How can I squeeze more than $200k out of my rental units

Question

How I made $200k after mortgage payments in less than 10 years on a single property and still own it but want more

I bought a 3 family unit in 2009 for $159k with only 3.5% down. $159k -$5650=$153,435+ closing cost $10k + Reno $7,000= $168,435 all in. Total monthly rental income $2,900 - $1790 mortgage =$1,100-$350 water/sewer/Reserves= $750 net monthly income x 12= $9,000 yearly x 10= $90,000.

Now you’re asking how did I get to $200,000. Here’s what I did on the last month on the 10th year. I sold the property to my wife and gifted her 20% equity. House was appraised for $320k-$139,000 mortgage balance= $181k- $64,000 gift of equity= $117k - $6000 closing cost= $111k+ $90k from rental income=$201k. Guest what I’m doing today? Same thing over and over on multiple properties. Yes I have houses in the Caribbean and not 50 yet. I have a 2 year old and a stay home dad very handy horrible in math with a couple licenses. How can I make more on these rentals. Im currently purchasing a couple singles with $500+ monthly cash flow.

Erik W. · Answer

Two things stick out to me in this post: #1 - Appraised value isn't market value.  #2 - NOI calculation is incorrect as it doesn't take into account vacancy, taxes, insurance, and maintenance.

A good ball park formula for Operating Expenses (OpEx) is gross rent * 30-45%.  In your case, that gives a range of $870 - $1,305.  Let's go in the middle right at $1,000.  Using those numbers, this is what I would expect:

Rent: $2,900

Less vacancy (5%): $145

Less OpEx: $1,000

= NOI $1755

Less debt service: $1,790

= Cash Flow negative $35/month

That is how any investor who has been around will measure this property.  I need a detailed explanation to understand how OpEx is only $350/month.

Hyacinth Dolor · Answer

Closing cost and Reno was included in my numbers. Also the $1790 included mortgage, interest, insurance and tax. My operating expenses was and still is $350 monthly which also includes paying a helper once in a while. I spend less than 3 weeks per year on my properties in total. Managing, snow removal etc. I guess my experience and aggressiveness towards work I take for granted. My approach to my rentals is “we are all one family” and it’s worked so far. I’m old school with almost zero overhead and all these ROI, 50% rule stuff. At the end of the day I guess I don’t value my time like others do and it actually works best for me and my family that we can pick up and travel anytime we want.  I’m almost certain at my rate I will have about 2 million saved up to retire in the Caribbean in 7-10 years.

Dan H. · Answer

The 50% rule includes PM so self managed the 50% rule is 40% to OpEx.  However, basing maintenance and cap ex on rent is providing a tight coupling were there is only a loose coupling.  At just under $1K/month rent per unit, I suspect the 50% rule could be fairly accurate (for low rent units, the 50% rule is aggressive).

To achieve a lower OpEx requires a more active role in the maintenance/cap ex items.  This is possible, but 1) it does not scale well 2) Is it smart for investors to plan to be their own handyman?  I think many of us started this way and with more success (and age), we hire out more of the maintenance/cap ex items.  If you have played the role of handyman, the $90K cash flow includes the salary that you would have made if you were paid fair market rate for your role in maintenance/cap ex.  Guess what that pay would have done to your OpEx?  It would have placed you OpEx very close to 40% of rents (40% because you self manage).

$2900 (rent) * 0.6 - $1790 (mortgage: Not clear if this included full PITI but if it does the 0.4 should be reduced) = -$50/month (cash flow negative but I believe the mortgage includes full PITI so …)

Lets assume the $1790 include insurance and property tax and that those two equal 10% of the rent ($290/month - I have no idea what prop tax and insurance costs where this RE is located so I used 10% even though my current prop tax/insurance to rent ratio is ~15% and that is with some prop taxes far below value).

$2900 * 0.7 - $1790 (mortgage with tax and insurance) = $240/month.

Lets use $250/month * 12 * 10 = $30K (versus $90K).

If we use 15% for prop tax and insurance to rent ratio

$2900 * 0.75 - $1790 -$385

$385 * 12 * 10 -= $46.2K (lets use $50K)

$111K + $50K = $161K.  This is ball park how much you made if you had provided compensation for your maintenance and cap expense labors.  That is still a very good return for a less than $16K initial investment (down plus closing but you may have put the closing cost in the loan and had even a smaller initial investment which would increase the ROI).

You appear to have done great even if compensating yourself for you handyman labors.

Great job and good luck

Hyacinth Dolor · Answer

I respect your calculations but my taxes differ And support my numbers. I do all my Renos. Twice in 15 years. I have not had vacancies. Neither on my 2 family. 1 tenant 15years and other 9years.

Hyacinth Dolor · Answer

Sounds good Greg. I bought in a B+ neighborhood. I just Renovated 1st floor and increased rent by 45%. Considering same for second floor but my tenants do not like moving out of my places. Average stays 6 years.

Greg Dickerson · Answer

You can only push rents so far so you need to buy right and increase operational efficiencies to maximize income on smaller properties or get into larger properties with more income.

How can I squeeze more than $200k out of my rental units

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