April 2014 Cash Flow Statement

by FI Fighter on May 7, 2014

in Cash Flow

Leverage

It’s been a few months since I last purchased a property, and I must admit that I’ve got the itch again. Realistically, my next purchase is at least a few months out, but buying another rental is what I’m working towards. I’m doing my best to keep up the frugal habits, and trying to re-invest any excess cash flow back into building up the next downpayment fund.

Here’s the report for April:

April_2014_Cash_Flow

Rental Property #1: Bay Area

Rental Property #1 continues its stellar performance this year. Another month, and some more cash flow coming in. Rent was collected on time and the tenants seem happy, which is always good. PG&E (the local utility company) did contact me about needing my approval to install some free energy efficient lightbulbs throughout the house. PG&E is pushing this energy-reducing initiative right now, and they were even kind enough to replace the old refrigerator with a newer model that consumes less power. No cost to the tenant or owner. How could I say no to that? :)

Total cash flow for the month was $447.67.

Rental Property #2: Bay Area

Similar to Rental Property #1, this property also continues to shine. No news is good news! I wish all my rental properties were as hands off and “boring” as Rental Property #1 and #2.

Total cash flow for the month was $344.76.

Rental Property #3: Chicago

The first floor tenant (market rate) renewed her lease this month and agreed to stay around for another year at the same rate, $950/month. Woohoo! I was thrilled to keep her and had absolutely ZERO interest in increasing her rent. I made sure to harp on that point over and over again to my PM. I don’t like losing quality tenants!

The second floor tenant missed payment again this month… This wasn’t the first time, and I’m pretty certain it won’t be the last time. She didn’t give an explanation and the PM had much difficulty getting in touch with her. Oh boy… not again. This tenant is only responsible for $94/month, as the remainder of her rent is covered by Section 8. I collected $1,064.

This tenant can’t ever seem to pay rent on a consistent basis. Her lease expires in August and I have no interest in renewing it. Even with the heavy subsidy from Section 8, I still feel like I can do better, and am willing to start anew with a new tenant. Losing $94/month really doesn’t impact the bottom line much, but with this tenant, it’s about the principle now. I don’t want to keep a tenant around who refuses to pay rent on time. If she can’t get her priorities straight, then I don’t want her staying long-term. I have expressed this concern to my PM and they’ve agreed to start marketing the unit as soon as they are allowed to. I will need to keep close tabs on this as I want to minimize the number of days the unit sits vacant.

Even with a PM in place, real estate investing will never ever be fully hands off. That’s why I like to call it semi-passive income, and not passive income.

Total cash flow this month for Chicago came out to be $871.13.

Rental Property #4: Indianapolis

Rental Property #4 wrapped up the eviction this month. The tenant officially moved out and my PM took back possession of the property. Since I negotiated a 1 year rent protection guarantee at the time of purchase, I avoided having to go out-of-pocket. The PM cleaned up the property, got it rent-ready, and started aggressively marketing it towards the middle of April.

I received my owner’s statement at the end of the month. The PM held true to their word, and I was not charged a penny for any of the make rent-ready expenses. Further, I don’t have to worry about any lease-up, or marketing expenses. With the rent guarantee in effect, I simply collected the $1,075 portion that the tenant normally pays.

Total cash flow this month for Indianapolis came out to be $518.18.

Rental Property #5: Chicago

This was my second full month owning Rental Property #5, and so far so good. Both tenants paid on time and there were no extra expenses that popped up this month. That’s excellent news for me, and I’m crossing my fingers, hoping that I secured some more great tenants in this building.

The first floor tenant is Section 8, and the tenant portion is only $110. Section 8 covers $1,098, or the bulk of the rent. As long as the government subsidy doesn’t change, I won’t have to worry about collecting the majority of the rent for this unit. Recently, I learned that the Section 8 portion a tenant receives CAN be subject to change, and isn’t guaranteed for a full year. If a tenant improves their financial situation, or earns more income, Section 8 will revise their subsidy. On the other hand, if a tenant loses their job or faces increasing hardships, Section 8 will step in and provide more assistance. So, it goes both ways, but this is something I need to keep track of. Previously, I thought the Section 8 portion would be fixed for the portion of the tenant signed lease (1 year).

The second floor tenants are market rent, and receive no Section 8 assistance. Their rent portion is $1,250. There are three working adults living here, so I do feel somewhat more at ease with this situation. Hopefully, they keep paying on time and enjoy living in this unit. I would love to secure some more quality tenants. I can never have enough of those!

After all expenses, total cash flow came out to be $1,199.54.

Summary

April marked the second full month where I’ve had five properties (seven units) rented out. Total cash flow for the month came out to be $3,381.28. The rent collected this month was less than what I collected in March, since the March Cash Flow Statement included pro-rated rents from February for Rental Property #5. April’s numbers are more reflective of where everything stands now with seven cash flowing units basically operating at maximum efficiency. So, in a best-case scenario, I’m able to clear $3,000/month in semi-passive income.

