As I sit down to write a recap of my experience, I can’t believe I have owned a rental property for a little over two years! For as long as I can remember I have wanted to own rental property. The reason is pretty simple, absent owning a business, I believe it is the most straightforward way to build wealth for two reasons:
- Cheap and Understandable Leverage – This may be more true than ever before, but nonetheless your borrowing costs are usually low (as long as you are not using hard money to fund the venture). In addition, people tend to understand the leverage vehicle of a “mortgage” whereas this may not be true in other investment vehicles.
- Other People are Paying Your Costs – While using leverage if you have a steady tenant they are paying for that cost.
- Inflation Adjusted Semi-Passive Income
The problem I have always had was that I live on Long Island where real estate costs are high, so despite looking for years and years (better chronicled on my old site) I was never able to pull the trigger until I moved in August of 2019.
How I Became a Landlord
I have gone over a detailed summary of becoming a landlord when I first started the site, however, I think the story is pretty common and can be made short. When we moved to our new home 2 years ago I was not getting the offers/asking price that was assured to me wouldn’t be a problem by multiple real estate brokers. After dropping it a few times it became apparent I was not pulling the equity out that I felt was worth selling the property.
Finally, The Wife said why not rent it out! and within a week of coming to that conclusion, we had someone reach out to us who has been renting it ever since. However, I still needed (not wanted) some liquidity I ended up selling 2 10% shares to outside individuals (childhood friend and brother).
My Numbers Behind My Rental Property
Since I have had 2 outside investors I decided from the start I would need to keep really, really good records, and I have done just that. I think there are 3 main metrics I am currently intereted in tracking as this adventure continues:
- Positive Cash Flow
- Value Update
- Cap Rate Value Update
Cash Flow for My Rental Property
The rent covers the mortgage, taxes, and has some extra to pay down the interest-only HELOC, although not at a speed I would like. I have not taken a dime from the rental property, instead, I have plowed any extra back into the HELOC to try and deleverage. Similarly, if I was short for a month due to a repair, I would slow down the HELOC prepayments until I was made whole by the group.
The property has been cash flow positive (i.e. extra money going to HELOC) every month other than 3 to 5 times in 2 years. Pretty routine items with homeownership caused those deficiets – boiler issue, some lights had to be fixed in the basement, etc. Eventually, I’ll have a roof issue, I am sure, or something big, but it hasn’t happened to date.
Currently the rent is set at $3,600/mo
Value Update for Rental Property
Since it is so illiquid, I never bothered to update the estimated value of the home for purposes of this spreadsheet or my net worth statement. Notwithstanding, I am going to guess that the property is worth at least another $50,000 or $75,000 higher than when I rented it in August of 2019 (pre-COVID).
Capitalization Rate = Net Operating Income / Current Market Value
The Operating Income does not take into account debt servicing, so the property tax is about $14,000 (don’t have time to look it up today). My current Cap Rate would be 4.4% to 4.8% (depending on if we value at $600k to $650k) – admittingly not a particularly great cap rate.
While an interesting metric to track and watch it does not take into account factors like the fact that my tenant has paid early every single month, and that there have been months where we don’t talk, just have my check deposited. I have watched my dad struggle in this world, I am not about to take on a 3rd job for a few extra points.
Will I be a Landlord Forever?
For as long I can remember I have wanted to own rental real estate and this seemed like an easy way to get into the game. The tenant just told The Wife yesterday how happy she is there and doesn’t plan on going anywhere, and as long as she keeps paying without problems I don’t see myself selling the property!
In today’s market (post covid on Long Island) I have a hard time seeing myself buying another rental property in the next few years, but I keep looking!