The first quarter of 2021 was great for my rental properties. Honestly, I have very little to complain about this quarter, things went great overall. Also, I finally closed on my 5th property and can not be happier to have that deal behind me.

I have a friend whose father is thinking about selling his house sometime soon. He reached out to me and asked if I would be interested and I told him absolutely! I’m not sure if this deal will happen or not but if it did I would be moving out of my owner occupied two-family and into that house. I’m pretty excited for the possibility.

Property 1 – Owner Occupied Two Family

I’ve owned and owner occupied this two-family since 2017. All things considered, this property has been great to me. I purchased the property for $75,000 and put 20% down. In late 2019, I was able to get a HELOC on this property for just over $40,000. Here’s the spreadsheet for the first quarter of 2021 below:

It was a good quarter for this property aside from a couple little hiccups. I expected the gas/electric bill to be a bit lower starting out this year for a number of different reasons. It was a pretty mild winter, less Covid restrictions and there is one less person living in the house (my tenants girlfriend moved out when they split up). For whatever reason, that didn’t happen, but no big deal.

We had a couple very windy days in March, which led to an unfortunate event. One of my trash cans got blown into my exterior screen door and absolutely destroyed it. On the same day, my german shepherd Harvey attempted to jump through a window to get at a squirrel or something outside (absolute lunatic, he just turned two in April). He shattered the window but thankfully he didn’t get hurt or manage to make it outside. This is actually the second time he’s done this. The window was an old school single plane, wooden window with the big metal weights in it. It needed to be changed eventually anyway, Harvey just thought it should be changed a little sooner than I did. Between the screen door and the window it ended up costing me $330.48 and a few hours of time.

It has cost me an average of $391.56 per month to owner occupy this house so far during 2021. Although, I paid $126.26 towards the principal on the mortgage in January and February. I could have owner occupied this house for $307.14 per month without those extra payments. In March and going forward, I will be putting that $126.26 towards my HELOC that I drew on to purchase my 5th property. It has a higher interest rate and it is variable. Considering the alternative of owning a single family house or renting, ~$300/month for housing is pretty cheap. If/when I were to move out, I would rent my apartment for around $850, leaving around $500 cash flow per month based on these first quarter numbers.

I still plan on doing some more work to this house this year. More windows, exterior paint, interior paint possibly, some flooring. We’ll see.

Property 2 – “Cool” Two-Family

I just closed on this property in February 2021. The purchase price was $115k and I put 25% down. I will be referring to this two-family as the Cool property. Here’s the spreadsheet for the first quarter of 2021 below:

Being that I closed late in the quarter, there isn’t a whole lot to look at here. One of the units was vacant when I closed so I had to get that filled first thing. The unit was basically ready to go aside from a few small things and some cleaning. Changed the locks, fixed some cabinet doors, a little bit of painting, fixed an exterior railing, replaced a few lightbulbs, etc. It cost me just $89.75 to do everything I needed to do. It’s worth noting that I have paint, lightbulbs and plenty of other stuff on hand, otherwise this would have cost a bit more money.

As you can see, it cost me $80.61 to own this property in March. When I got the vacant unit filled it was almost half way through March, resulting in prorated rent. I expect to see pretty solid cash flow from this property going forward.

Property 3 – “East” Two-Family

We refer to this two-family as the East property. This is the first of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s the spreadsheet for the first quarter of 2021 below:

This property got off to a great start this year. Much improved over the lackluster year last year. We did have a tenant move out March 1st and it was the easiest, most seamless transition I’ve yet to experience. The old tenants were great about communicating their plans and allowing us to show the apartment before they left. We had 0 vacant days and had minimal work to do on the apartment in between. If only it went that smoothly every time.

The property has cash flowed $630.09 per month so far during 2021. I don’t want to jinx it, but this may finally be the first great year for this property.

• 2021 Projected Capitalization Rate – 9.45%
• Total Cash-on-Cash Return – 210.99%
• Internal Rate of Return – 48.64%

Property 4 – “North” Three-Family

We refer to this two-family as the North property. This is the second of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s the spreadsheet for the first quarter of 2021 below:

So far so good here. No issues, no changes.

The property has cash flowed $520.77 per month so far during 2021. This property has done great year after year and I see no reason why it won’t continue to do so.

