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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Real Estate Investing Terms: DTI

First off, what is Debt-to-Income? The Debt-to-Income ratio is one used by lending institutions when underwriting your loan (for almost anything – car loan, mortgage, HELOC, etc). DTI is a calculation they use to  measure the risk on which you’ll be able to pay back the loan you’re seeking. The lower your DTI, the less risky you are to a lender. Think of it as your golf score, lower is better.

If you have just one source of income, DTI is fairly simple to calculate. Take your recurring monthly debt divided by your gross monthly income. Expenses like groceries, utilities, gas, insurance are not usually involved in this calculation. For example, let’s assume your current situation looks like this:

  • Reoccurring Monthly Debt: $2,030
    • Personal Mortgage/Rent: $1,000
    • Car Payment: $320
    • Total Credit Card Payments: $600
    • Student Loans: $110
  • Gross Monthly Income: $6,000

DTI = Reoccurring Monthly Debt / Gross Monthly Income or in this case:

DTI = $2,030 / $6,000 = 33.8%

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BUT WAIT, there’s more! What about the loan your seeking? Let’s say hypothetically the loan your seeking will add $700 more in monthly debt. Let’s recalculate as the lending institution certainly will.

DTI = $2,730 / $6,000 = 45.5%

Most lending institutions will consider you an acceptable risk if your DTI is less than 43%. Remember the lower your golf score, I mean DTI, the less risky you are to a lender.

BUT WAIT, there’s EVEN more! You and I are both here because of buy & hold real estate investing. So let’s assume you’re relatively new, have 2 properties in your portfolio and are seeking a loan for a 3rd property. DTI becomes increasingly more complicated to calculate the more properties and the more loans you have in your personal name but one of the reasons why I encourage you to build your team AND a solid relationship with a local bank is because it makes this process much easier as you start acquiring more and more properties. Using our original example, let’s do some more math!

  • Reoccurring Monthly Debt: $3,258
    • Personal Mortgage/Rent: $1,000
    • Car Payment: $320
    • Total Credit Card Payments: $600
    • Student Loans: $110
    • Rental Property #1 Mortgage: $415
    • Rental Property #2 Mortgage: $823
  • Gross Monthly Income: $9,625Gross W2 Income: $6,000
    • Gross Rents Property #1: $1,375
    • Gross Rents Property #2: $2,250

DTI = Reoccurring Monthly Debt / Gross Monthly Income or in this case:

DTI = $3,258 / $9,625= 33.8%

Making up the debt/income numbers as I go along, I found it extremely weird two of these examples both came out to 33.8%

By the way, check with your lending institution to ensure you understand their seasoning time frame. In this example, “seasoning” is how long a rental property has to be occupied to count the gross rents toward your DTI calculation. Most seasoning periods fall between 6-18 months but best to ask your lending institution what they require. In my examples, all properties are seasoned, except for the 3rd one you’re wanting to purchase.

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  • Reoccurring Monthly Debt: $3,258
    • Personal Mortgage/Rent: $1,000
    • Car Payment: $320
    • Total Credit Card Payments: $600
    • Student Loans: $110
    • Rental Property #1 Mortgage: $415
    • Rental Property #2 Mortgage: $823
    • Potential Rental Property #3 Mortgage: $722
  • Gross Monthly Income: $9,625
    • Gross W2 Income: $6,000
    • Gross Rents Property #1: $1,375
    • Gross Rents Property #2: $2,250
    • Gross Rents Property #3: $0 (once seasoned will be $1,700)

DTI = Reoccurring Monthly Debt / Gross Monthly Income or in this case:

DTI = $3,980 / $9,625= 41.3%

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Still under that 43% mark we’re striving for and if you have a great relationship with the bank and all other items check out, you should be on your way to close.

Also, gross rents minus the mortgage on a rental property does not equal cash flow. This is a common misunderstanding of the term and if you’re investing for cash flow, you need to ensure you’re calculating it accurately. More detail on cash flow here: REI Terms: Cash Flow.

In closing, DTI is just one factor a lending institute will consider when evaluating you and underwriting your potential next loan. Make sure your properties are seasoned properly when doing your own calculations but more importantly work on the relationship with your local bank to understand what all they require.

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Does Your Realtor Analyze Deals Before Bringing Them to You?

I hear this question a lot. The quick answer is No.

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Since the World Series (Congrats to the World Champion Houston Astros!) just wrapped up, I’ll use some baseball analogies to help answer this question. Long has been the day since this 5’8, 120 lbs high school junior kept the pine warm for those starters – wow, I’ve gained 100 lbs since then…all muscle! In the real estate investing game, I’m the player and the Realtors/Brokers are my coaches. They advise me on why they like the deal, details on the neighborhood and potentially an exit strategy.  In some sense, they are also my general manager, helping to ensure a transaction or trade goes as smooth as possible. Let me explain.

Here’s why my coaches don’t analyze deals before bringing them to me:

#1 – I want the BP!  The analytical part helps me stay current on our sought after markets and helps keep my analytical skills sharp. This is me taking swings in the cage. My daily BP! That stands for Batting Practice…or Bigger Pockets! My dad’s a huge baseball fan. Huge is probably putting it lightly. Growing up, one of his many tricks to get us invested in the game involved hanging an old tire off the back fence. I remember him wanting my brother and I to throw 100 balls a day into that strike zone. I was too interested in the couch and TV (and a little fishing) at the time but I wish I would have. Learning from that, instead of throwing balls, I’m analyzing deals, daily!

