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Was it a good investment? Hey, Nate, with Keyrenter Property Management here and I’m gonna walk through with you an analysis of an investment property, a standard and typical single-family home that you can buy in a lot of markets for a good price, rent it out for a good rate, over the course of 10 years. We’re gonna look and see, as we consider management fees, vacancy, repairs, and capital expenditures, and other costs, and even some bumps and bruises along the way, if this was a good investment or not.
We’re gonna first start with what the goal is for the investor. If he was an investor looking for cash flow today and looking to replace your income, you might be more concerned about the initial flow that you got on your cash, how much money you getting today. You may be looking at the wealth down the road or maybe a mix of the two. If you’re looking more for long-term wealth, you may not be as concerned about cash flow. In a lot of investments, get both, get one or the other. It’s just important to understand what you’re looking for.
Here’s our investment 8125 South Happy Circle. This is a four bedroom, two bath, one car garage, it sits on a good size lot, and we can rent this thing out for a good rate. We bought it for 250. Our total cash out of pocket was 60,000, which was including the down payment, closing cost, rehab cost of $5,000 for cleaning, maybe some repairs before we rented it out. Our monthly mortgage on that is 1,074, the 5% interest rate. Pretty typical, pretty standard. We put 20% down to keep our PMI out of the equation and to reduce our interest rate a little bit here.
Our income on this is 1800. We’re gonna keep it really simple with an $1800 rental rate. Our monthly expenses, we have two categories. We’ve got the fixed expenses, which is our taxes, our insurance, our management, and leasing. We put 12% because we’ve got management about 10%, and then some leasing costs. Pretty conservative numbers here. We’ve got an increase of 3% on our monthly expenses and our rent. Just keeping up with inflation on a yearly basis, which is pretty typical, as we’re looking at budgeting here.
Now our budgetary numbers, these are the items that we want to make sure that we’re accounting for, but they’re not guaranteed to happen. These are the things that help keep us safe and in the black. We want to budget for repairs and capital expenditures, about 10%, so $180 of our $1800 rent. Vacancy about 5%, $90 a month. Of course these are monthly figures. Total budgetary expenses of about $270.
The management and leasing fee, you may be looking at your situation and saying, “You know what, I’m just gonna manage myself, and not have to account for that, so I can maybe pay a little bit more or not have to rent it out.” Maybe the numbers work a little bit better, but you got to consider management because you don’t know what’s gonna happen tomorrow. You may be in a situation where you have someone come in professionally and manage it. Of course, as a property management company, we encourage you to do that from day one, so that you can free yourself from that burden and allow the professionals to come in.
Our totally operating expenses, including our budget and our fixed is $656, which leaves us in year one with monthly cash flow of $70 a month. Some cash flow focused investors would say, “That’s not great. That’s not enough.” But if we look at year 10, we’re bringing in about 420 a month after that period of time. Much better in the long haul.
Let’s look at this as we continue on. We want to make sure that we’re prepared for these 10 years. Of course, we’ve got our budgetary figures here, which often enough, the budget is enough to cover these repairs, these capital expenditures, the vacancy. A lot of the time, that’s all we need to have in place, and we’re gonna be okay. But you want to make sure that you’re prepared for the unexpected items. We’ve put unexpected in quotes because we always want to be sound investors and expect the unexpected. We have a recommended reserve of three times the rent, or in this case in year one is $5400, which is three 3 x 1800. Of course, we’re gonna increase our reserve as our rents are increasing over the course of time.
Let’s fast forward 10 years. We had our budgeted repair and capital expenses of 24,762. That’s a pretty good budget for repairs and capital expenses. If we needed to replace a roof, that may be increased, but often times investors will sell their properties about two to three years before they have to do that. Then our budgeted vacancy, 12,381, which again is a pretty good budget for vacancy as well, as most tenants in these types of homes stay two to three years anyway.
All right, so what is our return on investment after selling. This is factoring in all of our costs, closing cost, commissions, all those sort of things. It’s 127% return on our investment, which is our cash investment in the very beginning we talked about. We’re at 12.7 averaged annual return, with cash flow of 28,539. Was that a good investment? I would say that was a great investment. Yes, that’s a good investment. That’s a good rate of return on your money, and there’s some other benefits we’ll talk about in just a moment.