• 2020 Capitalization Rate – 7.81%
• Total Cash-on-cash Return – 528.51%
• Internal Rate of Return – 144.56%

Property 5 – “South” Two-Family

We refer to this two-family as the South property. This is the third of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $50,000 and put 0% down. Here’s the spreadsheet for the first quarter of 2021 below:

Again, no changes here. Smooth sailing so far this year. This property will need updates eventually, time will tell when that comes to fruition.

This property has cash flowed $548.97 per month so far during 2021. This property always does well, but it is my least favorite and I kick around the idea of selling it frequently.

• 2020 Capitalization Rate – 13.18%
• Total Cash-on-Cash Return – 469.39%
• Internal Rate of Return – 130.46%

If you want to check out last quarters update you can find it here: Rental Property Update – Q4 2020.

Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.

Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)

What I’m currently reading:

Househacking can drastically increase how much money you are able to save, invest or use towards your debt reduction strategy. The sooner you can start househacking the sooner you can reap the benefits from compound interest. 

Regardless of when you start, househacking can be a life changing decision. Just about everyone has the ability to househack in one form or another.

What Is Househacking?

There are a few different ways to househack, which is what makes it accessible to so many different people. 

Typically, househacking is referred to as purchasing a multi-family home, between two and four units, living in one unit and renting the remaining units. Ideally, you will cash flow positive by doing this, if not you will cover a large percentage of your living expenses.

I househacked in this exact way. I bought a two unit multi-family home, lived in one unit and rented out the other unit. After one year, my average monthly cost to own the house was just $257.97. My tenant paid me rent of $650.00 per month for the first year.

If I had bought a single family home for the same price my average monthly cost to own would be $907.97. 

My average monthly cost of $257.97 + rent of $650 = $907.97

This leaves me with an additional $650 (cost of rent) in my pocket each month. If this $650 was invested for the life of the mortgage (30 years) and earned an average 7% return it would grow to $788,369.72. This doesn’t factor in vacancies, repairs, rent increases, taxes, etc that would lower this number some.

By making this one decision I have the opportunity to save an extra $788,369.72 over the course of the next 30 years vs. someone who bought a comparably priced single family home. That’s remarkable.

Best Case Scenario

In an even better scenario, you could purchase a four unit multi-family home and have three units providing you with income. This option makes attaining a positive cash flow each month very likely. 

Even if the total expenses for owning that property were 50% higher than in my two unit scenario ($907.97 x 1.5 = $1,361.96) It’s still very possible to be cash flow positive. 

If you were able to rent the remaining three units for just $600 per month you would net $438.04.

Rent received $1,800 – total expenses $1,361.96 = $438.04 cash flow.

Instead of having to pay $1,361.96 like you would if you had purchased a single family home for the same price, you have a positive cash flow of $438.04.

If the $1,800 difference per month that was received in rent was invested for the life of the loan (30 years) and earned an average 7% return it would grow to $2,183,177.69. You could have over $2 million more than someone who decided to purchase a single family home!

Of course, there will still be small and large expenses, repairs and vacancies, as well as rent increases over time. These are broad numbers but they illustrate the point very well. There’s a huge financial advantage to buying a mutli-family house and renting part of it out.

Alternative Methods

Another popular way to househack is to simply rent out rooms in your home. You may have already bought a house and want to participate in househacking. This can easily be achieved by renting out extra rooms in your house. This can drastically reduce your living expenses and you could just as easily calculate how much this could earn/save you over a 30 year period. Any additional income received from rent can be plugged into a compound interest calculator to figure out exactly how much.

Househacking could potentially be done if you are renting as well. This will depend on your lease and what your landlord allows, but it could be worth a look. You may be able to househack in some less conventional ways as well. This may include renting garage space, driveway space, etc.

Househacking was the most impactful financial decision that I’ve ever made. The financial gain has been great, but I have also learned countless things that I probably wouldn’t have learned otherwise. I’ve learned things about home ownership, business, landlording, managing relationships and much more. Househacking provided me with the “boots on the ground” experience that allowed me the necessary confidence to continue investing in real estate.

Do you househack or will you in the future?

Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.

Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)

What I’m currently reading:

Well, that sums up 2020. This year has been nothing short of crazy. Thankfully, all my properties did pretty well throughout the year. While writing this I own four rental properties but, I’m in the middle of a deal to close on my fifth. I suspect that deal will close before my Q1 – 2021 rental property update. (Subscribe so you don’t miss it!)

