Cash flow is king for a rental property or at least in my eyes. Investors have different reasons for investing in rental properties and their requirements for a “good” property vary. Investors sometimes prefer for a property that has large equity. Some prefer properties that will hopefully over time increase in value. The numbers behind rehabbing Pensacola were from various calculations but the most important number was predicted months before I even closed on the property.
When I analyze properties, the amount of cash flow per month holds the most importance. If a property will not bring income into my bank account every month, then the property will not be in the running for an investment property. Some lingo that might help with this post can be found here. The preliminary numbers for Pensacola are listed below. I knew I would be buying the home using a Hard Money Lender but still did my preliminary numbers for when I would refinance into a conventional mortgage.
- Mortgage Amount: $125,000 at 5% interest over 30 years. (an investment property has higher mortgage rates)
- Yearly Taxes: $3,000
- Yearly Insurance: $1000
- Monthly Rent: $1350
- Vacancy & Maintenance: 10% each
Vacancy and maintenance are set at 10% each for monthly expenses since I over estimate all of my expenses and underestimate profits. This is just a way to cover my behind if I go through on a property. The preliminary monthly expenses and income on Pensacola came out to be:
- Expenses – $250 (monthly taxes) + $84 (monthly insurance) + $125 (monthly vacancy) + $125 (monthly maintenance) + $652 (mortgage payment) = $1,236
- Income – $1350 (rent payment)
My preliminary monthly cash flow comes out to be $114 a month. This turns out to be an additional $1,360 a year. Not bad for a passive source of income. This again is a very conservative estimate since the home is listed for $75,000 which means at a $120,000 mortgage it would need $50,000 in repairs (It needed $25,000) and my vacancy and maintenance repairs are very conservative. (The entire house was redone so maintenance should be 0% for the first couple years)
Numbers Behind Rehabbing Pensacola
After seeing the conservative potential in the property I decided to pull the trigger on Pensacola. Here are the numbers from the actual purchase price of the property:
- Purchase Price: $72,500
- HML: $88,000
- Money Required Out of Pocket: $18,000 (more than usual for a HML but we hit a snag the day before closing)
- Rehab Costs in HML: $23,145
- Actual Rehab Costs: $26,162
The amount of money that is in this property from my own pocket totaled $21,017 after the rehab process. This is a good chunk of money but knowing the after repair value of the home helped in recouping some of my money back after the refinance.
Itemized Repair Amounts
For my first time estimating repairs and rehabbing my first property, I would say my numbers turned out well.
Pensacola closed on April 29th, the rehab took until July 5th and the tenant moved in July 7th. Luckily she had planned to move in on July 1st, so she paid the full rent payment for the month of July. Here are the monthly figures for Pensacola:
- Rent Payment: $1450
- HML Interest Payment: $1080.25
- Taxes & Insurance: $310
Total Income and Expenses Since Closing
Since closing there has been a total of nine months of having the HML and paying the high interest payment. Tomorrow I officially refinance out of the HML into a conventional mortgage but we will talk about those numbers in a bit.
Another thing you should know is that from reading the posts on Pensacola, you should have noticed the driveway and carport in the front are dirt/sand. Being in the northeast with snow and rainy weather having a driveway that is unpaved can be quite the hassle. Also the home is close to the water so wind can be an issue. Luckily my tenant owns a paving company and we bartered to pave the drive way.
The estimate from her company was $5,000 which was lower than the other estimate I had received at $6,500. The agreement we decided on was that for five months she would pay half rent at $725 a month. (Make sure to create an addendum on the lease that is signed by both parties outlining the change in payment) So technically I only paid $3,625 for the new driveway. ($725*5 months)
For the months from May 2016 through January 2017 my numbers have been the following:
- Total Rent Payments: $8,700
- Total Expenses: $12,512.25
This comes out to a loss of $3812.25 over the last nine months. This is for two reasons. First the home was vacant for two months of rehab which totaled a loss of $2780.50. Second she only has paid half rent for two of the nine months to pay for the driveway.
Total Income and Expenses After Refinance
Tomorrow I will close on the refinance of Pensacola. The numbers are here:
- Appraised Value of Pensacola: $150,000
- Refinance Amount: $105,000 mortgage at 5.1% for 30 years
- Monthly Mortgage Payment(Includes Taxes & Insurance): $887.47
Over the course of the last nine months I have a total value of $24,838.25 in the property. For roughly $25,000 I gained a $150,000 investment.
One of the bonuses to refinancing a property besides lowering the interest rate is to get some extra cash out of the property. The HML is at a total of $89,449 and the closing costs came in at $7,456.83. So at a cash out refinance of $105,000 I will be receiving a check at closing for a total of $8,614.14! With the money coming from the refinance of a mortgage, none of the $8,614.14 gets taxed!
After closing there will only be $16,223.81 of my own money in the property.
So going forward after the refinance the monthly numbers for Pensacola are:
- Rent Payment – $1450
- Expenses (w/10% Vacancy & Maintenance) – $1177.47
- Cash Flow – $272.53
Over the course of a year this property will bring in an additional $3270.36 of income a year. (That is with the 10% expense for vacancy and 10% for maintenance) If you take out both vacancy and maintenance the monthly cash flow is $562.53. Totaling a yearly income of $6750.36.
Barring that there are no major maintenance or vacancy expenses, it will only take 2.4 years to get the remaining $16,223.14 of my money out of the property.
I hope this post has given some insight in the numbers behind obtaining a rental property. Crunching numbers was something that I enjoy but also value as the key to success when it comes to investing in real estate. If the numbers do not make sense then what is the point of purchasing a property?
If you have any questions about anything in this post, a property you are analyzing or just want to talk about Pensacola comment below!