But it’s important to keep your eye on the prize throughout this process. If you’re unprepared, without a budget, you’re gonna have some frustrations. You want to make sure you have those things in place because there can be some challenges along the way, and it doesn’t go exactly how you want it to go with these budgeted expenses in place. Let’s talk about some of the unexpected things that could come along.
Let’s say that in the second year of this investment, the water heater goes out. It’s $1,000 replacement in addition to the budget of repairs you already had in place. In the fourth year, the tenant moves out unexpectedly, 30 days vacant, in addition to the already budgeted vacancy costs, we had in place. This is 1967 in the fourth year value of rent. In the seventh year, the furnace goes out, $2300 replacement, and again, in addition to your budget allotment for repairs and capital expenses. In year nine, a tenant is evicted and leaves damage beyond what is expected, $2500 in lost rent, $7500 in damage.
Some investors along this path, when they hit these challenges, they get a little bit frustrated. Again, I believe it’s ’cause they weren’t quite prepared, they weren’t expecting the unexpected. When these repairs happen, where a tenant vacates, they might get frustrated, they might decide they want to just sell the property, and maybe put their money into mutual funds, or stocks, or put it in the bank, or do something else with it. But again, if we’re prepared for these things, and we know that this can happen, and we look at the long run here, and we look at the big picture, what we’re wanting to accomplish, and we don’t get caught up emotionally in this situation, everything will be okay, as we’ll see here shortly.
Let’s fast forward 10 years now, considering some of these unexpected items that happened. Our budgeted repair cost was 24,762 again, but our actual was 35,562. All right, so we went over budget. Let’s see what happens here. Budgeted vacancy, 12,381. When we went over budget, we spent 16,848 in vacancy. All right, not fun. But let’s continue on.
What is our return on investment after selling? Again, factoring all the costs and everything there. Our return is still 106.4% return on our investment, with an 8.86 averaged annual return, cash flow of just over 13,000. Was this a good investment? I would still say yes, it’s still a great investment, not just for the cash return, but for a few other factors that I want to just share.
You get tax deductions that are not accounted for in the return. You can depreciate the asset over the course of ownership, increasing your cash flow. I don’t account for that in the return either because once you sell, you may have some depreciation recapture that you can talk to your accountant about. You have full control over your asset. This is a huge deal, you guys. If you have full control, that means that no one can take it from you, where if you invest your money in stocks, mutual funds, paper assets, startups, whatever it is, you can’t control what happens to that money, to your investment.
Recently there was a silver fund that was a great investment for many people here in the state of Utah. A lot of people invested their entire retirement and their life savings, ’cause it was such a great investment. Well it turned out, it was a Ponzi scheme, and they lost everything. They had no control. Where with real estate, you can move into the house if you have to, if worst comes to worst. You can trade it, you can exchange it, you can do all sorts of things where you have full control over the asset. Of course, you can leverage it unlike any other type of asset.
But what about declining markets? A lot of people were worried about the market declining, they want to sell because they’re worried what’s gonna happen with it. Well if you look historically what’s happened, we’ve always had an appreciating asset, in terms of real estate. It has always gone up since the beginning of time, really. But if we look at this trend since the early ’80s, it’s gone up. Yeah, we’ve had some dips along the way, and we had bigger one here, but it goes up. If we look at the long-term perspective, and we’re looking at things in the long run, it will work out.
I hope this has been helpful for you to look at this to see if this is a really great investment. If you own rentals yourself, and you’re considering selling or doing something else because maybe you’re hitting some of these challenges, I encourage you to keep a long-term perspective, and recognize that real estate wins every time, compared to so many other investments that you can choose.
Thanks for watching. Feel free to reach out, should you have any questions. Happy to talk to ya. Thanks, and take care.
(This is a hypothetical example only and is not to be taken as a prediction of what will happen for you. Please seek competent financial, accounting, and legal advice for the purchase of investment property.)