I divide my empire into three categories: Cash Cows, Prime Properties, and Developing
- Cash Cows include my lower-tier rentals, of which I have 6. The last one, which I purchased at $20,500, rents for $700 per month. Even after expenses, I net several hundred dollars on that property. These tenants don't last long and don't take care of their homes.
- Prime Properties are my higher end, middle class single family residences. I have four of these, but I am leaning towards eliminating them. These are newer homes that require less maintenance and are occupied by higher quality tenants who tend to pay their rent on time and stay put. Three of the four have been occupied by just one tenant; the other has been occupied by the same tenant for 2.5+ years.
- Developing is my Florida portfolio, of which there is just one property right now.
What I have learned is that I make more money on the Cash Cows, but they require more effort. Makes sense, right? To address the effort involved while I am an absentee landlord, I am experimenting with a property management company to handle the day-to-day affairs of these properties. I have turned one home over to the company and am about to turn over a second one.
The Prime Properties will become Cash Cows once I pay off the associated mortgages, but they do not earn at the same rate of return as the lower end houses. While on the lower end a $20K investment returns about $7K per year after expenses, a $155K investment, which rents for $1,250/mo., is barely breaking even after interest, taxes, insurance and HOA dues. I would probably be better off using those funds to buy several lower end houses.
Lessons I have learned along the way are many. First of all, if I could change anything, I would not have taken on so much debt. When I lost my job in 2009, I had over $500,000 in debt and nearly all of that was on my rental properties. It might seem like having a $700 mortgage payment on a house that rents for $1,200 is a wise investment, but you will quickly learn otherwise when the rent stops coming in for whatever reason. Second, what often separates tenants from landlords are their lifestyles. My tenants live better than me, at least in conventional thinking. All of them have cable or satellite TV, and most of them have car payments. They have nice clothes, newer electronics, and often partake in expensive habits like smoking or drinking. I choose to live a frugal lifestyle so that I can pay off my debts as fast as possible. To me, financial freedom will be the day when I have zero debt and 100% of my properties are productive.