Thursday, March 23, 2017

A Transparent Look At Our Investment Property's Performance

When buying an investment property, I "run the numbers" to see what type of return I can expect. I make a bunch of researched assumptions, plug them into a spreadsheet and it pops back a bevy of numbers. Based on those numbers, we decided to buy or pass.

Jessi cares about one number: the pre-tax profit. She wants to make sure a property is cash flow positive each month. I definitely care about cash flow, and also the total return on our investment (ROI) since that's what we compare to other investments, like the stock market.

Since I recently completed our final accounting for the tax year, I thought it would be fun to look back and see how we're doing. I also know it's super helpful for others to see real live results. So, gird yourself for a bunch of numbers!

Cash Flow Analysis

Let's start with the cash flow analysis. We currently own 4 properties: LYN is the apartments. COL & JAC are duplexes. FIR is a house we converted into a rental half way through last year.

The line Jessi cares about is the 3rd line. Good news! Each of them are positive, even FIR (The money to fix up FIR is in the "Cash Invested" line).

We target $100/month/unit (line 5) and we're hitting it on the stable properties. I expect FIR to jump up around that level next year as well.

The final line (total ROI) is what I care about most. I expected COL to be at 52%, and we're easily beating that. JAC, however, I expected to be at 16% and it's slightly below that level. I knew it wouldn't be as high as the others because of the large down payment, but this is a little concerning. I was planning to re-paint in the near future, but now I'm starting to wonder if we can afford it.

(Side note: The cash invested in LYN shows $53K. That includes a $50K personal loan. The property is paying off that loan, so it's really $3K invested. That puts the total ROI at ~900%, and increases the TTL total ROI to ~60%.)

Overall, I'm happy with the results.

Classic Property Ratios

This isn't the only way investors look at properties. There are some classic ratios used:

The goal is a Gross Rent Multiplier (GRM) lower than 8.3. Technically my numbers are actual rents instead of scheduled rent (what you're supposed to get at 100% occupancy), but my vacancy rates are low enough it shouldn't matter. I don't personally rely on this number much, but I know others look at it. It confirms that JAC isn't our best investment (but not horrible).

In my opinion, a capitalization rate (Cap Rate) of at least 5-6% is. We're doing slightly better - that's good.

The 1% rule states that your rents should be at least 1% of your purchase price. We knew JAC was slightly below, but the others continue to above this threshold. This is another measure Jessi cares about when doing an initial evaluation.

The 50% rule is that no more than 50% of your revenue should go towards your mortgage. This is actually my first time verifying if we're actually hitting that. For both COL and FIR we did minimum down payments, so I'm not surprised that they're above 50%.


When we buy, we assume zero appreciation. We want the investment to be a solid one even if the market doesn't change. Never buy a property "because it'll go up in value". That's speculating, not investing and creating value (and why I'm disillusioned by the stock market). Still, it doesn't stop me from taking a peak. :)

There's two ways to evaluate the value of an investment property: look at comparative sales, and by an income approach (properties tend to sell at a consistent multiple of their rent). I used Zillow's Zestimate for the comparative sales. My income approach is conservative: take the monthly rent and divide by 1% (the inverse of the 1% rule).

Apparently Zillow doesn't feel comfortable making a guess on the value of a commercial building... The first ROI is comparing 2016 to 2015 (Y/Y). The next two lines are looking at the lifetime (LT) increase since purchase. At the very least, it's nice to know that I could sell the properties for a profit if I need to.

Fun to look at. If anything, it tells me it's OK to move forward with cash-out refinance of LYN. I should not attempt a refinance on any of the others at this time.

Final Thoughts

Am I making a killing? No. But I'm beating the stock market (36% vs S&P @ 9.5% and Dow Jones @ 13.4%). (OK. LYN is pretty good and COL isn't bad either.) Having said that, I spent more time managing the properties than managing my 401K, so there is a trade off. Of course, that's one of the things I like about rentals: there's an opportunity for me to add direct value to my investments, and that's what helped me get a 36% return last year. Plus, I actually enjoy working with tenants and doing maintenance. So it's win-win-win.

As for my next steps, I would like to buy another multi-family property (or two!) this year. Through some research last year, I learned that there are a lot of older folks who bought 1-3 duplexes 20-30 years ago for supplemental income. Lots of them own the properties free and clear (or with very small mortgages), are doing a lot of the managing and maintenance themselves, and have rents way too low for the area. I now have the proven experience of buying and successfully managing multi-family properties that I think I can help these folks fully retire. The plan will be to buy these duplexes at their current value, and then fix them up and raise rents to market rates (and then refinance to pull the invested cash out). This is exactly the same thing I did with LYN. You can see above that that's a winning strategy.

I'll probably be able to buy one property on my own. But I'm also interested in finding people with some cash to help fund deals through the refinance. I hear there's people with at least $25K that would like to outperform the stock market. It would be cool to help current owners retire, help improve homes in the city, and help others earn a better return on their money. So I'll be exploring that avenue later this year.

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