Analyzing My First Investment Property

Mathew Kuhn Making Money, Spending Money 11 Comments

Time to face the music and analyze my first deal after having rented it for several months! I truly believe that real estate WILL transform my family’s financial opportunities, but it’s not a get-rich-quick process. It’ll take time, work, and failures (hopefully I can keep these to a minimum!). 

In the long run, I’ve chosen real estate as my main path to freedom and part of that means being totally transparent about my own shortcomings so I can improve for the next property.

Before we get into the numbers, I just want to repeat that this is my first investment property. I bought it because I knew it wasn’t a terrible deal and I needed to:

  1. Get my feet wet in the world of investing. The hardest part of anything that involves risk and work is starting. This was a pretty simple investment property (standard financing, minimal rehab, etc.) that my wife and I both needed to ease us into real estate. I’m no longer afraid of what was previously unknown because it’s not unknown to me anymore. I needed to get past my mental barriers to know what buying and managing a property was really like.
  2. Learn by doing. I had already read many posts, books, and listened to many podcasts about real estate investing. The thing is, most of it didn’t really stick because it wasn’t applicable to me. Even though it was interesting, I didn’t need to know how to manage or fix a property. I didn’t even need to know how to analyze or finance a property because my brain knew I wasn’t read to really start. Committing to actually buying an investment property finally told my brain that I was serious.
  3. Have a baseline for all future investments. I was fortunate to have an investor/realtor help me pick this deal, but I knew it wasn’t going to be anything spectacular. I had only looked for a couple weeks and had only visited a handful of properties. But having a property and knowing the numbers for it allows me to be more and more selective with future properties because I now know what an average deal looks like. I have something to compare them against.

I already talked about how I found and financed the property in my first post on this property. Here, I’ll be going into the actual numbers. I want to know, was this really a profitable deal or not?

Getting to Our Purchase Price

The property we bought was originally listed for $292,500. Shortly after, the home was under contract with another buyer. Unfortunately for the seller, during the home inspection they found that the roofing needed to be replaced. This must’ve made the buyer nervous, because they backed out of the deal. It also motivated the seller to get the roof fixed.

Because of this whole situation, the house had been on the market for a couple months already before the seller was ready to market the property again. This 1) made buyers less interested in the home, and 2) pushed the selling out to the winter months, which typically shows less demand from buyers.

Because of the lowered demand, the seller lowered his asking price several times, for several more months. I’m honestly not sure why the house was on the market for so many months. It may have been because it was winter, poor-quality listing pictures, the time on market, or a combination of a bunch of things. 

By the time our agent showed us the property, it was listed for $278,900! Because of the time-on-market when we actually bought it (~6 months), our offer was accepted at $270,000 with the seller agreeing to pay $5000 of closing costs (and we had a new roof!).

As I mentioned in my previous post, we immediately put in granite countertops, painted several rooms, and hired a professional to take pictures of the house. We had several good applicants and quickly had it rented out for $1850/month.

Analyzing My First Investment Property

I’ll be honest, I did as good of an initial analysis as I could at the time, but I relied a lot on my agent to tell me if it was a good property or not. He’s an experienced agent with 10+ investment properties himself, so I figured it’d be reasonable to jump in without understanding every little detail.

Since I haven’t owned the house for a year yet, I’m going to run this analysis against 3 different scenarios – my current actual numbers, the conservative-leaning numbers, and the realistic numbers.

Let’s start with the number that will be the same for ALL scenarios – upfront expenses.

Upfront Expenses

These are the exact numbers I spent down to the cent.

Total Purchase Price: $270,000

Down Payment (20%)$54,000
Closing Costs (includes first month payments, appraisal, 12 months landlord insurance, etc.)$10,640.91 – $5000 (seller credit) = $5640.91
Vacancy (rented out before 1st mortgage payment due)$0

Upfront Cash Invested: $65,572.74

We’ll come back to this number. Now we need to figure out our yearly income. This will change based on the scenario and the assumptions we make.

