We Earned $231/hr From Our Rental Properties in 2018

The 2018 #s are in! The biggest # we track when it comes down to it is cash flow. While cash-on-cash return comes in at a close second for priority, the main focus for us is cash flow. And while I don’t go into net worth accumulation by someone else paying down your debt (i.e. the tenants) nor do I go into tax advantages, those are hugely beneficial and worthy of their own post. Today, just cash flow. There are several rules of thumb most people use when analyzing properties for cash flow: the 50% rule, the 1-2% rule, the $XXX/per door rule, the Lobster rule, the Alexa rule, the downward dog rule, all sorts of rules. Our primary focus is $100/per door/month and 50% rules.

Wait, before we go any further most of you know I’m involved in a 42 unit apartment complex. For this exercise the 42 unit is not being considered as we are still in process of stabilizing a heavily deferred maintenance property. I’m also not sure my partners want me sharing detailed info on that asset with the world wide webs so I’ll keep this exercise to the properties just my wife and I own. However, 2019 is looking VERY promising for the 42 unit.

Moves & Acquisitions

In 2018 we sold one property (our very first rental property in Pensacola – the one we’ll never sell!) and 1031 Exchanged into a 4 plex. Other than that our focus was geared toward stabilizing a couple acquisitions that were made in mid-late 2017.

Thank You PM Teams!

I can’t say enough about our PMs. Having a full-time job and growing family (ref: How I Balance), we have very little time to focus on managing these properties, plus managing our own rentals is just not what me or my wife want to do. Thus we hire professional property managers to manage all of our properties. We have a few different property managers based on our properties’ locations being in different cities, BUT those property managers are a huge part of why our hourly # is so high. All in all, we averaged about one hour a week working with our property managers. So 52 hours a year. Thank you Team! YOU GUYS ARE AWESOME!

The Numbers

Before we get started, here are a few definitions to ensure you and I are on the same page when it comes to The Numbers:

  • Expenses column includes mortgages (if applicable), insurance, taxes, property management fees, repairs, legal fees, miscellaneous operating expenses and capital expenses. Our expenses were high this year and I get into that in more detail below.
  • Revenue column includes rent, pet fees, and late fees.

Again, I can’t say enough about our PMs and the systems they have in place to keep us abreast with situations but overall they just handle them. So here is how I came to us earning $231/hr on our rental properties in 2018:

  • 52 Hours Worked for the Year (thankful for awesome PMs)
  • $12,038 Annual Cash Flow in 2018
  • $12,038 cash / 52 hours = $231.50/hr

One goal we want our assets to accomplish are $100 cash flow per door/per month. On average we were just shy of that in 2018 so I won’t spend any time discussing that here, but I do want to address the 50% rule.

Not Meeting the 50% Rule

For those of you not familiar, the 50% rule simply states that fifty percent of your rental income should cover all of your expenses (I’m grossly summarizing for the sake of this post). And since only 1 of our properties met the 50% rule, I feel the need to explain, just how close the rest of them were and the importance of keeping separate, sacred accounts for each property to cover vacancy and the more costly, unexpected capital expense items.

  • Little Yellow House: we actually sold this property in February 2018, so only two months into the year. The sell of this property yielded a 77.5% ROI for the life of us owning this property. The proceeds from this house were 1031 exchanged into the 4 Plex – Mobile. So while we experienced a negative cash flow for the 1st two months of 2018 with this property, all-in-all, it provided a great return from acquisition to exit.
  • Duplex – Gulf Breeze: We replaced one unit’s HVAC at a cost of approx. $3700. Not having to do so would have easily put this property above the 50% rule. Thankful for the reserve accounts we established. If you’re not establishing those reserve, sacred accounts for capital expenses and vacancy, DM me.
  • 4 Plex – Mobile, AL: this was the acquisition we 1031 exchanged into from the Little Yellow House. Almost completely turn key, but we had one tenant turnover and a few large repairs to make during the acquisition process – no worries though, we bought this at a bargain!
  • Mobile Home – Pensacola: this is the property from our First Tax Deed Auction. It had a rough 2018 with a tenant turnover, vacancy, a HVAC replacement and some fairly major plumbing issues resulting in >$3k in expenses. 2019 should be a strong, stable year for this one.

In closing, 2018 was a profitable year and I am anticipating 2019 to be much better. By that I mean I’m anticipating our cash flow to almost double as a result from just the two transactions. And while most investors don’t look at hourly earnings from rental properties, my W2 background has me thinking that way. If you’re not engaged with our group on Facebook, you’re missing out on conversing with us and 4,500 other W2 real estate investors. Join Us: Real Estate Investing for the W2 Employee

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Reflect and Soar Higher in 2019

Reflection on 2018 Goals


From the Time to Reflect, Time to Set 2018 Goals and Begin Pursuit post (man, I still love that photo and memory of taking it), I listed out my 2018 goals. Here is how I did with those: 

ACCOMPLISHED

  • Increase Annual Passive Income by $2,000 month (July 2018) 
  • Graduate Cardone University (August 2018)
    • I have a lot of respect for what Grant’s built, read almost everyone of his books, and become motivated almost every time I’m consuming his materials. However, as mentioned on The Millennial Real Estate Investor Podcast, I find Grant’s energy to be exhausting at times, which is why I have great respect for this man. Looking forward to learning and growing more through Grant’s teachings, very soon. 
  • Knock the Dust off the Grey Matter (December 2018)
    • One thing I learned from this goal and now echo in my mastermind group, the W2 Capitalist, is to be VERY specific and VERY objective in goal setting. I did not do that for this goal but I’m still marking it as accomplished. Here’s why. In 2017 I read 12 books and listened to many, many, MANY hours of podcasts. This year, I’ve read 24 books and listened to many, many, MANY hours of podcasts. Dust has been knocked off!

