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2012 Midyear Update On Our 4-plex Investment

by retirebyforty on July 9, 2012 · 43 comments

in real estate, side income

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4 plex income 2012 midyear update

The rental income has been stable, but unfortunately we’ll soon see some negative months due to upcoming repairs.

Owning a rental property is a great way to generate passive income and that’s why we acquired a 4-plex in 2011. It was a short sale and you can read about the details in the original 4-plex investment post. We first got started in 2007 by renting out our old home when we moved. After a few years, I got more comfortable about the rental business and thought a 4-plex would be a good investment while real estate price is down.

I haven’t mentioned the 4 plex in a while because everything has been running pretty smoothly this year. Now that the year is half over, I can crunch the numbers and see how we are doing so far.

Midyear update

Rental income*

Jan-12

$2,337

Feb-12

$2,119

Mar-12

$1,854

Apr-12

$1,969

May-12

$2,348

Jun-12

$2,103


total: $12,730

Expense
mortgage

$7,140

property tax

$2,192

insurance

$622

 Total Income: $2,806

*I hire a property management company to run the 4-plex and the rental income here is rent – monthly expense. The rental income is around $2,800/month before expense.

So far, we are doing pretty well at $468 per month. However, there are still some deferred maintenance issues to take care of. The two biggest tasks will be addressing a drainage issue and painting the exterior of the building. We’re planning to take care of these problems before the rain starts up in October. These two items will probably cost around $3,500. It’s going to be a big hit to rental income, but I think these are the last major repairs for a while.

All in all, 2012 is going better than 2011. We are generating positive cash flow and I’m pretty sure things will improve year by year. In the long run, we plan to increase rent in order to increase income and to improve the property so it will be a better place to live.

2011 summary

Here is a quick summary of 2011 for those of you who are interested.

Rental Income: $9,313

Expenses: $20,789 (including property tax, mortgage interest, some major repairs, insurance, management fee, and more)

Depreciation: $2,996

Net loss: -$14,472

I was only able to deduct $1,741 in 2011, but the rest will carry over into this year.

As you can see, 2011 was pretty painful. There were a lot of repairs and most tenants left when the property changed hand. In 2012, we saw the rental income stabilized and much less repairs and maintenance. From my experience, most rentals on the west coast take a while to generate positive cash flow and if we can do it in 2012, I would be very happy. Shaun @ Money Cactus wrote about Surviving the J curve. I feel like we’ll hit the bottom of the J curve in 2012 and we should be on the way up in 2013 on this property.

Are you thinking about investing in a rental property? I think the perfect way to get started is to rent out your old home when you move instead of selling it. Let me know if you have any questions and I’ll try my best to answer them. 

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{ 43 comments… read them below or add one }

Matt July 9, 2012 at 4:52 am

We plan on renting our current home 4-5 years from now. We will have it paid for in 2 years then would like to re-build our cash/investments and purchase our next home. We may get a bit eager and purchase a rental property before we move out if we come accross the right deal.

So now for the questions:
1. How much does your managment company charge? I’ve anywhere from 10%-25%.
2. What did you do to prepare to enter the real estate investment business? (exe. Consult with a lawyer, CPA, ect.)….do you need a lawyer to draft a lease aggreement?
3. Any other surprises that you did not expect, outside of repairs, such as permits or tax implications?
4. What process do you use to screen your tennents or does the management company have a screening process?

Sorry for the long post but this is a topic that has been on my mind lately since I saw a property .5 miles from my home that could net 1.5% return annually even if I paid list price. Alas some other investor scooped it up while debated paying off my home or invest in a rental property and pondering the questions above.

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retirebyforty July 9, 2012 at 9:24 am

It’s great that you’ll have the home paid off soon. I think the real estate market is starting to turn around so there are not as many good deals as last year, but I’m sure if you look hard enough, you’ll find one.
1. I worked with a few companies and they usually charge 7-9% here.
2. I didn’t do that much. We hired a manangement company to rent out our old house at first, but that didn’t work out. We have a stable long term tenant with a 2 years lease. I purchased an online landlord for for my rental home.
3. The insurance for the 4-plex was more demanding than usual. They want several things including fire extinguishers and fixing cracks in the drive way.
4. The management company screen the tenants. For my rental home, I was pretty lucky and have a family with a good job.

Hope you find the right property. There are many online resources for people who wants to get into rental properties. I’ll see if I can find a good site.

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Early Financial Freedom July 9, 2012 at 4:59 am

We plan to rent out our primary residence when we travel overseas for an extended period of time. What do you look for when hiring an property management company? Any tips for being a landlord? (Our investment property, a condo, is rented but its management is taken care by family members so I don’t really have any hands-on knowledge of being a landlord)

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JW @ AllThingsFinance July 9, 2012 at 8:49 am

I share the same question regarding management companies. I only have one property rented at the moment, but soon, I will have a second. At that point, I will need someone to help manage the properties.