Yearly Income

The gross income will stay the same regardless of our assumptions. Let’s calculate those real quick:

Monthly Rent: $1850
Total Yearly Rent: $1850 * 12 = $22,000

Average Monthly Principal Paydown (for year 1): $303.45
Total Yearly Principal Paydown (for year 1): $303.45 * 12 = $3641.40

Now the expenses for the year will change based on the scenario.

Scenario 1: Current Numbers

Right now (few months in) we’ve had 0 repairs and 0 vacancies.That means our only monthly expenses are the parts of the mortgage (principal, interest, escrow) and HOA:

Escrow (Taxes and Insurance)$212.75

Monthly Expenses: $1393.34
Yearly Expenses: $1393.34 * 12 = $16,720.08
Actual Total Yearly Income (not including principal paydown): $22,000 – $16,720.08= $5279.92

Scenario 2: More Conservative Numbers

We can be pretty certain that 0 repairs and 0 vacancies won’t last forever. So let’s add those in! 

Based on the area, the number of applicants we had when we first marketed the home, and what our realtor has experienced let’s go with a very conservative (I’ll explain why I think this is conservative in scenario 3) vacancy rate of 20 days/year. 

For small repairs, our handyman charges about $65 a visit. Let’s say he has to come over every 2 months to fix something. That would be $65 * 6 = $390 a year.

For bigger repairs (capital expenditures, or just ‘CapEx’), I’m going to use a number from (affiliate) “The Book on Rental Property Investing” by Brandon Turner and just average $183. FYI, this book is amazing if you’re just starting out in real estate and want to learn it from A-Z. By the time you’re done, you should know enough to get started in real estate like I did if that’s your goal.

Vacancies(20 / 365) = 5.48%; 5.48% * $1850 = $101.38
Small Repairs$390 / 12 = $32.50
CapEx Repairs$183
Escrow (Taxes and Insurance)$212.75

Monthly Expenses: $1710.22
Yearly Expenses: $1710.22 * 12 = $20,522.64
Actual Total Yearly Income (not including principal paydown): $22,000 – $20,522.64 = $1477.36

Scenario 3: More Realistic Numbers

Realistically, I think I’ll average somewhere in between Scenario 1 and 2. 

Let’s start with vacancies. 

My real estate agent has over 10 properties in the same area I bought in (some in the same neighborhood!) and has been investing for 7+ years. Out of all the years he’s invested, he’s only ever had to pay 1 full months’ mortgage payment. Let me repeat – he’s only ever had to pay 1 FULL MONTHS’ MORTGAGE PAYMENT. 

This is because of 3 things:

  1. There’s a high demand for rentals at our price point in the area
  2. Tenants in our area tend to rent for longer periods of time
  3. He and his wife manage all their properties (similar to my wife and I for now) and start looking for tenants 60 days before a lease is up. It only took us 3 weeks to get our current tenants all signed up! This is what I’ll be doing and I expect our close management + property class to keep vacancies to a minimum.

So I’m going to lower the vacancy to an average of 7 days a year (or a full months’ mortgage every ~4 years).

Next, the repairs.

I have no idea what CapEx repairs will be, so I’ll keep those at $183/month. However, I doubt I’ll need to call the handyman every 2 months. The house is relatively new and we put a good amount of work into it before the tenants moved in. I’ll say at most, we’ll pay an average of $65 every 3 months. This brings small repairs down to $260/year.

Let’s look at the expenses now:

Vacancies(7 / 365) = 1.17%; 1.17% * $1850 = $21.72
Small Repairs$260 / 12 = $21.67
CapEx Repairs$183
Escrow (Taxes and Insurance)$212.75

Monthly Expenses: $1619.73
Yearly Expenses: $1619.73 * 12 = $19,436.76
Actual Total Yearly Income (not including principal paydown): $22,000 – $19,436.76 = $2563.24

My Yearly Returns

Now for the fun (or painful) part! Let’s see what my returns for each scenario are. 

