Can you make money with passive rentals?

[William S.]

I've done a few deals now, educated myself more, and now am regrouping for my next move. In doing so, I'm wondering if making money passively is possible remotely. Below is a 30-year hold (life of loan) KC SFH B+ Class deal as an example starting with the fixed expenses first!

Taxes: $185

Insurance: $60

City Registration: $2

Maintenance: $50

CapEx: $200

Quarterly Inspection Fee: $33

Biannual HVAC Service: $26

Total Fixed Expenses: $556

Let's call this section Expenses A = $556/m

Okay so in order to run this properly and keep the property in top notch condition it will cost $556/m. I'm sure I also forgot other costs such as legal/account fees, but I'll leave that out. Now that we know this, what kind of monthly income do we want? That will of course be determined by the rent, which will also drive the other costs below:

Expenses B

Property Management: 8% of the monthly rent

Lease Fee: 1 months rent to place new tenant (tenant moves out at the end of a one year lease)

Vacancy: 1 months rent (tenant moves out at the end of a one year lease)

So now lets break this down for now, without a mortgage on the property using various rental rates.

$1,000/m - A - B = $198/m

$1,200/m- A - B = $348/m

$1,400/m- A - B = $499/m

Obviously the higher rent, the higher income. Now let's add some leverage 25% down 4.5% 30-year fixed mortgage. For this particular area in KC most homes retail from $120-$150k, but lets say we get a deal at $100k.

$100k home 25% down = $25,000 + $2,000 closing costs = $27,000

And let's also say we get even luckier and there's only $5,000 worth of work.

That brings us to $32,000 of investment with a mortgage of $380/m.

Now that we have $380/m mortgage lets see what the income is now for the various rental rates.

$1,000/m - A - B = $198/m - mortgage = -$182/m

$1,200/m- A - B = $348/m - mortgage = -$32/m

$1,400/m- A - B = $499/m - mortgage = $119/m

It takes the $1,400/m rental rate in order to become positive and the return is only 4.46%! Also, that rental rate for this area is a big stretch, the purchase price and rehab cost too. That return is no better than a dividend stock. The only benefit for the rental here is to diversify your portfolio I suppose. There will be some appreciation, but nothing crazy like Denver/West Coast.

Summary:

After reading several success stories on BP and looking at the numbers I always find one of two things.

1. They are doing a lot of the work themselves, therefore not paying a PM and perhaps some minor maintenance work too.

2. They didn't post all of the expenses and also used percentages instead of the fixed costs.

My conclusion here is that you have to cut out the PM and/or payoff the mortgage to get a decent income out of it. If not, selling the home before major CapEx items kick will be a must. Collect the income and gain profit when you sell, however this doesn't fit my buy/hold strategy.

I'd like to hear your thoughts on this. Is anyone making money passively?