Sunday, January 21

Passive Income from Rental Properties

In 2006 I became a landlord, mostly by accident.  I was living in a 2 bedroom townhouse about 30-45 minutes away from my job.  I wanted to be closer to work, and I found a brand new subdivision merely a 10 minute drive from the office.  The market in the area where my townhouse was located was weak for sales, and my best friend and his wife were looking to move back to Birmingham.  I suggested he rent my townhouse, and the rest is history.

Passive income - income that requires relatively little effort on my part - is a huge part of my plans for financial independence.  I began buying up rental properties, mostly foreclosures.  In 2008 I moved from the house I bought in 2006 to another new house and rented that house out.  Fast forward to 2018.  I have 10 rental properties.  I've held all my properties except one, which I sold in 2015.

Today I'm going to take a look at how I'm doing.  Below I have included properties I own as well as the two held in my retirement account.



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2014201520162017
Income$95,076$93,305$83,874$91,728
Expenses$34,553$36,689$44,861$33,919
Cash Flow$60,523$54,616$39,012$57,809

Maximizing Income

Last year was a solid year for income.  Every year I will experience vacancies, but in 2017 most of the properties were occupied and rent was paid.  I haven't added any new houses to my portfolio since 2014.  I look at how much I am charging every year and, if warranted, I raise the rent.  I try not to be too aggressive because it is better to keep existing tenants than find new ones.

Minimizing Expenses

I have some control over my cash flow by deciding how much money I will spend on my properties.  The townhouses are in a declining area, and I am especially careful not to overspend.  My single family homes have more potential, so I try to make those very nice to attract the best tenants.  This strategy seems to work:  across the 3 nicer homes I own, one tenant has stayed 9 years, another 8 years, and the third is in her second year. 

What do I do to keep expenses low?  Over time I've simplified things.  I am currently working on a vacant property, and my handyman is repainting the entire house, walls and ceiling, white.  I have removed carpet and replaced it with vinyl peel and stick tiles.  I'm thinking about removing dishwashers from these properties, and I have already removed most of the garbage disposals.  The goal is to minimize service requests by using more durable products and eliminating anything that can break.  I'm also deferring some maintenance.  For example, the wooden fences around my townhouses have been in bad shape for years, but I have put off replacing them. 

One last note about expenses.  I don't include depreciation in my calculations because it is not an actual cash outflow.  If I included depreciation, which basically amortizes the cost of the property over its useful life, my income would be much lower.

Passive Income is Awesome!

Becoming a landlord is one of the best decisions I have made.  Everyone needs shelter, and the properties have dependable cash flow regardless of how the stock market performs.  Over time I'd like to not be an absentee landlord, because being so far away increases my costs.  Having a steady stream of income while I am doing other things is so important to my financial independence.

6 comments:

  1. Thanks for sharing the annual numbers. You're doing great with your rentals. It looks like you're making quite a bit more from them than you are from your jobs.

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    Replies
    1. I definitely am, Andy... particularly when you look at how much time I have to spend on them to keep the money coming in, which is minimal.

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