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:
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.