Author: mrsonedollarallowance

Rental Profit Calculations

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When we consider purchasing a house to be used as a long term rental unit, we perform a “cash on cash” analysis. I’ve discussed this in the past, and I regularly share this with other people for their use. The gist of this calculation is to determine whether we would get a return on the cash put into the house.

The calculation considers the cost of taxes, insurance, homeowners association fees, vacancy expectation, maintenance expectation, costs to get the place rented, property management, etc. This is compared to the projected rental income. The upfront costs are compared to the annual cash flow projection. That ratio is hopefully in the 8%-10% range to be considered a reasonable cash flow to look further into the purchase.

Since we’re not really looking to purchase properties these days, I use this spreadsheet to consider changes in a tenant’s rent when it’s time for renewal. I kept all the original cash flow amounts to see how things change over the years. As I sat down to determine what changes, if any, are needed in the rents I charge, it was disheartening to see how our portfolio has dwindled in profitability over the years.

A few years back, housing prices skyrocketed, which drastically increased our taxes owed. Unfortunately, I hadn’t increased everyone’s rent consistently. I kept many people level or did small increases every two years, but that means I’m now “behind the 8 ball” in trying to make up for those drastic increases that happened in 2021-2022. In addition to tax increases, we’ve also seen huge insurance premium increases that weren’t projected in our portfolio.

Our total “cash on cash” started at 11.42%. It’s now projected to be 7.58% – if the increases I project actually go into effect over the next few months.

We historically increased long term tenant’s rent by $50 every two years. Some of these tenants have been with us for over 5 years, and the $100-200 changes in their rent have not covered the increases we’ve seen. I hadn’t worried too much about it because the losses on those houses were offset by houses where we saw greater margins. Now, everything has leveled out, so those losses are felt harder.

The table above shows the change from our original “cash on cash” to our current status. In some instances, we’ve been able to increase our margins. But there are 8 instances our margins decreased, with some being drastic. Even though some are drastic decreases, there are only 5 properties that fall below the 8% goal we have.

For Property2, the projection shows that rent would need to be at $2,500 for us to hit our cash flow goal. The rent is currently at $1,600. The neighborhood doesn’t call for $2,500. I also don’t want to be in a position where I’m floating someone’s rent at that price. From the time we bought the house to now, our taxes and insurance have increased by $1575. That number only continues to grow. Our insurance started at $390 and is now at $765. Our taxes started at $1,500 and are now at $2,700.

On top of the obvious ones like that, our maintenance costs have also increased. As one example, our HVAC technician first was charging $125 per site visit. He now charges $325 just to show up. I’ve found someone who charges $200, so I’ve been going with that guy, but just knowing that there’s been such a change in pricing structure needs to be factored into our costs.

These are really big affects on our houses that a tenant and the average public opinion don’t seem to grasp. I don’t get paid hourly or per transaction I perform to manage these properties, so that decrease of 3.8% in our cash-on-cash analysis is actually a net loss in my “income.” In many cases, we catch up when there’s tenant turnover, but watching the rent compared to our expenses are things that I need to be more on top of year-to-year.

January Financial Update

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We’ve done a good job at enjoying time together this past month. We haven’t had a lot of expenses pop up, which was a nice reprieve. However, the market is much lower at this time this month than it was last month, so our net worth actually decreased. I keep focusing on the long term picture though, and our net worth is much higher than a year ago.

RENTALS

We have 13 rental properties. They were mostly purchased in 2016-2019, with one purchased in 2022. Most of them have sustained very little tenant turnover.

I had 4 houses not pay their full rent on time this month. As of this post, only 1 is still outstanding. They’ve had car troubles and have communicated regularly with me. While I’d prefer to see at least something paid towards rent by now, they’ve been with us for 8 years, and I know they’ll eventually be whole. They never take more than the month to get rent fully paid. Of the other 3 that were late, I only charged one a late fee. The others aren’t usual offenders and communicate up front, but this one has been more difficult to get rent paid from the time we purchased the house.

While looking back at last year’s January post, I must note that this past year has been fairly easy on the rental front. We’ve had a lot of frustrations and things to manage, but it hasn’t been as time consuming in the “people management” side of things. We had a few issues with a tenant that first moved in last winter, but they’ve been quiet since. We had 4 houses turnover tenants in 2024, with fairly little loss of rent.

PERSONAL

We have been battling snow for almost two weeks now, which is very unusual in Central KY. We’ve already taken the kids skiing twice this year. Even the baby got on skis! He’s 2, so I guess he isn’t such a baby anymore, but that’s the earliest we’ve put a kid on skis. He’ll slide down the mountain, but he doesn’t stand on the skis; he’s just squatting the whole way.

