly 8.6%. Not too shabby!

A lot of investors don’t include the principal pay down in their ROI calculations, but I am just to humor myself.

The other good news here is that for every year that I own the house the returns seem to get better. Sure more repairs seem to pop up, but rent also goes up, as does the amount applied toward principal with each monthly mortgage payment.

I hope to eventually pay off this house and purchase another rental in the Austin, Texas area in the next year or two.Austin - Texas - 360 Bridge - Pennybacker Bridge


7 thoughts on “Rental House Update

  1. That’s pretty high rent, so I’m going to assume it’s located in a solid location. At 3.5% down, it would be hard to locate cash flow in pretty much any area, let alone Austin.

    With your numbers, what about property taxes? I’m not sure if that is escrowed into your monthly payments or not… I’m guessing not since property taxes in Texas are usually pretty high.

    Still, Austin is a great market, and I’m sure you’ve benefited a bit from the recent appreciation. In similarly expensive areas like the Bay Area, today, investors are kind of accepting the fact that they won’t cash flow on Day 1. If we could find $70 net each month with only 3.5% down, I think investors would take that deal all day long.

    All the best!

  2. The rent is average for the neighborhood it is located in, Dallas Texas area. I purchased the house back in 2009 as my primary residence, and rented out the other two rooms to roommates, thus through an FHA loan I was able to make the purchase with only 3.5% down. After moving to Seattle I converted it to a full rental in 2012.

    The property taxes as escrowed into the monthly payment. They typically run about $2,700 per year, with roughly $227 of each payment going towards escrow.

    On my next rental property investment in Austin I plan to put somewhere around 25-30% down on a property valued in the neighborhood of $200k.

  3. Great that you’re paying down your mortgage loan and in the process build up your equity, which allows you to leverage for your future investments. It would be shrewd to allow 2-3 months vacancy allowance for your next investment property for feasibility assessment to see how your cash flow stacks up. Happy investing!

    • Kelvin, Thanks for the great advice. Expecting some amount of vacancy is wise. I was fortunate starting out with almost three years of no vacancy. Clearly I can’t count on that in the future.

  4. Time will tell if they are great tenants. I picked up three tenants so far this year, two tenants will not be moving out until the end of the month, but I have new tenants lined up already. Price right, market effectively, and make money!

    Of course, my cash flow is a bit better, but yours will be too at some point.

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