FAILED

  • Increase Social Media Following: 1k Blog Subscribers, 10K IG Followers, & 1k FB Likes
    • I new this was going to be a lofty goal but I went with it anyway and learned A TON when it comes to social media. Although I didn’t grab the # of followers, Likes and Hearts I wanted, this goal did push me to launch the Real Estate Investing for the W2 Employee Facebook group. Created in March, officially launched in June, we now have over 3500 members and the amount of engagements and more importantly the VALUE of the discussions that are happening there is simply AMAZING! I am humbled and with this momentum, my primary focus for 2019 is growing this group. 

Goals for 2019 (or the next 12 Weeks)


One of the best things I adopted this year (in Q3) was the concepts of Brian Moran’s book The 12 Week Year: Get More Done in 12 Weeks than Others Do In 12 Months. I’m not going to deep dive into the book’s contents during this post but I will say it has been the most productive tool discovered this year (grab a copy if you want a positive change in your life). So going forward, I will post 4 goal setting posts per year and if one thing became apparent to me this year, it is the value of implementing the entire cash flow quadrant as presented by Robert Kiyosaki. With 2 of my 4 cash flow quadrants producing well (W2 and investments) and the looming, expected down turn of the real estate market, the next 12 weeks I’ll be focused on injecting fuel into our movement, currently known as Real Estate Investing for the W2 Employee

Goals for Q1 2019 (Due March 31, 2019)

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How We 1031 Exchanged Into A Swimming Pool for Our Personal Residence

So, simple definitions before we dive into this blog post.

1031 Exchange: is essentially a code in the IRS rules that allow you to postpone paying taxes on any gains (in our case, from a real estate transaction) if you reinvest those gains into a similar or qualifying like-minded property. There are other rules, like the 45 & 180 day rules regarding a successful 1031 exchange and I even heard of a Reverse 1031 Exchange during this process, but best rely on your 1031 Exchange Intermediary to guide you through these rules and stay on the required timelines.

1031 Exchange Intermediary: person you hire to legally handle your 1031 exchange. By this I mean, you’ll never touch the money from the sell and purchase of the like-minded exchange…and for legal tax reasons you should hire a 1031 Exchange Intermediary.

Now legally we can’t 1031 Exchange into a swimming pool for our primary residence…BUT WE DID! Here’s what I mean.

Setting the scene: We personally just moved (growing family need more space, wanted a better school district) and living in Florida, we certainly wanted a pool in our new home (which the house we moved into did not have). We recently sold the little yellow house, our first Pensacola rental property for $50k cash. For ease of calculations we’ll use that # going forward for calculations but truly it’s $50k minus all the closing costs, 1031 exchange fees, etc (a few grand total).  The little yellow house was not on the market and when we were approached by a potential buyer, the cash proceeds after that sale, after capital gains tax, would allow us to pay cash for the gunite pool we wanted to have installed.  Paying cash certainly would have been the Dave Ramsey school of thought…no debt!  But here’s why we didn’t go that route.

 

 

For clarity, if we didn’t utilize a 1031 Exchange, we would have had to pay 15% capital gains tax on the $50k sale price on the little yellow house, the “house we’ll never sell”.  This would have equaled $7,500, which would have immediately been taken out of our pockets IF we didn’t use the 1031 Exchange rule, meaning we would have walked away with $42,500 (minus closing costs). 

Compare that to the Pool cost of $40,190. 

By 1031 exchanging into a like-minded property, we were able to keep that $7,500 and roll the total $50k into our next rental property, which just happens to be an off-market four-plex, fully occupied, turn-key property.

Here are the #s on the four plex (for a complete copy of this report, download here):

Screen Shot 2018-06-15 at 6.58.31 AM

Screen Shot 2018-06-15 at 7.00.09 AM

The main focus of the #s on the 4-plex is also our main focus when acquiring properties…cash flow. With this conservative analysis our monthly cash flow is anticipated to be $538. Remember this #, $538. It’s also important that the Cash-on-Cash ROI (CoCR) is above 12% as well. My minimum target for CoCR is 12%. I go more into Cash on Cash Return in the post located here.

IMG_2883

Now, let’s switch gears and look at the #s on the pool. Since we didn’t pay cash for it, we obviously financed and we did this through a home improvement loan. Our monthly payment for the pool construction is $359 and we’re going to add-in the additional costs of increased electrical expense for the pump/filter (which has been approx. $65/month) and chemical costs (approx. $20/month).

Monthly Pool Costs: $359 + $65 + $20 = $444

Now recall the anticipated cash flow # from our 4-plex, $538.

$538 – $444 = $94/month

So after paying the mortgage, insurance, property management expense, putting money back for repairs/maintenance, putting money back for capital expenses, putting money back anticipating vacancy costs on the 4 plex, AND paying for our pool, we still cash flow $94/month.

We can buy a lot of pool toys at $94/month!!!

Just kidding. We’ll take that extra $94/month, put into our sacred account to be used for a down payment on our next property.

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And while the above paragraph is exciting, we’re still earning 14.86% on our money and have the option to keep the cash flowing asset after the pool is paid off.  Acquiring the cash flowing asset is a much better use of money versus paying cash for the pool.

The Lickety Split: Get involved in your local real estate investing association (REIA) – it’s where I found this 4-plex deal. 


 

 

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