My early FI target fluctuates regularly, as I can never seem to make up my mind, but I would like to be over $4,000 before calling it quits in corporate. There are still a lot of moving pieces and variables (1031 exchange?, HELOC?, rent increase for Bay Area properties?), so we’ll see how close I can get to that “final” figure… I have one year, roughly, to figure it out. :)

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{ 25 comments… read them below or add one }

1 kbNo Gravatar May 7, 2014 at 7:06 am

Wow – keep up the great work man.

Reply

2 FI FighterNo Gravatar May 7, 2014 at 7:04 pm

Kb,

Thanks! Appreciate the support. :)

Cheers!

Reply

3 Mr. FrugalwoodsNo Gravatar May 7, 2014 at 8:30 am

Holy cow, those are good returns. And nice work on the rent guarantee. That really nicely aligns the incentives for the property manager!

I’m curious about that particular arrangement. Is this something you negotiated as part of the sale? Are you giving the PM a higher % of the rents in exchange for this? Sure seems like in this case it was worth it.

Reply

4 FI FighterNo Gravatar May 7, 2014 at 7:05 pm

Mr. Frugalwoods,

Yes, the rent guarantee was negotiated at closing to be included since the property didn’t appraise… Right now, I’m glad I worked that in there as going through an eviction is no fun.

No, the PM fee for this company is the same, regardless of the rent guarantee. 10% is the standard rate they charge their investors.

Cheers!

Reply

5 MaxNo Gravatar May 7, 2014 at 9:31 am

Do you pay for tenant’s utilities? I find that after trash + water my returns are a little lower than I would have hoped. I know I get to write it off, but it still adds up and I notice you don’t have anything for these items.

Reply

6 FI FighterNo Gravatar May 7, 2014 at 7:07 pm

Max,

I pay for utilities on #1, #3 and #5. For #3 and #5, I paid last month, and they don’t bill me every month. These are duplexes and the owner is responsible for common area electric and water on both units.

Yeah, utilities can really add up… For #3 and #5, it’s split among two tenants, so that doesn’t hurt so bad.

Cheers!

Reply

7 Dave @ The New York BudgetNo Gravatar May 7, 2014 at 1:42 pm

As always, you are killing it. I am with you though, already feeling the itch!

Reply

8 FI FighterNo Gravatar May 7, 2014 at 2:40 pm

Dave,

Haha I totally understand how you feel! It’s kind of like an addiction… A good one, I hope.

Cheers!

Reply

9 CurtisNo Gravatar May 7, 2014 at 2:04 pm

I agree that those are extremely good returns. Excellent cash flow! I can only get those numbers AFTER a property is paid off.

My biggest issue is that you make no allowance for repairs and vacancy. Those really should show up as an expense. Like depreciation, it’s not free money and wild ultimately have to be paid out of pocket. For a more accurate monthly cash flow statement, I would suggest that a percentage of gross rents should be included in the expense column whether you use the money or not.

See my post on the subject here: hhttp://payoffmyrentals.blogspot.com/2013/06/rental-finances-101.html

These hidden, foreseeable expenses are not if’s but when’s. They will wreak havoc on your budget when you are trying to live on rental income if you don’t have the money set aside in advance. Trust me on this.

Otherwise, great job!!! Keep up the good work.

Reply

10 FI FighterNo Gravatar May 7, 2014 at 2:25 pm

Curtis,

Thanks for the comment. Whenever I run cash flow analysis I make sure to set aside a portion of the gross rent for vacancy and maintenance. Typically I plug in 10% for each, or I use the 50% rule. This is purely for a rough estimate projection.

The purpose of the cash flow statement is to show actual results NOT projections or estimates. If an expense happens, it gets accounted for immediately. If it doesn’t, there’s nothing to report for that month. This doesn’t mean that I don’t set aside reserves for emergencies. :)

It’s very important to always have reserves set aside, like you mentioned because things will always break and tenants will miss payments or eventually leave. It comes with the territory.

At the end of the year, I add up all the cash flow statements and compute net operating income and total cash flow for the year… For a given year, all expenses will be accounted for.

I’m pretty conservative and not naive enough to think that I can get by without ever experiencing any hiccups. That’s why I said $3k only happens in a best-case scenario or at optimum efficiency.

Take care!

Reply

11 No Nonsense LandlordNo Gravatar May 7, 2014 at 4:05 pm

The Indianapolis property is the most profitable this month. No wear and tear, 100% rent collected. Calculate what it would have been if you paid for everything, like you will have to next year. That is part of making sure you have enough capital to weather any storms.

Make sure the PM in CHI sends a cure/quit notice on the 2nd of the month when your Section 8 tenant doesn’t pay. Send a copy to the Section 8 office. You PM is lacking in their duty. Odds are, they have not been a PM very long. maybe they are trying to nurse the place along so that do not have to guarantee the rent?

Have you ever compared your current tenants credit scores to some of the tenant screening advice on my blog?