#2 – I don’t want to be traded to the Detroit Tigers!  By that I mean, I have to love the deal! And for the longest I can remember the Detroit Tigers have been the worst team in  the MLB. Analyzing is only a piece of the puzzle. Love is an emotion and if you’ve been following us I suggest removing the emotion out of the deal (something I continue to work on). However in this case, loving the deal (the location, cash flow, portfolio balance, & value add) is highly motivating. Just don’t let the love emotion compromise your numbers – be willing to walk away. For example, in the last 2 months I’ve submitted four LOI’s. Two of which are still pending but the other 2 we could not come to terms.  I loved these deals but wasn’t willing to compromise on our numbers as doing so wouldn’t yield our anticipated return.

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#3 – Extra Innings.  In my dad’s words, it’s “Free Baseball” but, working a full-time job, family w/2 kids, 48 units under our umbrella and currently undergoing a personal home live-in-remodel, I don’t have a lot of spare time to filter through every deal my coaches send my way. Sad to say there are probably some gems that I quickly push to the trash bin because I knew I wouldn’t have time to review and now I’ve wasted my coaches’ time to find and send it to me. The current process I like to follow is finding the opportunity and reaching out to the realtor/broker in that market and so far that has worked very well.

#4 – Pitching Change.  We started out wanting to buy single family homes that cash flowed really well, which are typically C Class properties/neighborhoods and below and we only looked in Pensacola, because it’s local for us.  While I still look at those properties our evolution of investing has progressed like this: single family in one city -> small multifamily in another county -> apartment building in another state. All within a relative easy drive, we now own assets across 3 counties in 2 states. Staying with the value add properties the size of our deals have increasingly grown in size.

#5 – I Simply Don’t Expect Them To It’s not Brent Strom’s responsibility to throw any pitches for the Astros, that’s the players job. I understand how realtors/broker get paid – when a deal closes, not when they send me a listing. I’m very conservative on what we buy and we haven’t sold anything (except our personal home) since we REALLY started investing in 2014. In my opinion, my coaches’ or realtor’s roll is to help educate & advise me, negotiate the deal and ensure a smooth-ish transaction. If they perform these things, then they’ve represented me very well.

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Successful REI Takes A Team: Our Roster


Hopefully this relationship will continue to build, but playing a key role on the team, I plan to start interviewing additional companies now, identifying that backup option just in case.

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real estate investing pensacola fl

Our Pensacola Real Estate investing is focused on buying & holding (B&H) properties for short-term cash flow and long-term wealth building. While the team members discussed here pertain to our focus and are the team members we’ve discovered to successfully invest in B&H, different investment objectives may introduce different and/or more team members. I discuss the various types of investors in the Advantages of Selling Your Home to a Real Estate Investor blog post, but here I’ll discuss what our current roster looks like to make our buy & hold investing a success.

The current players are:

  • Realtor: someone who is used to working with investors or a young go-geter who has just gained his/her license and ready to tackle the REI world for you. Nothing wrong with interviewing realtors to let them know how you plan to invest and the direction you want to take your REI. Don’t be shocked if they all say Yes to everything you ask of them – after all, they are sales people. If you’re just starting out, work with 2-3 or ever how many it takes to find that one that truly understands your investing goals.

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  • Property Management: a must for Buy & Hold investors. I started our investing wanting to play this role and I still do for a few properties in our portfolio, but the tenants are AWESOME. As I started searching for PMs, I called and left messages with the top 3 Pensacola Google magic results and 1 that I met in person. In the voicemails I left, I let the prospective Pensacola Property Manager know that I had 4 properties I wanted to transition to them. I went with the only one that called me back and so far it has been a relationship where we’re learning a lot about each other. Hopefully this relationship will continue to build, but playing a key role on the team, I plan to start interviewing additional companies now. Because this is such a key role, having the backup option identified will prove to be key.

 

  • Tradesmen (electrician, roofer, plumber, HVAC, handyman): if you have a PM in place do you still need these? Yes. While your PM should have a rolodex of tradesmen to provide quotes on needed repairs & upgrades, having your own list isn’t a bad idea. I started building my list when I first thought wanted to be my own PM and just like any other team member, it took going through 2-3 of each to find the right one. The right ones for us are ones who provide quality work for a fair, consistent price.
  • Lawyer: just a no brainer. At some point in time you’ll need a lawyer for a very important event (title searches, evictions, closings, asset protection, lawsuits, etc.). Interview early, let them know your REI goals, but start this relationship before an event happens. I have a great one in Pensacola if you need a referral.

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  • Accountant: also a no brainer…at some point. Starting out or having <7 properties this is probably not a need but as your portfolio builds, it is a must have. Ensuring taxes and tax advantages are properly gained, a licensed CPA will do a way better, legal, job of this than you will, unless of course you are a CPA :).
  • Wife / Family: support groups are key, and my wife provides the positive reinforcement needed when facing challenging times and level-headed thinking when I want to invest outside of our criteria. The MVP of our team!
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