Remember that “cash-on-cash” return is only concerned with cash flow (how much I’m pocketing every month). “Total return” also takes the principal paydown (aka. “debt paydown”) into account.

Scenario 1: Current Numbers

Cash-on-Cash (CoC) Return$5279.92 / $65,572.74 = 8.05%
Total Return$5279.92 + $3641.40 / $65,572.74 = 13.61%

Scenario 2: More Conservative Numbers

Cash-on-Cash (CoC) Return$1477.36 / $65,572.74 = 2.25%
Total Return$1477.36 + $3641.40 / $65,572.74 = 7.81%

Scenario 3: More Realistic Numbers

Cash-on-Cash (CoC) Return$2563.24 / $65,572.74 = 3.91%
Total Return$2563.24 + $3641.40 / $65,572.74 = 9.46%

Analyzing the Analysis – Was This A Good Deal?

I like to use index funds as a baseline for all my investments. If you can’t beat an extremely passive index fund, what’s the point of putting your money anywhere else? 

Index funds average about 7% a year over time. That said, I would’ve loved a higher CoC return for all scenarios. That is money I’m guaranteed every month regardless of what the value of the property is. Granted, I live in a pretty expensive market, so I may need to look further out for higher returns. 

On the flip side, even in the Conservative Scenario 2, my total return beats 7%, even if just barely. So even though I might not see the money every year, I’m building equity in the property which I’d see once I sell. 

Here are other major bonuses I didn’t consider in my analysis above:

  • I bought the property with equity already built in. With rehabs we did and our improved marketing, I’m very optimistic that we could sell the property for $290k. Since we bought at $270k, we “made” $20k just from buying the house
  • I haven’t accounted for appreciation. The area I bought is in what’s known as a “path of progress”. Meaning the property value should go up significantly over the next decade. This appreciation is what could really push this property to be significantly better than an index fund.
  • There are tax benefits that come with owning rentals (the government rewards those who provide affordable housing to others). This will help decrease expenses.
  • Principal payments go up every single year, meaning that my total return will be higher every year. With index funds, the average return stays the same every year.
  • Once the mortgage is fully paid off, the CoC return will shoot up as almost all the rent will be cash flow

On the negative side:

  • Rents will need to match inflation or I’ll be losing money. So if inflation is 2% this year, I’d need to raise my rents by $37 a month next year. However, increased principal payments may counteract this a little. 
  • If taxes go up in future years, that’ll eat into my CoC return.
  • I may need to pay marketing fees (Zillow now charges a small fee to list houses for rent in VA)

For me, this purchase was 100% worth it. It got me started on my Real Estate journey and since my returns are all positive, I’m basically getting paid to learn. It helped my wife and I spend more time together and we each got to see strengths in the other we never really knew about.

I’m very curious to see what my actual returns are over the next few years, but for now I’m happy with the returns above for my first property. 

After this though, my conservative estimates will need a CoC return of at least 8%. That means I’ll need to do some real deal searching and be much more involved in analyzing the property beforehand.

Now onto the next one!

What do you think of real estate in general? Would you accept returns like these for a first property? Why or why not?

Comments 11

  1. Congratulations on buying the property and doing such an organized job of tallying your expenses and income. You haven’t shown your selling costs – those are always higher than I expect – but it sounds like those are a ways off for you.

  2. Wow this is great – and good for you! I think I would be too nervous to try this in our area, but can definitely see how so many people invest in property!

  3. I enjoyed reading this. The financial end of it all does give me a headache. I think if I would have started in real estate investments when I was young…life would be wonderful now. I have a friend who built a real estate ’empire’ by rehabbing and renting…over 100 properties! He does very well and I see him a lot….he started when he was 20 years old..he is now in his 50s. Good luck!

  4. Holy Moly…numbers. I think you lost me at the word “investment.” I am so far from a numbers person. I just mentioned to my daughter who is a young 20’s girl the importance of investment and how we weren’t focused on retirement when we were young and probably should have been.

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