The Numbers Behind my First Year as a Landlord

by Evan

I have wanted to own rental real estate as long as I could remember. Trying to think back about my first justification for the desire, had to be explaining to The Wife (The Girlfriend at the time) that it seems to be the most straightforward way for a non-business owner to build wealth. Over the past 12 years or so of running this site I have talked about owning a rental property ad naseum, the earliest I could find was in December 2013 but that is probably only because I don’t want to search more. There is no shot I highlighted all of the deals that have come and went but a few are:

  • Feb 2014 when my brother-in-law who is a contractor wanted to buy a place, fix it up and manage it. I can’t being to tell you how much of a fucking bullet I dodged here. Reading this post makes me cringe.
  • March 2014 when a buddy wanted to flip a local property. This one probably could have worked, however, at the time (and even with 20:20 hindsight vision) this was too big of a job for my first time being involved in that type of investment. Truth be told I don’t see myself ever really getting involved in a flip on Long Island in any meaningful way. I wouldn’t close the door on it, but it seems so unlikely.
  • July 2017 looking at a vacation/investment property on the North Fork of Long Island. The debt servicing on the deal vs the income left very little room for error. I think this one may have been a mistake. The property has appreciated since the post, and I know I would have loved a vacation spot in years from now out there.
  • October 2018 when one of the partners at my firm brought me a deal that was too small for him. It was a short sale where the current owners couldn’t pay the jacked up mortgage they were on the hook for, but could pay a reasonable rent after the bank took a bath on what they lent out vs what the next buyer was going to pay for the property. I was outbid on this property because I had a pretty good idea of the risk I was taking on and was not willing to get into a bidding war on something so risky (i.e. the current tenants/ex-owners were not even going to be able to keep up on a reasonable rent for the area plus the amount of shit that could go wrong with the house).

So these are just some of the deals I have come across my plate but did not eventually close. So how did I actually become a landlord? Pure happenstance.

How I Became a Landlord

The Wife and I started looking for an upgraded home when a few properties in my neighbor sold at a number that I thought would provide us the amount of equity in the amount to buy something that would feel like an upgrade and provide us with liquidity to do some upgrades.

Long, and I do mean long story short, the house was not selling for what I was willing to let it go for. Our broker kept asking me to lower the price, and at some point, I came to the realization that I didn’t need to pay her 4%. At some point the property price would be low enough that she has brought zero value to me. The house was on the market for $625k originally, so 4% is not a few grand!

It was at this point, I said screw it, I am going to try and rent it out. I put out a feeler or two in our local community, and it took all of a week to find someone. She was getting divorced and had 3 boys in our school district so she wanted to stay local as she split custody. I knew what her husband did, so I figured at the very least child support is going to cover my rent.

She has turned out to be a fantastic tenant. She has paid early every month since taking control of the place. We’ve had a few hiccups in terms of items that needed to be fixed, but nothing crazy. Knowing that she is a single mom there (and the fact that she has never caused a problem with rent), I try to take care of things pretty damn quick when they go wrong.

The Finances Behind my First Year Owning a Rental Property

When I came to the realization that I was buying a new home without liquidating the first I immediately realized the liquidity crunch I was going to be in. Could I do it? Yes. Was it going to be tighter than I would like? Absolutely, so I reached out to a few guys that have indicated over the years that they were interested in real estate investing and laid it out to them:

  • Have a tenant paying $X
  • I think the house is worth $Y (non-negotiable)
  • Debt is $Z
  • The house is cash flow positive by a few hundred a month

Two that I thought would be completely into it, were not, but two that I would have given less than 10% chance of closing said they were 100% in. I sold them each a 10% share and put them on the deed. That took care of some of my liquidity concerns. In the years to come I am pretty sure that will be very expensive money but I did what I had to do.

So with the back story out of the way let’s get to some numbers. For all intents and purposes the property cash flow is even with the carrying costs. Specifically there is anywhere from $50 to $200 of positive cash flow/mo, and any extra money is put towards the interest only HELOC on the property. The interesting part of this first year is watching how my mortgage has decreased while not affecting my cash flow.

As this was previously my main residence I was over 6 years into a 30 year fixed mortgage at 3.375%. So I was just seeing my payments start to move the needle when we decided to move, and now, the tenant is moving that needle for me. Specifically, I went from owing $328,200 on the mortgage to $316,200. The nearly 5% of equity increase was solely born by the tenant all while the property continues to increase in value.

The Future of my Investment Property

I would be lying if I put pen to paper about where I knew exactly where this is going. My father likes to remind me that I have rose colored glasses with zero major repairs and a tenant that has always paid. During COVID I have seen a major uptick in properties being listed and sold in my area. If I got a large amount number (without a full 4% payable to a broker) I could see myself pulling the trigger, however, if everything stay status quo there is zero reason for me to sell. That 5% debt repayment will only mathematically become larger as is the nature of an amortization schedule. Currently, the tenant is in there for at least another year, so not sure how much I’d have to pay her off to break the lease.

I truly believe that the longer I can keep it going the better for mine and my partners’ future net worth. I would love to see this paid off one day and just getting a check one day!

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