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retirebyforty July 9, 2012 at 9:26 am

Talk to your friends and see if they have any recommendation. It’s hard to find a good property management company. If one doesn’t work one, then fire them. I guess there must be a better way, but I haven’t found it yet.

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Kurt @ Money Counselor July 9, 2012 at 8:08 am

Sounds like a shrewd investment Joe, particularly since you got the property through a short sale. Hopefully the value is or will be going up too, while you generate some cash flow.

We’re thinking about doing the same in our community, but property values here are, we believe, just beginning to trend down. We’re going to keep our powder dry for now.

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retirebyforty July 9, 2012 at 9:27 am

I think you’re making the right choice. It’s not worth getting into the rental business if the price is too high.

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Jeff @ Sustainable Life Blog July 9, 2012 at 8:59 am

interesting joe – does the rental company handle your old home as well as the 4plex, or do you manage your old home?
Glad to see everything is going well for you. I do have 1 question though – how come your costs to the property company are not stable month-to-month?

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retirebyforty July 9, 2012 at 9:28 am

I manage our old house because we have a stable long term tenant with minimal problems. It’s working out so far.
The cost isn’t stable because repairs and bi monthly utilities.

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20's Finances July 9, 2012 at 9:47 am

Interesting finances. It looks like 2012 will have a little positive cash flow, but you are setting yourself up for a great 2013. I guess that’s why real estate is a long-term investment.

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retirebyforty July 9, 2012 at 3:33 pm

Unless you got a great bargain basement price, rental real estate is a really long term investment. I think in 5 years we will start to do very well here.

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Michelle July 9, 2012 at 10:14 am

Sounds like a good investment! I plan on doing something like this eventually.

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retirebyforty July 9, 2012 at 6:01 pm

Good luck! I think most rental properties take a while to turn around, but they are a good long term investment.

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Mr. Everyday Dollar July 9, 2012 at 10:33 am

I have spent some time looking into rental property but have concluded for now that owning REITs provides the benefits of owning real estate without all the headaches of being a landlord.

Mr. Everyday Dollar

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retirebyforty July 9, 2012 at 11:07 am

That’s what I told my brother. He lives in Norther CA, where you can’t really afford to invest in real estate.

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Lance@MoneyLife&More July 9, 2012 at 10:55 am

I will be renting out our townhouse when we eventually buy a.new house. We are making sure not to over upgrade for the area and I am keeping my receipts to capitalize projects.

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retirebyforty July 9, 2012 at 6:01 pm

That’s a great way to get started in the rental business.

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Michelle July 9, 2012 at 1:02 pm

I don’t think I could ever be a landlord. People are too annoying and gross! Especially at a place they’re renting. You must be a saint…with loads of patience. Although, I would love all the extra income. :)

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retirebyforty July 9, 2012 at 6:02 pm

Heh heh, yeah, I agree with you. That’s why I hire a property management company.

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krantcents July 9, 2012 at 1:21 pm

Rental property is like any investment, there are ups and downs. In the long run, it is very profitable. 2013 will probably make up for the expenses with some rent increases.

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retirebyforty July 9, 2012 at 6:03 pm

Larry,
Thanks for the encouragement.

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Broke Professionals July 9, 2012 at 5:28 pm

First, I love that you referenced the Money Cactus post on the J-Curve, as I loved that article! Second, thanks for sharing all your numbers – with our house having a tough time on the market, my husband and I are seriously considering becoming landlords and renting it until we can sell it.

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retirebyforty July 9, 2012 at 6:04 pm

You should give it a serious consideration. You might like it enough to become a long term landlord. That’s how a lot people got started. It’s a great way to get low interest loan too. :)

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Kim July 9, 2012 at 6:21 pm

That’s really impressive that you have a rental house and a 4-plex unit! Was it more difficult to get a mortgage for the multiplex property vs buying a single family home?

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retirebyforty July 10, 2012 at 9:39 am

It was a bit more difficult because it was an investment proprety, but we got it done. The interest rate was also a bit higher than a primary residence.

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SB @ One Cent At A Time July 9, 2012 at 7:51 pm

So you are staring to go up the J now. Good for you Joe. Now since Sam took the plunge, how far are you?

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retirebyforty July 10, 2012 at 9:40 am

I hope there are no more big repairs for a couple of years. I thought Sam was going to pull the chord soon and I was right. Stay tune for more news. :)

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Roshawn @ Watson Inc July 9, 2012 at 9:24 pm

Yay, I love these posts. I’m glad you are in the the black. That has to be very encouraging. I’m sorry about all the blood spilled last year. It certainly seems like your fortunes have turned though.

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retirebyforty July 10, 2012 at 9:41 am

That was somewhat expected because of the short sales, but new tenants are good because we were able to raise the rent a bit.

