Is my cash flow really $135.75/month?

[Seth B.]

I bought a duplex a couple of months ago. Here are the numbers:

Purchase price $85,000 (I put 25% down)

Monthly payment including taxes and insurance is $585/month

Total rent for both sides is $1,550/month

Property Management charges 7% ($108.50/month)

Tenants pay all utilizes (including water, garbage, electricity, ect..)

If I use the 50% rule, as Bigger Pockets and others who are experienced in rentals over the long term use. Then total rent $1,550 minus management fee's of $108.50 equals $1,441.5 divided by 2 for the 50% rule equals $720.75 minus my mortgage/insurance/tax payment of $585 equals a positive cash flow of $135.75/month

Is this correct? If so, how do rentals make people money? Do people just hope for appreciation, and think about how they are paying down the mortgage over time? How do people claim to live just off of rental income, by owning 30+ properties? I would think if you had the money to buy 30 properties, with the 50% rule you would have made more of investing in an IRA, stocks or something to that effect?

This was my first buy and hold rental property and if these numbers are correct I am not sure I made a good decision buying it. Maybe I should have used the down payment to try a real estate flip or invest it in an IRA/stock market (smart stocks though like Nike, Apple ect....).

I guess I am lucky that I really searched hard for a property that would return this kind of gross rent compared to the purchase price/mortgage payment just to basically break even. I see a lot of first time rental property investors buy a rental property that rents for $1,000/month and have a mortgage payment of $800/month. So I assume they will lose money over the long term and may decide to sell early when they run out of money to throw at it?

Any thoughts from experienced rental property investors?

[Seth B.]

I decided to update everyone on the duplex I bought since it has been over a year since my last post. I had a rough start after buying my first rental property out of state as you can see from my older posts.

I am happy to say things have gotten better over time… 

About 1 month after purchasing the property ( I purchased it on 9/20/2013) I found that one of the existing tenants never put down a deposit when they moved in. So I figured I would tell my property manager to ask that tenant to pay a deposit. This I feel was a mistake (for a new rental property owner getting his feet wet) because the tenant put in their 30 day notice instead of paying the deposit. So I was hit right off the bat with a 1 month vacancy and around $1,800.00 in repairs (the tenant had lived there for 6.5 years). The tenant smoked in the unit (even though their original lease said no smoking), so it had to be repainted and several other smaller items needed repair. The old tenant was paying $650/month in rent. The new tenant signed a lease for $800/month rent, so at least I received a rent increase.

Since the property was a duplex I assume there was a good chance that this tenant told the other tenant about the "new owner" asking for a deposit. This may have made the other tenant worry that the new owner was going to ask for additional deposits or possible raise the rent. So a couple months later the other tenant put in their 30 day notice. This time it took 1.5 months to find another tenant which signed a lease for $765/month. 

During the second vacancy, the unit was broken into by a person who had been causing a lot of problems in the neighborhood. The tenant on the other side of the duplex heard some noises one night and called the property manager. The property manager came over to the unit and came face to face with the burglar. The manager chased the burglar (ya not real smart) for a few blocks and they just happened to run right past a parked police car. The burglar was arrested and has a lengthy record so he will be looking at some real jail time. I sent the police report to my insurance company and they covered all but $800 (my deductible) of the damage caused. 

Now that I have had two new tenants for around a year, things have went much smoother. My total rents each month is $1,565/month. My property management company charges 7% which comes to $109.55/month. That leaves me with $1,455.45/month. I bought the duplex for $85,000 and put 25% down. My monthly mortgage payment which includes taxes and insurance is $585.00/month. This would leave me with $870.45 each month for the last year. But after some small maintenance items that have come up over the last year I estimate I clear about $820/month on the duplex. 

Since purchasing the duplex 1.5 years ago it has appreciated also. I estimate it to be worth about $110,000 right now. So since I purchased it for $85,000 (which was about $8,000 under what it was worth at the time) it is worth $25,000 more than I purchased it for.

As for the $820/month I am clearing I just deposit into a dedicated bank account each month and don't touch it. Because I understand that some day the roof will need to be replaced, possible AC Unit, furnace ect…

After I file my taxes in the next few weeks, it will be the second year of tax returns that I will have the rental duplex included on. So the banks should then be willing to count the rental income against the mortgage payment, which helps against ones income to debt ratio when wanting to buy another rental property. 

So my plan now is to buy my second rental property in the next few months. If things continue to go well I will continue to buy rental properties until the bank tells me I am at my limit. Then I may work on paying off the mortgages or look into an umbrella loan from a credit union, and continue to buy more rentals.

I will say that the $820/month feels pretty good, the account I deposit it into each month has grown from $0 to about $9,000 in just 11months. not to mention the $25,000 in equity.