I literally haven’t had an update on my rental properties since June of 2020. I’ve been busy with a couple of sales, several purchases and 2 more pending.

In case you are just now tuning in, my goal with these properties is to get a COC (cash-on-cash) return of at least 10%. This can be difficult to do and has a lot of factors involved but essentially that means if I spend $50,000 to purchase a property, I need to profit 10% or $5,000 annualy. I posted how to calculate it in that link above.

A few other criteria I look for are 3+ bedrooms, 2+ baths, good neighborhood (this is key, Location! Location! Location!), single story, brick home, no pool and meets the 1% rule. The 1% rule basically means that the rent should be at least 1% of the purchase price. So if I paid $100,000 for a property, I should be able to rent it for $1,000. This is a simple rule of thumb for a quick screen.

I’m currently using a spreadsheet that keeps track of most quick information I want to see. This is a shortened version for easier viewing.

So as you can see there have been some changes. I sold my last property near Austin with capital gains of $100,000 that I rolled over into a 1031 exchange. The 1031 exchange marketplace is an excellent place to invest in property and it allows capital gains taxes to be deferred which is also great. If you do decide to do the same then you may want to look into a 1031 exchange broker to see how they can help you. I should write an article about the capital gains taxes process soon. It was actually fairly easy but now I know a lot more than I did and there are certain rules you have to follow. Basically, it allows me to reinvest the money from the sale without paying capital gains taxes. One of the properties was purchased already and I currently have 2 more under contract.

Property #8 and #9 are currently under contract with numbers being estimates. Both properties are right around a 10% COC return if I achieve the estimated rents I have in my spreadsheet.

The market here in Texas has been crazy. Properties have gone up 15-20% across the board on most of my rentals and I’m not in a big city. This isn’t great if I’m not selling but luckily rents have also increased. I’ve increased rent from $1400 to $1500 easily and waiting until two tenants move out to increase rent in the last $1400 properties, #3 & #4 above. I’ve taken no longer than 1 week to find new tenants on any property I’ve released.

I’ve been very fortunate with repairs. I’ve found some good contractors and handymen and I’ve also done some simple repairs myself. So far my estimates for maintenance/vacancy have easily covered repairs and vacancy (which has been nearly non-existent).

So if these last two properties close as expected in March, I’ll have a net profit after all expenses of $42,750. That’s $3,562/month. That’s a nice chunk of change and covers a lot of my expenses.

In case you didn’t know you can only have 10 government-backed mortgages currently. Counting my primary residence these will put me at the 10 mark. My next plan is to find a small bank that will lend and start putting more money back into my dividend growth portfolio. I’m also looking for and interested in commercial opportunities. There was a commercial property I looked at that needed a lot of work doing to it so I’ll be getting quotes from contractors like Multi-M Contracting (multi-m-contracting.com) before I consider purchasing it. I’ve purchased a 1.5 acre lot that has been cleared and I plan to build storage units on it at some point.

My current real estate page is here: https://allaboutinterest.com/real-estate

Guys, I’ve been buying real estate rental properties now for almost 10 years. I’m going to teach you a few things I look for when purchasing a property.

1% Rule

The 1% rule is the quickest metric you can look at and in fact I still screen properties by this rule today. What it means is that you will be able to rent a property out for 1% of the purchase price. This assures you are getting a decent cash-on-cash return.

Example: You see a house priced at 200,000. You will need to look at other rentals in the neighborhood and decide if you will be able to rent that house for 1% of the purchase price, or 2,000 a month.

Cash-on-Cash Return

After passing my quick 1% rule screen I then go into a deeper look at the property and determine what the cash-on-cash return will be. I look for a 10% cash-on-cash return. In higher growth areas I realize this isn’t possible. Since there’s not much growth here I’m getting good cash flow. It’s a tradeoff.

I have a spreadsheet that I made to enter these numbers in to calculate quickly for me. If anyone is interested I can add a link to it.

