I’ve been a real estate investor for a while, over a decade now, that’s how I got into the real estate industry then into being Realtor full time. Going in I knew it could be a rocky industry and it has been. I also knew there were many ways to generate income as an investor: both passive and active. I’ll skip the active here because what that really is is a job in itself, not investing and I want to concentrate on investing and one particular example of how well it can work, especially now.
The example below is based on an actual property that I personally purchased in the last 6 months. I’m using it because I know all the numbers, inside and out, but I won’t disclose the property address and I don’t keep real estate in my name either.
The subject property is a triplex in Phoenix. It’s three units: one two bedroom and two one bedroom units each with one bath, plus a shared coin operated laundry.
Purchase price: $145,000 – 20% down – 5.5% private, interest only loan for 5 years – I’ll also provide an example of the results with a more typical 20% down – 4.5% 30 year fixed and fully amortized loan.
All Income: (monthly)
- Rents: $2,000
- Laundry Income: $90.00
All Expenses: (monthly)
- Mortgage payment: $532.00
- Electricity: $45.00 (common area + laundry)
- Water: $150.00
- Taxes: $1,230.00/12 = $102.5
- Insurance: $750.00/12 = $62.5
- Landscaping $100.00
- Repairs $85.00 (average over the last 6 months)
- Monthly cash flow: $1,013
- Annual cash flow: $12,156
- Cash on cash: 42%
What if it was a more typical investor loan?
- Mortgage: $575.00 + (taxes) + (insurance)
- Monthly cash flow: $970.00
- Annual cash flow: $11,640
With a more traditional loan the investment is even better. 1. The cash flow is equally good, but because of the lower interest rate less goes toward interest payments. In addition a large portion of the monthly payment goes toward principal: the 1st year $1,871 goes toward principal, in year 3, $2,141 in principal pay-down and year 5, $2,342.
At the same time annual rents tend to trend up, if not every year you should see an increase at least 1-3 times over 5 years, but there are many factors here.
I did not include deferred maintenance. I did not have any, but depending on your finances it may be prudent to set aside or calculate in a monthly per unit amount for deferred maintenance and capital expenditures. This is stuff like replacement of air conditioning units, roof and so on.
Also how are you going to manage it? Management cost money? If you hire a management company it can be 10% of your gross income plus leasing feed. If you self manage there is still opportunity cost involved: there is always a cost, even if it’s not monetary. I left it off, because it’s different for me then you.
Vacancy is another cost not included here: this property has been leased and full for over 4 years, but you may want to add a 3-10% vacancy rate – maybe higher if you have a management company involved since it takes longer to lease that way.
Cash flow on a multifamily property needs to be higher then a single family home. It’s the nature of the beast. In a triplex, for instance, you have three of everything: three, kitchen, 3 heat-pumps, 3 water heaters and so on, in addition to, greater turnover. The higher cash flow makes up for that, theoretically.
It also comes down to how you manage your business, where it’s located etc.
As you can see the results are pretty good here. Once you have a few of them plus they have some age, in addition to other sources of income then you are more in control of your finances rather then your boss.
Another thing I want to mention. That is about the value of the property. In this case it was purchased at regular market price, but what if in 5 or 10 years the market is bad? For one, I don’t have to sell it! The value can be the same – that is the price may go up at all. I don’t care: look at the cash flow. Even if I sell at the same price with the loss of my selling costs at 7% I still did very well, especially if I had the traditional loan and not the private loan.