How Our Rental Property Has Accelerated Our FI Date

Rental properties are certainly not stress free but man, do can they provide income!  Our new duplex has had a little bit of stress and work associated with it but really nothing substantial.  We continue to have good communication with the tenant who was paying rent late and this past month he was on time so there was improvement.

But one of the best things about a rental is the cash flow.  Before we purchased this property I ran all sort of estimates to see if it would be worth it.  It fell just short of the 1% rule often used to evaluate a property before purchasing but the cash flow looked good and we know that one of the apartments could probably be rented for slightly more.  Most important was making sure that even taking into consideration some annual maintenance costs we would be netting some income.  Based on my estimates we should end up netting an average of $1,000 per month over the course of the year.  Not too shabby!  So far our income has actually been slightly higher than this (the past 3 months have averaged $1,228) but I would rather be conservative with my estimates.

So the big question is how does this change our FI date?  Drastically!  To purchase this property between the down payment and closing costs we spent just under $100,000.  This was no small feat and it took us 4 years to save this amount plus leave enough of a buffer so we could cover any unexpected expenses.  But the big question is, is it worth it?  Although we are only 4 months in with this new duplex (I know, really new to us in the whole scheme of things) I think it has made a huge difference in our FI goal.  Let’s take a look at actual numbers to see what I mean.

It took $100,000 to buy this property but what if instead we had saved this money and added this to our other investments, how would that look?  Over the past 4 years that money would have likely been invested instead of sitting safely in cash waiting to be used.  So to be fair, let’s say that $100,000 is actually $110,000.  I got this number by estimating $25,000 annually saved with a 7% interest rate (I use 7% for most market return estimates even though actual results are usually higher) which came to $110,998 but let’s just say $110,000 to make this easier.  If we were to use the 4% safe withdrawal rule this would give us an annual income of $4,400 today.  Not bad but only covering about 11% of our estimated $50,000 budget.

But when we leverage this $100,000 with the purchase of a duplex (75% of the value was financed) we are really getting this money to work for us.  Instead of generating only $4,400 per year, I am estimating that this one property should give us a net income of $12,000 per year.  That is quite the difference!  This covers 24% of our $50,000 annual budget and gets us significantly closer to our goal.  Add this to the $16,680 (gross) we get from the other unit in our owner occupied duplex and 57% of our budget is now covered, without having to touch any investments.  Pretty sweet!  (The reason use the gross amount of rent from our owner occupied duplex is we would have a mortgage and property taxes to pay regardless of this income so I just use the gross amount whereas the income and expense for the other rental are all calculated completely separate from our individual expenses so I use the net income number).

So for now we able to save this additional $12,000 of income per year from the new property while we are still in the saving phase, but eventually this will provide us with a nice little income stream when we are in spend-down mode.  I have a couple of different spread sheets that I created to estimate our FI date (one I modified from the one J Money uses) plus I have used the retirement calculators in both Personal Capital and Fidelity and all of them give me an estimated date that is a full 2 years sooner when we add in this rental income verses just having the investment income.  That is a big difference!

Personal Capital
Retirement Calculator from Personal Capital

Of course a lot of things could change between now and then but this does make us realize that we are a lot closer to our goal now than we were even 6 months ago.  One potential future expense is that our city has stated they will be increasing the property taxes on all investment properties.  They recently sent out notices to owners of building with 4 or more units and the tax increases are substantial.  A friend with a 4 unit property just received a notice that his taxes will be going up 53%.  This is huge and can make a big difference to property owners and also renters.  Now most landlords will likely raise rents to absorb this increase but you can’t do this mid-lease and we are in an area where rents are already pretty high.  If both of our properties receive an increase like this we could have an additional $6,000 in taxes.  I would expect that we might end up absorbing a piece of this but eventually pass on the majority of the increase to tenants.  I am still hoping they will leave 2-3 unit properties alone but at least we won’t be blindsided like our friend if this happens in the next couple of years.

Am I recommending that everyone should go out and find an investment property?  Certainly not as it is not for everyone.  We now have multiple properties to maintain, dealing with all sorts of individuals and not knowing if they are going to respect your property and pay on time, and all sorts of unknown expenses that may come up.  A property manager could be hired to take care of some of these things but I am not willing to give up 10% of our rent at this point.  If you are interested in looking at investment properties make sure you do your research beforehand.  Both Paula over at Afford Anything and Tracy at Financial Nirvana Mama have built up a a real estate portfolios generating a nice income streams and have oodles of great information.

For us in the mean time, we are saving and investing the net income from our investment property and trying to keep our tenants happy so that they will continue to pay the rent in full and on time.  And although a lot could change in the next few years, I am hoping our projections are correct and I can retire at age 40.

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