Cash-on-cash return = profit / cash costs

Here’s an example of a property I just looked at:

Cash Costs –These are the out-of-pocket cash expenses you will incur. These costs include closing costs, down payment, and any out-of-pocket repairs you need to make before renting. Depending on what state you live in, whether that be Houston, Texas, or Orlando, Florida, there will be different ways that closing costs will be calculated depending on a myriad of factors, so be aware. In this regard, it is wise to find out ahead of time what fees and charges you will need to pay at closing in order to plan your finances adequately. If you are purchasing a house in Arizona or a nearby area, for instance, you may be required to pay an underwriting fee, credit report fee, appraisal fee, and title insurance, among other expenses. Your real estate agent may, however, be able to negotiate some of the closing costs with the seller for you. In addition, there are several online resources like https://tubac.com/tubac-az-closing-costs/ that can help you learn more about how you can reduce your out-of-pocket costs.

Purchase Price – 170,000

Repairs – 500.00
Closing Costs – 5,100
Down Payment (25%) – 42,500
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Total Cash Costs = $48,100

Financed Amount (25% down payment) – 127,500

Monthly Expenses – This one is self-explanatory , total monthly expenses

Interest Rate – 5.75% for this example

Monthly Taxes – 334.58
P&I Monthly – 744.06
Property Ins./mo. – 107.25
HOA Dues – n/a
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Total Monthly Expenses w/o Maintenance – $1,185.89

Maintenance/Vacancy Costs – This one can be a little tricky. A lot of people like to estimate 20% here to be safe. Depending on the age of the property and location I make a determination here. I used 15% for this property. That means I allocate 15% of the monthly rent into an account to cover any future maintenance or vacancy expenses.

Maintenance/Vacancy (15%) – 270.00
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Total Expenses after maintenance/vacancy costs = $1455.89

Expected Rent – 1800

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Monthly Profit = $1800 – $1455.89 = $344.11 or $4129.32 yearly

To get your Cash-On-Cash return just take the $4,129.32 and divide by your total cash costs of $48,100.

Cash-on-Cash return – 8.58%

As you can see, this property passed the 1% rule of estimated rent above 1% of purchase price. However, the cash-on-cash return is just 8.58%. This was a property I looked at back near the end of last year when interest rates were higher.

At an interest rate of 5% instead of 5.75% , the Cash-on-Cash return boosts to 10.07%!

So basically I’m also watching interest rates to meet my criteria. If I can get this same property at a 5% rate then it meets my criteria of a 10% cash-on-cash return.

If this is helpful let me know, or if there is anything else I can explain let me know as well. So far this simple process has served me well.

Wait just a second!  How did you have rental #3 if you didn’t buy another rental property you may ask and what is 3b?  Well, ok so here’s what happened.

I decided to call it quits with the restaurant.  The building is wonderful but I just decided the restaurant business wasn’t for me.  So I sold the business but still retained the building.  The tenant I sold the business to didn’t work out and long story short,  defaulted on their 3-year lease after just 3 months.  Yes, I had to evict them, there’s a first time for everything.

In the meantime I’ve rented the upstairs which is where I was living before I purchased a new home in another town about 30 minutes away.  My wife and I are now in a regular home which I think will be better to raise a child in.  Anyways, the upstairs is a wonderful 2,000 sq ft , 2 bedrooms 2 1/2 bath property with all real hardwood floors and awesome updates, granite counters, crown molding and custom woodwork throughout, etc.  I listed the property for lease on Zillow and had 3 people that wanted it within a week.  I realize I may not have asked enough for the property.  I have leased the upstairs of the building for $1,200/month on a 1-year lease.  The bottom floor is where the restaurant was housed and is currently for lease.  I have a few good prospects and hope I can close one before the new year.  I need to get this thing cash flowing!

There’s lots of NEW coming in 2018.  New house, new job, new income sources, plans for aggressively growing my passive income stream!

Here are the numbers on the property:

Unit A – Downstairs, 2 bathrooms plus restaurant – approx 2000 sq. ft.
Unit B (this is what is currently rented) – Upstairs, 2 bedroom, 2.5 baths – approx 2000 sq. ft.