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Jai Catalano July 10, 2012 at 4:18 am

I have a rental property too. My taxes sky rocketed a few years ago and finally I have a tax appeal coming next week. If it goes well I will be in the green again after 4 years.

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retirebyforty July 10, 2012 at 9:43 am

Sorry to hear that. Our tax increase is capped at 3% so at least I know what to expect.

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DaveL July 10, 2012 at 11:51 am

Cant wait till I have enough money saved to invest in this. Im sure it would be a little stressful but I think I’d really enjoy it!

Good luck with your investment!

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retirebyforty July 10, 2012 at 11:12 pm

Thanks and good luck to you too.

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Jennifer July 10, 2012 at 2:39 pm

You did really good job in rental investment. I used to hire a property management company (Kerr Properties Inc.) for my rental house but I didn’t have any luck with it. This company charged so many fees but didn’t do the job. The tenant were late payment for every month and finally we have to evict them (lost 4 month income). I fired the company after the contract expired and manage by myself. However, I still don’t want to do this job. Do you know any good property management company in Portland metro?

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retirebyforty July 10, 2012 at 11:21 pm

I’ll PM you with more local info. I think the key is to communicate with the property management pretty often and if they don’t follow through, then try a different company. I also fired a company after they dropped the ball a few times.

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Epicfinances July 10, 2012 at 5:36 pm

Thank you for this honest update.

I wish you nothing but the best of luck with your 4-plex. I have been tempted to get in rentals, but I still cannot see the light of the end of the tunnel.

You are making about $110 a month per unit a month, but you say there are potential repairs on the way? What kind of potential % return do you think you will see for 2012 after all is settled up (including taxes, etc.)?

Thanks for the update.

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retirebyforty July 10, 2012 at 11:22 pm

It’s hard to say because I’m not sure how much the repairs are going to cost. We probably end up making only a few thousand dollars for 2012. I’ll have to crank the number and do taxes before I can see the real figure.

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Chuck July 10, 2012 at 6:32 pm

Old primary’s are how the wife and I got started as well. It takes patience and the ability to deal with people if you manage your own propeties. Some seem to have it and some don’t. Once you get a couple of them paid off, it really starts to snowball.

I think rentals are the greatest way to generate wealth while still holding your day job. Anyone can do it, but don’t be fooled — It’s not completely passive income – You will have to roll up your sleeves sometime.

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retirebyforty July 10, 2012 at 11:24 pm

That’s very encouraging. I can manage good tenants, but I don’t think I can deal with bad tenants effectively.
Luckily I have good tenants on my old home right now and they work with me to minimize any problems.

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Shaun @ Money Cactus July 14, 2012 at 7:57 pm

Good to see things are on the up Joe, sounds like a solid investment in the long run and that is what it is all about. Thanks for the mention too!

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retirebyforty July 15, 2012 at 9:38 pm

I think 2013 will work out a lot better for us. No problem and great job on the J curve article!

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davidmichael July 1, 2013 at 7:44 am

Joe…you have an amazing blog. As I have been retired for 20 years, I come in with a different take on things. But, in general, you are doing many of the steps for financial freedom that I wished I had done during the very stressful and challenging period of the 30-50 age range. I see it with our kids (5) from a blended family as they raise their children. Stress, stress, stress…and then bang, it’s all over and the kids are out of the house doing their thing.

In creating a business to fund my addiction towards world travel, I gave up a lot of security for a dream. Mostly, it was fantastic. But…a few road kills along the way led to a divorce that led to losing lots and lots of potential investment income. So…step number one in your quest for financial freedom, say the mantra …”Happy Wife, Happy Life.” Wife number two for me has been a blessing everyday (now 30 years). Every day show thanks, love, and blessings to your wife.

Regarding the four plex. As I have said previously, all of my teaching buddies who bought rental houses in the Bay area, one at a time, and then moved onto three and fourplexes, are multimillinaires now. They literally begged me to join them in the early 70′s when real estate was a bargain. One small example was our Los Altos home. We purchased it for $37,000 in 1966 and it was valued at two million over ten years ago. Of course, we sold it much earlier for $240,000 for a decent profit, and that was split two ways. That’s just an example of what happened during the crazy 70-90′s. I never did the rental property thing because I like to travel and explore too much. But…in hindsight, I wish I had and hired a property manager. During that time of life, it’s full of stress anyway, so adding rentals is a great way to get on the path of financial freedom. So, hang in there, population is increasing in California, rental demand is increasing, and over time you will do well. Very well. See it. Feel it. Live it!

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retirebyforty July 1, 2013 at 10:41 pm

I try to live by that mantra too. I’m really lucky to have such an understanding partner.
The Bay Area’s real estate market is crazy. Oregon has been much more reasonable.
Thanks for the encouragement about the 4plex. It’s a lot of work and I really hope we’ll stabilize soon.

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