I have a friend whose father is thinking about selling his house sometime between now and spring time. He reached out to me and asked if I would be interested and I told him absolutely! Nothing has come of this yet, but I plan on reaching out again after I close on the deal I’m in the middle of. I would be moving out of my owner occupied two-family and into that house if the deal works out.

Property 1 – Owner Occupied Two-Family

I’ve owned and owner occupied this two-family since 2017. All things considered, this property has been great to me. I purchased the property for $75,000 and put 20% down. In late 2019, I was able to get a HELOC on this property for just over $40,000. Here’s my spreadsheet for the year 2020 below:

Unbelievably, either unit required any repairs at all this year. Aside from that, rent was increased from $700 to $725 in October. This is lower than market value, but I’ll likely leave it alone in 2021. Gas/electric and water increased by a total of $303.60 and $78.06, respectively, from last year. Not bad, I’m sure some of that increase is quarantine related and I expect both to be a bit lower next year.

It cost me an average of $324.48 per month to owner occupy this house. Although, $126.26 per month of that amount is paid towards the principal on the mortgage each month. I could have owner occupied this house for just $198.22 per month. Considering the alternative, owning a single family house or renting, I’m pretty happy with that. If I were to move out, I would rent my apartment for around $850, leaving around $525.52 cash flow per month with the extra mortgage payments or $651.78 cash flow per month without.

I plan on doing some work on the exterior of the house and some upgrades to my unit next year. This will likely increase my cost to own significantly, depending on how much I actually decide to do next year. A lot of that decision will be dependent on the single family deal.

Property 2 – “East” Two-Family

We refer to this two-family as the East property. This is the first of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s my spreadsheet for the year 2020 below:

It was a rough year for this property. We had to replace the boiler which ended up costing over $4,500 and a refrigerator that cost over $800. Shockingly, Gas/electric and water decreased year over year by a total of $537.74 and $50.55, respectively. Some of that can probably be attributed to the newer more efficient boiler.

The property cash flowed $86.43 per month in 2020, down from $252.49 per month in 2019. This decrease is mainly because of the boiler replacement. Without that huge expense, the property would have outperformed 2019 considerably at $468.54 per month.

This property has yet to have a great year. 2018; vacancy and full apartment remodel. 2019 vacancy and full apartment remodel. 2020; boiler replacement. On the bright side, all of the work done in the last few years should set this property up to perform well going forward. Unfortunately, one of our tenants is moving out March 1st. The unit shouldn’t need much work so the outcome will really just depend on how soon we can fill the vacancy.

• 2020 Capitalization Rate – 4.95%

• Total Cash-on-Cash Return – 169.98%

• Internal Rate of Return – 74.41%

Property 3 – “North” Three-Family

We refer to this two-family as the North property. This is the second of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s my spreadsheet for the year 2020 below:

It was another great year for the North property. We had some small repairs here and there but nothing major.

The property cash flowed $661.88 per month in 2020, down from $707.55 per month in 2019. There was no large expense that can be attributed to this decrease. Rather, a bunch of smaller increases to taxes, gas/electric, water and home owners insurance.

This property has performed great each year we’ve owned it. I’m hoping the ball keeps rolling going into 2021.

• 2020 Capitalization Rate – 9.41%

• Total Cash-on-cash Return – 494.62%

• Internal Rate of Return – 337.24%

Property 4 – “South” Two-Family

We refer to this two-family as the South property. This is the third of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $50,000 and put 0% down. Here’s my spreadsheet for the year 2020 below:

Not much in the way of repairs for this property this year. I know that we’ll have some big expenses at some point at this property, but nothing imminent.

This property cash flowed $613.12 per month this year, up from $519.58 per month in 2019. In terms of cash flow, this was the best year so far for this property.

This property has also performed great each year thus far. Here’s to a great 2021!

• 2020 Capitalization Rate – 10.41%

• Total Cash-on-Cash Return – 433.67%

• Internal Rate of Return – 267.34%

Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.

Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)

What I’m currently reading:

There always seems to be a lot of talk surrounding the 1% and even the 2% rule. For some reason, new investors seem to be inexplicably drawn to this rule more than anything else. Generally, when we hear rules, we think these are things we need to pay attention to and follow. The 1% rule may not fit the typical definition of a “rule”. We’ll talk about what the 1% rule is, what it is good for and some of the problems with it. 

What is it?

The premise of the 1% rule is that a rental property is a good investment if the monthly rental income is equal to or higher than 1% of the purchase price of the property. For example, a property for $100,000 must have monthly rental income of $1,000 or higher to fit this rule. $100,000 x .01 = $1,000. 