NET WORTH

Last year at this time, I was sharing that our goal was to reach $4 million. We were at $3.869 million.

Our net worth is about $66k less than last month. I don’t always update the value of our assets, so that’s a fairly static number. Everyone few months, I’ll check on the ‘zestimates’ though. Typically, we expect to see the total decrease in the winter months because there are less sales and less activity to raise the sale prices like you see in the Spring months. On top of that, all of our investment accounts (except one that increased by $22) decreased a bit.

We have a 0% interest credit card that has a balance over $12k on it. We also added a car payment, which we haven’t had since about 2015. Tesla was offering a 0% interest loan, so that monthly payment isn’t going away for nearly 5 years. Overall, our credit cards balances total more than $3k less than last month’s, which makes me happy to see.

December Financial Update

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We bought an electric vehicle. Honestly, I didn’t see this coming. Since our trip in July, Mr. ODA has been reading about them. He decided he wanted a Tesla for numerous reasons. We test drove one in mid-November, and we picked up our new car order by the end of that week. Tesla was offering 0% financing, if we put $3,999 down. The purchasing process was as easy as buying something off Amazon. I’m still in awe over it. We’ve now added a $589 payment into our monthly finances, but it was worth it for the trade off of interest earned by keeping the balance in our savings account. As part of this purchase, we sold Mr. ODA’s vehicle. It was 15 years old and in relatively great condition. We got much more out of that than we expected, and that check helped cover a gap I had in our checking account (yes, I could have transferred from savings).

I’ve continued to monitor the status of our insurance woes. Luckily everything is complete. I was able to get the new policy executed (after about a weeks worth of work) on the house with the roof that was too old, which meant I had to manage the cash flow between us and a partner. I had to answer a couple more questions on executing a new policy, and we received all the reimbursements from the old policy that was cancelled. I’m happy that’s behind us now.

We have a tenant who hasn’t paid anything towards December rent. Honestly, it’s expected each year. But they seem like good people, and they always work really hard to get things situated, so I’m always lenient with them.

NET WORTH

Well, we bought a new car, paid off a credit card with a $6,500 balance since the 0% interest expired, and added a hot tub purchase to a different credit card, so there was some big swings in our net worth this month. With the hot tub added, our credit card balance went up $6k. Our cash only went down about $600, which was interesting to see. Our liabilities increased with the car purchase, but with our investments, our net worth increased by over $30k.

EV vs Gas

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I’m late to this comparison, but I didn’t have a reason to pay attention to electric vehicles (EVs) until our trip to Denver in July. As seems to be the case regularly there, the rental car company didn’t have any available inventory of gas vehicles, even though that’s what we booked. I’m actually starting to wonder if they have any gas vehicles because it’s suspicious that they thrust these EVs on customers so consistently. Here are some quick thoughts on an EV after experiencing it, but also the gas usage versus electricity usage math comparison we did while there.

EV EXPERIENCE: THE NEGATIVE

It started out stressful. Had we been given a tutorial or any guidance at all, it may have started out easier. However, we started the trip by having to wait in a 90 minute line to even get the car. Then we were greeted by a disgruntled employee who had no intention of helping us. Then when Mr. ODA tried to talk to a manager, she just kept saying “we don’t have any gas vehicles. I can’t do anything for you.” Well ma’am, you could maybe take 2.5 minutes and quell all our fears of the unknown, in a foreign place, while traveling with 3 kids that are 5 and younger.

The biggest issue was our timing. We arrived later in the day, needed to get the kids fed and their bedrooms set up, while also allocating enough time for them to just play and have fun since we’ve been traveling all day. The next morning, we planned to get out of the house and head to the mountains. That’s the problem. We don’t know our range. We don’t know where to fill up or how to fill up. We do know that charging it is not a 4-5 minute process like filling up a tank of gas. We do know that there aren’t super chargers everywhere. There was a lot of “I don’t know what I don’t know.”

Luckily, a friend of ours recently had a similar experience, and she shared some tidbits with us. For instance, there are multiple charger apps you need to download. Then once you download all of them and use the map to figure out where in town the closest one is to what you’re doing, you have to figure out what the data means. “6.6,” $ vs. $$$, “fast charging.” There were different filter options in different apps, but no legend on what these terms mean.

The first charge came while Mr. ODA dropped us off at McDonald’s, drove down the block to a “fast charger,” ran down to eat with us, then ran back to get the car and pick us up. This wasn’t ideal. This was really affecting our trip with this dark cloud hanging over us trying to figure out how to efficiently charge this thing. Plugging a car in while trying to entertain 3 kids for 45 minutes wasn’t how I expected our trip to go.

