Rental Property #1 – Hammond, IN

Back at the end of 2016, I purchased a small single family house in Northwest Indiana. I bought this property as a turnkey investment meaning it was a cash-flowing rental property ready to be cash-flowing from day 1. The property is a 3bd/1.5bath ranch with a finished basement. It has a two car garage and is located walking distance to an elementary school which was a big plus to me. The purchase price was $87,500 and it was rented out for $1,100 at the time.

How has it been overall?

I’d say for the most part, this property has performed really well since we bought it. I joke that I probably bother the tenant more than he talks to me (via the property manager). I decided to hire a property manager because it was far enough that I did not want to have to go to the house if anything came up. Aside from a couple small items needing repairs inside the house and a roof issue with the garage, the maintenance & cap-ex have been minimal. In all honesty, this rental property has been boring BUT from what I’ve learned, that’s exactly what I’d want for all my investments so long as it’s meeting our investment goals. I totally get the draw of hitting a grand slam with super sexy triple digit returns but for now, slow & steady will still get us to the finish line.

Analyzing the numbers

Today, the rent has been increased but only to $1,125. The math for the rental works out as follows:

Mortgage Payment-$355
Property Management-$113
Vacancy (8%)-$90
Maintenance/repairs (5%)-$56
CapEx (10%)-$113
Net Monthly Cashflow (Conservative)$100
Table 1. Rental Property Cashflow Analysis

How has it performed?

On that list, the mortgage, taxes, insurance & property management are the true outflows on a monthly basis. The vacancy, maintenance/repairs & cap-ex are considered expenses but we’re really just saving it in the business account for when that time comes. An aggressive investor can say they are cash-flowing $359/mo on this property but we’ll play it conservative and save each chunk for what it’s allocated for until we need it.

The $100/month cashflow equates out to around 6% returns annually: $100/mo * 12months/yr = $1,200/yr. We put a 20% down payment of $17,500 on the purchase but let’s round it up to $20,000 w/ closing costs. Therefore, $1,200/$20,000 gives us a 6% return.

*Note to self: Cover the other three ways this rental property is adding to the bottom line (appreciation, mortgage paydown, taxes) in a future post.

What’s next?

When we bought this rental, we called it “Nolan’s college fund.” He was about 6 months old and we said we would math out the necessary surplus in mortgage payments so that when Nolan graduated college, it would be paid off. (Side note: We did also start a 529.) We figured if the 529 didn’t cover everything, the income from a fully paid off property 15-20yrs down the road damn well better cover the rest. To cut a long story short, a lot of other stuff has happened since then that has changed our view/plan on college for the kiddo (I’ll cover that another time.)

Currently with the change in plans, I’m trying to figure out which path to take with this property:

  • Refinance/HELOC – We would need to get in touch with a realtor and/or check in with our property manager but I’m pretty sure there’s a hefty amount of equity sitting idle in the house. Depending on what amount that is, we could either pull out cash with a refi or open up a line of credit to give us access to that cash. Between these two, I’m leaning towards the refi if it doesn’t increase the mortgage too much and using that cash to pay off a nice chunk of the existing debt we’re aiming to eliminate this year.
  • Sell sell sell – If you ask seasoned real estate investors what their biggest mistake was, you often hear “I wish I never sold…” I’m in this same boat. As sure as I was back in 2015 that I was making the right decision, I wish I held onto the Quincy condo knowing what I know now. But hindsight is 20/20 and there are always exceptions. In this case, a sale of this rental would for sure include the use of a 1031 exchange. Using a 1031 exchange allows us to sell the property and roll over the gains into an equal or greater property instead of realizing them & paying taxes. It’s the equivalent of trading those 4 green houses in for a nice red hotel in Monopoly haha. In our case, I think I’d want to either get a larger single family rental or a couple more condos in Illinois.

Just like the debt paydown story, I’m torn between the two options and likely will just keep thinking on it for a while longer. Even with the whole “pay it down for Nolan’s college” plan vs what we’re shifting this rental towards, I can’t help but think we keep changing things up too much hahaha! But then again, sometimes you can’t just put blinders on and ignore everything. You have to be able to make tweaks & adjustments. Am I right or wrong? Only time will tell, I guess.