Monthly Liabilities:
Insurance (Commercial Property & G/L): $3011  or $250.92/mo
P&I: $1524.95
Taxes: $614/mo
————————————-
Expenses – $2389.87
Estimated Vacancy & Maintenance (10%): $300
———————————————————————–
Total Expenses – $2689.87
Current Rent: $1200 (Leased until December 2018)
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I’m in the hole $1,489.87 right now.  I plan to have a tenant in the building by January at a rent of $2,000/mo where it’s at least cash flowing.  It’s not a high cash flowing property so I currently have the building listed for sale.

The picture is from a trip to Thailand in 2016.  I noticed one of the original bloggers I followed had moved to Chiang Mai and figured I’d post a Thailand pic.  I’m obviously supporting the local beer!

Prior to Starting My Business

It was 2008, about a year before the financial meltdown which we now call The Great Recession. I owned just one property at the time (currently rental house #1) as my primary residence. I had owned this house for approximately 2 years. I had also taken advantage of easy financing by only making a down payment of 5% on a 205k property. The great part was I didn’t have to come up with a lot of cash to buy my first house but I had a higher monthly payment.

Of course, you would think that a higher monthly payment would come with further financial difficulty down the line, but I think I was pretty lucky that I was able to handle this with little to no problems at all. Although, not everyone is lucky and I know some people who have had to take out an installment loan, with somewhere like Tower Loan (https://www.towerloan.com/lending/installment-loans/) to help cover the cost of their mortgage payments. They do still need to pay that money back in monthly installments but this will be made at a set price, so they should be able to pay back all the money they’ve borrowed. It sounds like a good option to me, especially if you’re struggling with your bills. For me, I think I found myself in a pretty good situation.

This was the year I decided to quit my day job and start my own business. I mentioned a little about this on my ABOUT ME page. My total mortgage payment with taxes, insurance and PMI was $1920. My interest rate was 6.5%.

I was living with my soon-to-be wife at the time. We were in a suburb just outside of the city. Her commute downtown with traffic was an hour each way. So what we decided to do was look for a cheaper property that was closer to downtown and try to rent out our house.

We first found a location that was much closer for her and actually slightly closer for me. This area was a great compromise and there were many affordable condos here. I checked out Eddie Yan real estate but we couldn’t find one in the right location for us.

Next we started looking at viewing these condos that were in our new price range of less than $120k. I had actually looked at condos before a while before this, looking at Marco Island Condos For Sale but never pulling the trigger on a deal so I knew what I was doing. We ended up finding one that was about 750 sq. ft. This would be a big change from being used to about 2200 sq. ft. but we both agreed we could make it work. My wife took advantage of the first-time homebuyer credit as well of about $8,000. We were able to purchase the condo through the FHA with a minimal amount down at an interest rate of 5%. We figured our new total monthly payment would be right at $1050 per month.

We then had our realtor pull rent figures in the neighborhood our house was in. They averaged about $1600/month which is what we ended up getting.

INCREASING OUR DEBTS TO SAVE MONEY

So here’s what the new numbers looked like:

House Monthly Bills – $1920
House Monthly Rent – $1600
Condo Monthly Bills – $1050
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New Monthly cost of $1370
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Monthly Savings: $1920 – $1370 = $550

As you can see, these numbers look pretty good. Not only could we save $550/month but we were investing into another property that would eventually become our condo rental. My wife was also happy about her new commute time of less than 30 minutes! It even cut a few minutes off of my commute time as well. It also meant that we weren’t so tight on cash and could actually focus on repaying our debts. We got close to needing to take out a loan to afford our monthly bills and I found myself on this Website looking at the reviews a few times! We got there in the end though and it all started to get better from there.

So we downsized, sold a lot of our furniture, and I began finding ways to spend less. The $550/month savings at that time was huge when I wasn’t making any money yet, not to mention the gas savings that we now had with the shorter commutes. This point in time was a giant turning point in my life. I was now working for myself and learning how to live on less than ever before.

2014

Now fast forward 6 years and the house is still a rental. It was refinanced a couple years ago and is currently getting $1700/mo in rent. The house has also had some nice appreciation which is just a bonus if I ever sold. The Condo is also a rental, currently at $1000/mo. You can find details of these plus my new Rental #3 on my REAL ESTATE page.

In the end, I’m extremely happy with our decision. It was truly life-changing!