EV EXPERIENCE: FIGURING IT OUT

ChargePoint ended up being the easiest to use. They have a lot of stations around Denver, especially free ones. We looked for places to eat a meal where we could utilize a free charger and take advantage of the “down” time. It involved walking a block or two each time, but it gave us the peace of mind to get through the next phase.

One morning, we went to Red Rocks. There were a few free charging stations in the parking lot. We plugged in, spent two hours exploring the place, and received about 80 miles on our range, which was plenty for the next day of our trip. That night, we went to a concert at Ball Arena. Instead of parking where most of the other concert-goers parked, we went one block further and parked a well-lit, clean garage. We had to pay to park in the garage, but the charging station was free.

We also learned how to utilize the charging available within the car itself. EVs don’t “coast.” They have regenerative braking. You basically drive the car only using the accelerator, and don’t use the brake. You slightly hold down the accelerator to keep the car moving as you approached a stop, and it charges as that happens. There were different levels you could put the car at to take advantage of this charging process.

GAS VS ELECTRIC COSTS

We spent time figuring out the apps and the types of chargers. We avoided the chargers that had flat fees on top of the kwh charge cost. Almost all of the chargers had a “parking fee,” which meant that if you remained plugged in after the car was fully charged, they’d charge you by the minute for taking up that space. It makes a lot of sense since charging spots are limited, and you want to disincentivize people just walking away from their car for hours.

After we figured out the process of how to use the vehicle and the charging locations, we were able to do some math on the cost per mile. We specifically charged the vehicle either at free locations or in off-peak charging time (there is variable pricing on some chargers). We calculated that the cost per mile came about a few cents higher than if we were in a gas vehicle. However, that could be higher if you were charging during peak time or you needed to use the fast charging locations more often based on your vehicle distance/use. Gas prices in the Denver area were in the high $3.20s to low $3.30s, and we calculated a charge equivalent of $3.34.

There is the opportunity cost of your time. It only takes a few minutes to fill your car with gas. You’re not walking away from an EV charging location in less than 20, and it’ll likely be longer. If you have the ability to charge at your house, while the car is in the driveway, then it changes the equation. Since we were at a rental, that wasn’t an option available to us.

EV EXPERIENCE: END RESULT THOUGHTS

After the initial anger and fear of the unknown subsided, I’m not against EVs. If you can charge them at your own home, they’re great. They’ll get you around town just fine, and you’ll have the convenience of it charging while you’re home and comfortable. Your home charger won’t be a fast charger, but having it plugged in overnight for that 10-14 hour charge wouldn’t be an inconvenience.

I wouldn’t take them on long road trips. There would need to be careful planning of your charge range compared to where charging stations are. Unless it’s a truly a fast charger (15-20 minutes, and more expensive), you’ll need to plan to be somewhere for hours to get a charge. Then there’s the fear of availability when you arrive there, and whether you’ll get a spot because it’s not likely you can just travel down the road a few miles to find another station.

I wrote the initial draft of this in August. So it’s interesting to say – we bought an EV.

November Financial Update

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We bought a hot tub! It’s something that we’ve been talking about for almost a year, went looking at in May, and then finally ordered it last month. It was delivered and set up this week.

RENTALS

We replaced the roof on one of the houses. I go into that a little more in the ‘insurance’ section, but that was a $6,300 payment that was made.

INSURANCE

The fact that I have a separate category to cover my insurance efforts is just frustrating.

Last month, I complained that we were threatened with our liability policy being dropped because we didn’t provide the necessary documentation … that. we. were. never. asked. for. So I dropped everything and got the documentation as fast as I could, while being praised for my organization and response time as usual. Then a few weeks later, I was told that our policy has expired because they couldn’t get to our documentation review fast enough. Awesome. I love the one way street. We were finally informed that everything was reviewed and our policy was reinstated with no lapse in coverage. I paid that policy.

During that process, we were informed that one of our policy providers does not qualify to be covered under our liability policy because their company rating fell below A. Ironically, we had already pulled all but this one policy from this company. We requested a quote from another agent, but she said they couldn’t write a policy on the account at this time. It’s frustrating to me that once you file claims on your insurance (which it’s there for), you’re blacklisted. There were no claims for 8 years of rental properties and 12 years of homeownership, but that doesn’t matter. Since 3/4 of our claims in the last year are all in the same location … all those houses were hit by the same wind storms to cause damage. I certainly didn’t request trees to fall on two houses. Add in that the damage to our house was severe, making our policy pay out high for the last year, so getting new insurance policies where necessary (and on houses with no claims) has been difficult. There’s nothing to say we can’t keep this policy on this house even though the rating declined (which I would have never even known about), so we’re not stressing about it.

