About My Rental Property

Overview

The Rental Real Estate Investing Reports are based on a single family home I own in Kansas. This home was a perfect starter home for me as a single dude living in a rural community. Here are some stats for the home:

Contract Price of Home: $82,000
Rural Development Loan Fees: $1,673.46
Total Price Paid: $83,673.46
Down Payment: $0.00
Interest Rate: 4.375%

Current Mortgage Payment: $637.86 (Breakdown below)
Principle and Interest: $417.77
Escrow (Insurance & Taxes): $220.09

Rental Property Revenue Per Month: $750.00

Commentary

This rental property was converted from a personal residence to a rental property on July 1, 2018 (really it was earlier, but that’s the first official date I had a tenant). The property brings many financial challenges to rental real estate investing due to the high mortgage and low(er) rental property revenue. If you notice, the rent is currently at $750.00 and my mortgage is $637.86. From a pure cash flow standpoint, that’s a positive $112.14. A positive $112.14 may seem like a positive, but that $112.14 would need to cover two very important “expenses:” 1) repairs and future maintenance and 2) no renter fund. In addition, I have hired a property manager to handle all of the property issues because I am two states over and it is just easier and I sleep well at night not having to deal with any or all of the issues related to the property (although some would argue that it shouldn’t take much work and you’re just wasting money - well I already waste too much money on dumb stuff).

One of the reasons for such a small margin between the rent and the mortgage is due to the fact that I put 0% down on the home. If I took you back to when I bought the home, I didn’t have 20% so I really couldn’t put a proper down payment on the home. The USDA Rural Development Loan allowed me to purchase the home with basically 0% down and 100% financing plus the USDA origination fee. So I literally purchased the home with 0% and because of that I have a “higher” mortgage. If I put 20% down, first I wouldn’t have Private Mortgage Insurance (the $1,673.64 USDA Origination Fee) and second my mortgage would drop to $547.62 instead of $637.86. That would mean my free cash flow would have been $202.38 and although that isn’t a ton better, it would put me in a better financial position with the rental property.

Rental Property Strategy - Property Manager

I do use a property manager because I am in Texas and the property is in Kansas. Some rental property investors would be okay with being in a different state than their rental property, but I just didn’t want to have to worry about issues that came up from another state. I do have a great rental property manager so I don’t mind paying for her services. The property manager is costing me 10% of each month’s rent and annually when the renter renews the rental agreement, she gets to keep 50% of the first months’ rent on the rental agreement. So in 1 year it is costing me about $1,200 to have a property manager ($325 Month 1 and $75 Months 2 - 12).

Rental Property Strategy - Repairs and Maintenance

As part of my agreement, I decided to take care of lawn care out of my own pocket rather than having the tenant do it themselves or having the tenant pay for lawn care. This was an outright decision I made to ensure the place is well kept from the outside (as someone who HATED to do yard work, I didn’t hesitate to pay for this. My property manager has been given instructions that in any given month the lawn care fee cannot be more than $60 a month. She has a guy who does it for about $20 - $30 every two weeks. In Kansas, we only need to do the yard between April and October, so it isn’t a yearly cost thing.

As far as repairs are concerned, I save about $160 per month towards repairs. Now I know what you are thinking, $112 free cash flows each month and that has to cover 1) my property manager and 2) the lawn care in the spring/summer. So how can I save $160 a month? This is one item that comes out of my personal pocket. I budget this amount from my personal pocket. When I get my paycheck each month I transfer $160 to my rental property account for repairs and maintenance.

There are a lot of articles of how much you should save for repairs on a rental property. I chose to save about 2% of the property’s value each year. So at a value of $96,000, 2% would be $1,920 annually or $160.00 per month. I would like to accumulate $12,000 in this fund (although I will probably keep adding to it after $12,000). I do keep these funds in either a Certificate of Deposit (CD) or a Savings account. I do have a CD ladder strategy when it comes to this savings.

Rental Property Strategy - No Tenant Fund

My biggest fear is that I won’t have a tenant and I would have to foot the mortgage. If I didn’t have a tenant, I could hustle my mortgage and come up with that payment each month, but I would rather not. So as a strategy, I save 1 month’s rental income per year. What does that mean? For my first year of renting the property, I calculated my rental income to be $775.00 (it’s not $750, but close enough) and then I divide it by 11 because my assumption is that annually I may have 1 month where the tenant doesn’t pay or I don’t have a tenant. This gives me $70.45 per month. So each month I put away $70.45 from my personal budget to the rental property account as a just in case. My goal here is to save enough to be able to pay my mortgage for 1 full-year without a tenant, highly unlikely, but you really don’t know what could happen. This will continue until my mortgage is paid off in 2044 (I know I should pay my mortgage down faster and I’m trying, but it is what it is).

The Overall Strategy

A lot of people would look at this and go, damn, this isn’t a great investment at all. You’re underwater in cash flows and the return on investment isn’t really great. Well, it’s all true, but this is a low risk real estate investment. The mortgage is under $650 and that is an amount that I could literally take a week and hustle that with an on-demand app. This is a great way to learn about rental real estate without having a huge mortgage. I do plan on trying to pay down the mortgage faster because 2044 is so far away. I also don’t know if I will keep the property and do a 1031 exchange for a property closer to me, but time will tell. It’s a great opportunity to get into the business and learn from it.

Check out my quarterly rental real estate reports here to see how the finances are going.