Friday, July 13, 2007

Rental #1 Final Numbers

As I promised a while back, now that the refinance of Rental #1 is done, I'm able to post the final numbers for the property.

Purchase Costs
Earnest Money Deposit


Funds Due At Purchase


Funds Due At Refinance


Property Management Maintenance Deposit

Total Purchase Costs

Monthly Income

Monthly Expenses
Management Fee



Maintenance Reserves

Total Monthly Expenses

Monthly Profit




And now for some discussion of the numbers..

Purchase Costs: This is pretty straightforward. The first entry is my earnest money deposit that I paid to open escrow. The next entry is the amount I needed to bring to the title company when I purchased the house. In other words, this figure includes all the title fees, taxes, appraisal costs, etc. Since I was buying this property using a hard money loan from another company I own, the costs were pretty low. The last figure is the amount I needed to bring to the title company when I refinanced my hard money loan with a conventional lender. This amount includes all appraisals, title fees, taxes, loan fees, and funds the lender required for their escrow account (about $400). This amount also includes my down payment on the property so that I could get the loan to value ratio down to 80%, thus avoiding private mortgage insurance. The Property Management Maintenance Deposit is the amount the PM company required me to give them to hold as a deposit against any repairs that might be needed on the property going forward. The total of these fees, therefore, represents all the money that came out of my pocket to purchase this property.

Monthly Income is, of course, the rent the tenant pays.

Monthly Expenses: The management company charges me 10% of the rent, or $75, for their services. PITI represents my monthly mortgage payments and includes principal, interest, taxes, and insurance. Maintenance Reserves are funds that are saved to pay for any repairs that might be needed during the year. In the past, this has been a big point of contention with some readers, who feel this amount is too low and unrealistic. To each his own. This is a number you can make whatever you want. I chose $25 a month. Keep in mind, I have already put $250 into a maintenance reserve fund when I hired the property management company, so I actually have more saved for maintenance than this monthly number would indicate. Since it's not actually a real expense until you have to spend the money on a repair, it's possible I won't even spend this money at all this year and will therefore, end up with a higher ROI. (OK, unlikely, but still possible!)

Monthly Profit is simply monthly income minus monthly expenses.

ROI is my annual rate of return, calculated as twelve times my monthly profit divided by my purchase costs. I'm happy with over 12%.

One other item to note is that the current tenant's lease is up on November 1. I expect to be able to slightly raise the rent at that time, which of course, will increase my profit and ROI.

Back in February when I bought the place, I estimated a monthly profit of $200 and an ROI of 20%. The actual numbers turned out a bit lower. This might be in part due to the lower appraisal value that I ended up with for the refi, which required me to add another $2,000 to my purchase costs.


Derek Burress said...

Only #25.00 in mantainence reserves? That sounds a bit low to me?

Shaun said...

If you read the post, you'll see I've already got $250 set aside in addition to the $25 a month I am also setting aside. Again, people's opinions vary on this.

Craig said...

Do you include in your ROI your tax savings and potential appreciation on the property?

Shaun said...

No, it does not. Including these figures would, of course, increase my ROI. If I have time, I'll run my numbers through the great real estate investment calculation I wrote about here. That one includes all that stuff.

fernando said...

OK. I've been following your blog, and I hope not to be too doom and gloom. I had a section 8 property also out of state, and thought I could deal with it easily, but I mismanaged it. I think section 8 might have a more reliable rent (from state), but there is more management hand holding that is probably required.

Though I hope that my bad experience is not a general trend. I'll give you a warning: the maintenance overhead is probably going to disappoint you ( drama and broken stuff, upgrades ). Also you don't seem to have any slack for vacancy ( and or late payments, etc ). Or inefficiencies of hiring out management/handy man, since anything work could cost at least $50, etc.

Also, if you are going to compare this ROI against some other form of investment, you have to account for your own time involvement. A mutual fund has zero time involvement, while for this property you probably have to pay yourself at least $50 to account for your time and headaches.. but only if you want to. :)

Though I really hope it goes well for you. The key I think is just to make sure that you keep on top of the management of the property, even if it's "hired out". And make sure that new tenants are very very well screened, double check on the the managers. (my manager did not actually screen, and put in bad tenants that cost me, cost me, cost me). It's better to have it vacant for a long time, than to put in bad tenants early!!

:) :) :)

fernando said...

Hi. I have been wanting to plug a really great service that you should find useful, since I've been following your blog for a while, but I hope that you don't think of this as spam, I think it'll really help.

Anyhow. Please go ahead and give a try. It's from the same company that does the . My friend is producing it ( yes I'm an investor too ), but it is really cool, and I'm sad that I was forced to sell my property last year so i can't use it. ( I mismanged it; section 8, bad management company, bad bad tenants ).

It's a tool to help people manage their properties. It helps you keep track of your real estate portpolio, values, mortages, leases, income/expense, reminders, payments, receipts, advertise for new tenants, etc etc. And pretty soon, they will even support accepting of payments from tenants ( no need to go to the bank anymore ).

Since you are an out of state landlord, on your first or second properties I would still recommend having a local manager, but maybe as you get more experience and good tenants that you trust, you don't have to use them to do everything, just for handyman services.

Shaun said...

This one is not a Section 8 property. The Section 8 one I was going to buy fell through.

Yes, I did neglect to include vacancies in my ROI figures. I did this because the place was already rented when I bought it, so I wasn't thinking about it. A full analysis should include that.

As far as ROI comparisons, there are many advantages to real estate investing over mutual funds. You cannot take a depreciation expense on your taxes with a mutual fund. You cannot take advantage of "forced appreciation" by improving the property. You cannot roll your gains tax free into another investment. As for time, I would have spent time researching which mutual funds to invest in and checking them each quarter to make sure they are still performing to my expectations. That is not as much time as selecting a property, but nevertheless, mutual funds are definitely NOT a zero-time involvement investment.

Using the comprehensive real estate calculator I mentioned in my comment above, my actual ROI for year 1 is 16.94%. This includes a 5% vacancy allowance and maintenance costs of 8% of income, which is almost twice as high as the figure I used in my calculations here. It also includes the amount you save in taxes due to the depreciation allowance and your mortgage principle reduction. I assumed an annual appreciation of 2% in property values (somewhat low) and a 5% annual increase in income and expenses.

It sounds to me like you are someone who tried REI and got burned and so you prefer to stick to investing in mutual funds and/or stocks. That's fine.

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