One of the wind damaged houses with a claim caused that company to drop us. That’s fine. I have been working on this replacement since September 23rd and finally got everything squared away on October 31st. One of the frustrations on that was that I’d ask multiple questions, and this guy would either not respond to an email or respond to half of it. One of my complaints was that my original request was for $500k of liability coverage (which is higher than offered on most policies I’ve had written, but is the minimum required for our liability policy), but he wrote it at $1 million. I asked for it to be lowered no less than 4 times. He finally responded when I got stern and called out the lack of action; he said that since it’s only about $25-30, they just go ahead and do it. I finally said (again) that I have liability policies that give me extra coverage, so I don’t want my individual ones to give extra coverage “just because,” and that it’s up to me to decide whether that $30 is worth it. He finally reduced it. The new policies are $510 more than the policy we were covered with that got dropped.

Oh – the original policy that we got dropped from included two houses. It wasn’t clear whether the company was dropping both houses, but I went ahead and switched both. I was hoping that the new policies would be written like all my other houses – individually. Unfortunately, it’s under one company and they handle things the same way, so both houses are tied together under one policy number again. I have multiple houses covered by Travelers, and they’re each on their own policy. I don’t understand why these houses get lumped together.

Another house of ours was given “high risk” insurance because of our roof condition. Our partner didn’t tell us about the transfer of insurance or the reason why. I discovered it when I received weird paperwork for our liability policy (which, ironically, now that I think of it, my liability coverage didn’t call out as odd, but they weren’t happy about that company getting downgraded…hmm). I discovered this on September 6th. I started getting quotes for roofers immediately, but that process took forever. I finally got the roof replaced on October 18th, and then I requested her to find us new insurance on October 31st. We have a new policy being issued effective November 15th, which will cancel the higher insurance. The total savings equates to about $450, but it’s still over $300 more expensive than the original one that we walked away from.

TAXES

Central KY taxes were due this past month. I paid 4 houses worth of taxes. 3 were cashed immediately. I pay via online bill pay, where they send the check on my behalf, instead of online because there are fees associated with that. Well, now one of them is floating out there without my knowing what to do next. There’s a 2% discount if you pay before 11/2, and that check didn’t get cashed by that deadline. So now I have to make phone calls to track down why the check I sent via bill pay didn’t arrive, even though another one arrived just fine. I also have a city that I have to pay a small amount of taxes to, and I’m waiting for those two checks to cash as well.

NET WORTH

Our net worth is almost $100k over last month’s. Not reflected in the credit card yet is the payment for the hot tub that just happened this week. By next month’s update, I’ll have to pay off the 0% interest credit card, so the total credit card number probably won’t change drastically.

October Financial Update

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I feel like I have a lot of balls in the air right now, but looking at our finances, they don’t say that there have been a lot of charges. However, this post sure says that I’ve been juggling a good amount of things over this last month, and most of the issues are related to insurance in some way (and I despise insurance!).

Last month, I mentioned that we had two large charges hit our credit card. One that I purposely held off until the new credit card cycle (an insurance charge) so that the previous month’s credit card was lower than average (psychological play for myself). Then we had the electrical work completed on our deck rebuild, and that was another significant balance that needed to be paid. After that, we just had a a few medium-sized, if you will, charges that hit. I paid an extra payment to keep the balance closer to the $3000-3500 range. Well, it didn’t work. Another two service calls to rental properties and the dog’s annual vet appointment, and we were back up to $6k. We have the cash to pay it off every month; it’s just not something I want to see!

When we have a large purchase, we open a new credit card. The new credit card gives us some sort of bonus, and we get 0% interest for 12-15 months, typically. Last Fall, we replaced the carpet on the first and second floor of the house for over $10k. I paid $500 per month up until last month’s payment. The balance wasn’t a round number, so I went ahead and paid that little bit while also upping the payment to $1000. That balance is at $7,000 now and will need to be paid by December 13th. The new credit card will be used to purchase a hot tub and pay for the electric work associated with that (as well as an electrical panel upgrade).

INSURANCE CLAIM

Since our deck work is now complete, we submitted a request for additional funds. The concrete replacement was controversial in the claims process. They eventually agreed to pay for it, but they held back a significant amount of depreciation on it. We submitted the final work order showing the concrete costs and that the job was complete, and they sent us a check for about $6,550. Additionally, the electrical work was projected to cost about $1,700, but it actually was about $3,500. Luckily, we submitted the invoice and, with no questions asked, they cut us a check for the difference.