Reply

12 FI FighterNo Gravatar May 7, 2014 at 7:11 pm

Eric,

This Section 8 tenant is sporadic, and although she misses payments here and there… she does eventually come around and pay back the balance in bulk… I will inquire about the cure/quit notice. Thanks for the tip.

In this case, Section 8 will pay each month the tenant remains living in the unit. Her lease expires in August and I would prefer to get a new tenant in there at that time.

My tenants’ scores are all over the map. For #1 and #2, yes, these scores align with your criteria of 700+… Might even be 750+…

For the out-of-state properties, that’s a bit of a challenge. For the low income stuff I would be lucky to find 600. It just comes with the territory, unfortunately. As you’ve mentioned before, and my own take, high yield comes with higher risk. There are no free lunches…

Cheers!

Reply

13 CurtisNo Gravatar May 7, 2014 at 6:34 pm

OK. Very good. Didn’t mean to imply that you didn’t know what you were doing, I just didn’t fully comprehend your method. A appreciate the clarification.

Carry on!

Reply

14 FI FighterNo Gravatar May 7, 2014 at 7:03 pm

Curtis,

No worries! :)

I should probably start putting in a note in there at the beginning of each report to be more clear. I wouldn’t want someone to misinterpret the cash flow numbers and what I’m doing with these reports.

Take care!

Reply

15 A Frugal Family's JourneyNo Gravatar May 7, 2014 at 9:22 pm

Nice cash flow update! Our family would love to add real estate (aside from our primary home) to our asset portfolio too but not sure we have enough capital or income right now. Maybe in a few years. BTW, I noticed you have properties in three different states. Do you find it difficult to own and manage properties that are out of state?

Reply

16 FI FighterNo Gravatar May 9, 2014 at 9:36 am

AFFJ,

Thanks! I outsource the PM for the out of state stuff, so it’s mostly on auto-pilot, although I do check in with the PM about 1-2 times each week.

I would call it semi-passive… Depending on your tenants, it can be more/less work. I actually spend less time each month managing my local properties b/c I have fabulous tenants… Go figure.

Cheers!

Reply

17 BrianNo Gravatar May 8, 2014 at 3:35 am

Congrats FI fighter! Thats terrific income.

I didn’t realize that your locations were so geographically diverse. That must make thing interesting to manage.

Do you find that working with property managers is worth the cost? How did you go about selecting the ones you are currently using?

Long Term Brian

Reply

18 FI FighterNo Gravatar May 9, 2014 at 9:38 am

Brian,

Thanks! Yeah, I’m spread out quite a bit, but it hasn’t been too bad so far. It doesn’t take up too much time…

I would definitely go with a PM and I make sure to budget this expense when running cash flow numbers. Although some folks find a way to manage out of state successfully, this isn’t something I want to do at all.

With out-of-state, I’m using turnkey companies, so the PM was already in place. That is, the company that sold me the rehabbed property also owns the PM.

Take care!

Reply

19 MaxNo Gravatar May 8, 2014 at 4:32 pm

Have you looked at turnkey investing internationally? I wonder if there aren’t some great deals out there too.

Reply

20 FI FighterNo Gravatar May 9, 2014 at 9:39 am

Max,

Not yet, as my focus right now is to build my U.S. portfolio. Perhaps in the future… I’m sure there are great deals out there, but I think out of state turnkey investing is already risky enough as is… Let’s figure out the local turnkey stuff first :)

Take care!

Reply

21 TraderNo Gravatar May 10, 2014 at 9:28 am

Really amazing to see yout path. Everything seems in the right direction, but thats the result of very good analysis and planing yoy make.

Cheers!

Reply

22 FI FighterNo Gravatar May 13, 2014 at 9:24 am

Trader,

Thanks! I’m doing my best to stay on the right direction… With REI, I know it won’t always be smooth sailing, so I need to do a good job planning for emergencies as well.

Take care!

Reply

23 Financial independenceNo Gravatar May 12, 2014 at 6:50 am

This looks very very good. How much downpayment did you put towards the mortgages? What are the returns on the invested capital?

Reply

24 FI FighterNo Gravatar May 13, 2014 at 9:27 am

FI,

I typically put in at least 20%. Here’s what I did for the following:

#1: 25%
#2: 20%
#3: 25%
#4: 25%
#5: 30%

It generally gets more difficult after #4. For #5 and above, 30% is the requirement for most lenders to meet Fannie underwriting guidelines.

In regards to returns, it varies from location to location. Maybe 4% to 5% for Bay Area rentals (currently), and over 10% for the out of state properties… factoring in reserve allocation for vacancy/maintenance.

Cheers!

Reply

25 EL @ Moneywatch101No Gravatar May 30, 2014 at 6:11 am

It appears you are doing really well with real estate investing. I know your goal is financial independence, and with that in mind, what are you doing with the surplus cash? Would like to know the investment strategy on that cash?

Reply

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