It’s extremely easy to calculate, maybe that’s where some of the appeal comes from.

When To Use The 1% Rule

This rule is great for determining a properties price to rent ratio. Practically, the 1% rule should really only be used as a screening tool. Trying to decide if a property is worth buying or not requires more than a simple price to rent ratio. A properties cash-on-cash return, cap rate and appreciation potential should also be considered. The 1% rule should probably be called something, anything other than a rule.

Drawbacks Of The 1% Rule

The 1% rule doesn’t give a calculation of net cash flow. For example, a property that costs $50,000 and rents for $500 per month. This property meets the 1% rule, right? What the rule ignores is all the expenses that accompany a rental property that will likely eat all of the $500 rent and some. Buying this property using only the 1% rule would likely result in a negative cash flowing property.

The 1% rule also doesn’t take into consideration the condition of the property. If you bought that same $50,000 property in the previous example using just the 1% rule, you wouldn’t know that it needs $50,000 in repairs and renovations. Now, your 1% just turned into 0.5%. You shouldn’t use this single metric to decide if an investment is “good” or “bad”.

Takeaway

The 1% rule should be called the 1% guide. Or even the 1% screening tool. It can be useful in finding properties to run more analysis on. But, it’s not thorough enough to be used as a standalone property analysis tool. It is a good indicator of the property price to rental income ratio but, that’s really about it.

What do you think about the 1% rule? Is this something you have used, will use or thought about using?

Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.

Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)

What I’m currently reading:

Cash-on-cash return is a metric used to determine an investment’s net income as a percentage of total cash invested. This lets an investor know how much of their out of pocket investment they could earn back each year. This is a great, quick way to measure an investment’s potential performance. To calculate cash-on-cash return we need a few pieces: monthly net income, annual net income and initial cash investment. 

How To Calculate Cash-On-Cash Return

The formula to calculate cash-on-cash return is relatively simple. You just need to divide the annual net income by the total cash invested and then multiply that result by 100, giving you a cash-on-cash return percentage. 

Annual Net Income / Total Cash Invested x 100 = Cash-On-Cash Return 

Calculating Net Income

Now that we know the formula to calculate cash-on-cash return we need to know how to calculate our annual net income. We’ll start with monthly net income and then convert that to annual net income. To do this we’ll need to subtract our monthly expenses from our monthly income and then multiply that number by 12.

Monthly Income – Monthly Expenses x 12 = Annual Net Income

Income

The majority of your income will come from rent. But you should also consider other opportunities for income as well. This can come from things like garage spaces, laundry fees, non-refundable pet deposits, etc. The result of all of these things combined is your monthly income.

Expenses

Unfortunately, there are a lot of potential expenses involved with owning real estate. Here is a list of common expenses you can expect to pay while owning property.

• Mortgage – Principal and Interest
• Taxes
• Insurance
• HOA Fees
• Maintenance
• Repairs
• Property Management Costs
• Actual or Potential Vacancy Rate

Adding all of your applicable expenses together will result in your monthly expenses. You can now use these pieces to calculate your annual net income.

Total Cash Invested

Now we need the last piece for the equation, total cash invested. This is relatively-straight forward. You will have a down payment, closing costs and possibly pre-rental repairs. If your units are already rented when you close you may not have this expense. Basically, any money that you needed to pay out of pocket before you had any tenants.

Example

Let’s calculate cash-on-cash return with real numbers. 

Monthly Net Income – $1,400 Rent, $50 Garage Space = $1,450 

Monthly Expenses – $492 Mortgage, $400 Taxes, $60 Insurance, $200 Maint., Repairs, Vacancy = $1,152

Annual Net Income – $1,450 – $1,152 = $298 x 12 = $3,576

Total Cash Invested – $26,000 Down Payment, $8,000 Closing Costs, $1,500 Pre-Rental Repairs = $35,500

Cash-On-Cash Return – $3,576 / $35,500 = 0.100 x 100 = 10.07%

Cash-on-cash return can be a great metric to analyze a property. It can be especially useful for comparing one property to another, quick analysis of a property and how much financing you should use. Cash-on-cash return doesn’t take into consideration potential appreciation of the property or all of the risks that are involved with investing. This is a great screening tool and can help give you an overall idea of how an investment will perform, especially when used in conjunction with other metrics.