Just for the record, the job was never fully completed. Mr. ODA pulled up deck boards and retrofitted the waterproofing. We never paid out the final payment. The City’s inspector came out and started asking a bunch of questions, and the foreman finally acknowledged that they hadn’t completed the waterproofing. We didn’t tell them we fixed it, but we have no intention of being in touch with them again. Outside of the waterproofing and concrete subcontractor issues, the contractor was great at the work he does – but they should stick to simple deck construction.

PERSONAL CHARGES

We actually had a low number of transactions over this past month. We took a trip, which I covered in my last post. Mr. ODA negotiated a refund of some of the cabin charge since we booked it with a hot tub and discovered at 8 pm that there was no water in the hot tub. They refunded 10%! We had our typical charges that occur monthly, and I paid several health insurance bills for various reasons.

RENTALS

Luckily, everyone has paid their rent this month. We have $750 outstanding, but it’s not technically due until the 19th with how I’ve structured their lease. One person did pay half her rent late (on the 15th), but I didn’t charge a late fee since she actually paid when she said she would this month (always a gamble). We had a few smaller maintenance issues come up in the last month, as well as a range replacement at a property that will be installed this Saturday.

  • INSURANCE

Due to a claim on one of our properties, that insurance found a reason to drop us. They notified us that we have a couple of months to find new insurance. I’ve been working on that for the last 3 weeks. It hasn’t been easy. They want pictures and then want all different angles, as if it’s my home and I can just take these pictures on a whim. Then for some reason, the agent I found through a local real estate group is great about answering questions on one property, but won’t answer questions on the other. It’s pretty frustrating. As of 10 minutes ago, I at least got the policy executed on the one he hadn’t been responding on. I started this process on September 23rd and got this run-of-the-mill policy executed today – ugh. So that’s over $900 going on the credit card today.

We have a roof replacement occurring on a property in VA tomorrow. I found out that our partner switched insurance companies without us knowing. That seems fine, except that I discovered our policy went from $600 to $1400. It turns out, he switched because that original insurance company was requiring a roof replacement. Conceptually, that’s annoying because they find some action for us every year with no warning or previous mention of something being on a watch list. However, it turns out that the roof was bad enough that no one would insure us. Again, I’m finding all this out after the fact. Our agent found someone to cover us for short term, and we’re paying a hefty premium on that. As soon as I found out, I requested quotes from roofers. I signed a contract 3 weeks ago, and that’s finally under way with materials dropped off this morning. As soon as the roof is done, I plan on sending documentation to our agent to get us switched to a “regular” insurance company and hopefully reduce that premium substantially.

We had issues with our Commercial Liability Umbrella Policy issuance this year. It was all due to the company’s poor communication. They asked for a new document to be completed, which I did in less than a day. Then I heard nothing from them until a cancellation notice for not providing supporting documentation. I had to scramble to gather all the documents, only for them to not even review my information timely and cancel the policy. They reissued with no lapse in coverage, but goodness that’s so frustrating that they can do whatever they want with no repercussions. In that process, we learned that one of our houses isn’t included in the CLUP because that insurance company’s rating fell below a reasonable threshold. So now I’m shopping for insurance for that house.

I had to pay one property’s insurance of $270 (it’s a townhouse with HOA insurance also). I also had to contact one of my escrow accounts to find out why they didn’t pay on time, which is so much fun (and I still don’t have that resolved).

  • TAXES

It’s that time of year again where I have to pay out on KY taxes. Relatively, they’re low amounts, but they add up to a decent amount when you have 4 to pay at once. I’ve issued payment on these, but they haven’t cashed the checks yet (it would be nice if businesses would allow electronic payments without exorbitant fees!).

NET WORTH

We’re over $800k over this time last year. It’s crazy to see that number because I don’t feel comfortable with our finances. I can’t put my finger on it, but I just don’t like how often I need to transfer money out of a savings account to cover obligations in the checking account. It’s just a psychological thing for me. I can’t figure out why I can’t get past it, when I know for sure that we have 18 safety nets out there if we were in a bind.

Last year’s update mentioned that our finances took a big hit between September and October, but this year, we’ve recovered a good bit and increased over $115k from last month. It appears last year I paid off a large credit card balance this month, whereas the large credit card balance pay-off will be December this year. I’ll also have additional charges when the hot tub gets delivered in a few weeks, which will increase our debt.