Lately on the blog, I’ve shared a bunch of insider looks and reviews of our rental properties. But this is a really special one to me. Because our first rental property just turned 3 years old!
So, I want to go in depth in analyzing its performance. It obviously has a special place in our hearts as being our first foray into real estate investing. But it’s also an amazing example of how a relatively small investment can snowball into so much more.
And that is the really fun part!
How we analyze real estate deals
I’m leading off with this quick review. It’s important to understand how we analyze deals. Because this forms the foundation for success in real estate investing.
You are going to see in this post how our first rental property has performed really well. And how we run it on a daily basis plays a big role in that. But the biggest reason for our ongoing success is because we bought the property well. We are believers that investors make money when they buy the property.
If you are new to these concepts, I’d recommend you read this post on my analysis strategies first if you haven’t already.
But, I’ll give a quick recap as a refresher
- We invest in multifamily cash flowing rental investment properties using a Buy, Fix, Rent, and Hold model
- To screen investment properties, I use the 1% rule (Monthly rent/Purchase price >/= 1%)
- If it meets criteria, I move forward to more analysis
- If it doesn’t meet criteria, I move on to another property
- To analyze investment properties, I use cash-on-cash return (Annual Net Income/Money Out of Your Pocket >/= 10%)
- If it meets criteria, I lock up the property by placing an offer based on your criteria
- If it doesn’t meet criteria, I move on to another property
- To valuate investment properties, I use NOI (Annual Income not including financing)
- Estimated Sale Price = NOI/X% (based on local market data, usually 8%)
Remember, you can download our free Cash Cow app on iPhone or Android here to help you analyze deals on the go!
With this reviewed, let’s look back on our initial deal analysis of our first rental property.
Initial deal analysis of investment property #1
You can see a full run down of this deal analysis through all the stages of buying the property here.
But our final analysis is summarized here:
(Also keep in mind that these screenshots were created using the real estate calculator created by Semi-Retired MD from their Zero to Freedom course that Selenid and I took!)
Here are the highlights:
- We bought the property for $174,500 using a 30 years mortgage with 25% down
- Our monthly expected net operating income (profit after all expenses except mortgage principal and interest) was a $1621
- Our expected monthly cash flow after all expenses including mortgage principal and interest was $871
- Our expected annual cash flow was $10,453
I always like to highlight this because many of you will be looking at the cash flow number and be thinking, “Wow, is $871 per month really worth the hassle of owning a property and investing in real estate?”
The answer is a resounding yes! Because cash flow only tells part of the story. Granted it is the most important part of the story. But there is more. Remember, there are 4 ways that you make money in real estate:
- Cash flow
- Appreciation
- Tax benefits
- Principal pay down
- Inflation hedge
But really what I want to focus on and emphasize in this post is cash flow. Since that is what we base our analysis on. Also, what I hope to continue to demonstrate is how the cash flow from this one rental property compounded over the years…
Rental property performance after 1 year
So, in all, our first investment property performed very well in its first year!
After 12 months,
- Our total cash flow from the property was $13,932.14
- Our yearly cash-on-cash return was 21.04%, more than beating our projection of ~17%
Here are some additional numbers:
- Cash flow: $13,932.14
- Appreciation: $150,000
- Tax benefits: $25,000
- Equity pay down: $2,000
- Inflation hedge: $752 ($13,932.14 * 5.4%)
And you can see a more in depth breakdown of our 1 year review here.
Rental property performance after 3 years
Now, let’s fast forward to today! After 36 months,
- Our total cash flow from the property was $38,210.19
- Our yearly cash-on-cash return was 16.81%
So, we are spectacularly close to our projected CoC estimate of 17.5%!
But why the fall from our 1 year over performance of 21.04%?
Well, the major reason is that this was our first rental property. And we learned some lessons in both analyzing and running investment properties.
Check out my best-selling book, Money Matters in Medicine!
The first lesson is that we were underestimating capital costs, which would fall in the “repairs/renovations” category in our deal analysis. After 3 years, our capital costs were near $20,000, a big over from the $6,500 we initially included.
Second, we have seen how vacancy can really eat into our cash flow. We’ve minimized it for sure, but a few months of vacancy hurt us.
However, we were very conservative in other areas of our initial deal analysis. This includes underestimating rent and overestimating maintenance and other expenses. As a result of these countering forces, our current cash flow very closely approaches our initial estimate.
Plus, the lessons we learned are invaluable!
In all, we have recouped >50% of our initial investment with cash flow alone
But remember, there is more…
- Cash flow: $38,210.19
- Appreciation: $150,000
- Tax benefits: $25,000
- Equity pay down: $6,000
- Inflation hedge: $2063 ($38,210.19 * 5.4%)
This all totals a net worth increase of $221,273.19!
You can see how real estate investing has played a huge role in my steady rise in net worth as Selenid and I approach millionaire status.
But even more importantly…
The increase in net worth is impressive. However, wealth and net worth, while correlating, are not the exact same thing as I argue here.
What this property does is give Selenid and me >$1,000 in cash flow each month. And then we used that cash flow in addition to our month savings rate to save up and buy more rental properties. And on and on. To the point where our monthly cash flow from our 8 properties and 18 doors is >$10,000 monthly.
And eventually we will use this cash flow to fund our expenses in retirement. And we combine this cash flow with traditional retirement savings in stocks and bonds via our nest egg in a hybrid approach.
This is all a great example of how real estate investing is not a rocket ship but is a flywheel. And this first rental property of ours was our initial push on the flywheel that now is spinning faster and faster!
That’s why this is my favorite post for any doctor looking to get started in real estate: The Real Estate Flywheel Effect for Successful Physician Investors!
What do you think? How does this rental property stack up? Do you invest in real estate? How do you track your success? Let me know in the comments below!
