Can you believe it? It’s been two years now since we bought our rental property! In 2015, we had been maxing out our retirement accounts and looking for a new type of investment. Going by all the early retirement blogs I was reading, it seemed like the next step was adding rental property to our portfolio. The jerry-rigged returns you can conjure by buying a rental property with little cash down are pretty incredible. So I bought some books and read up on what to expect.

We bought a two-family house that hardly needed any work. We had more money than time, and were strictly interested in having a positive cash flow as soon as possible. We didn’t want to be stuck paying for renovations and waiting to rent it out.

Here’s a summary of what’s gone on for the past two years:

July 2015 – We buy the house for $134,000. It’s vacant and in good shape, so we get to work cleaning it up and doing some maintenance. The chimney needed re-lining, and we needed hookups for a washer and dryer on the second floor apartment. We had a lot of discussion about what prospective renters would be looking for in an apartment, and a washer and dryer seemed right at the top.

September 2015 – We find out first renters after listing the apartment on a Saturday, giving them a tour on Sunday, and getting the lease signed that week. This was extremely lucky. They move in in mid-October.

December 2015 – The first 1st floor apartment is still vacant after doing numerous showings and getting some unattractive applicants.  We eventually get a couple and they move in in just after New Years, after we purchase a washer and dryer for that unit. (We had been leaving this one unit without a washer and dryer in order to attract those tenants that have their own. That didn’t work out, as you can see)

Winter, Spring, Summer 2016 – This was the golden time. “They were serene days and quite undemonstrative.” Rent was always paid on time, we hardly heard a peep from the tenants, and everyone was getting along. We didn’t have any major repairs, although the 30 year old washer in the 2nd unit broke, so we bought a new one.

October 2016 – Our first tenants let us know that they won’t be renewing and are moving to be closer to work. We become dizzy with greed and get anxious to fill the unit as soon as possible! We accept new tenants and they move in just after Thanksgiving. The less said about them, the better. Pretty soon, we realize…

February 2017 – After a few nightmare months, we buy out our tenants’ lease by giving them a free month’s rent, and then vow to better vet potential tenants in the future, even if it means the unit stays vacant for longer. We soon get a referral from the 1st unit tenants. Their friends visit, love the place, say they are looking for a place to stay long-term, and sign a lease. We let out a huge sigh of relief.

June 2017 – We replace the ancient fridge and stove in the 2nd unit. (My parents laughed when they saw these appliances) One of the 1st unit tenants start mowing the lawn and raising a garden in the backyard. We let out another huge sigh of relief and for the moment, we’re back on easy street.

So far, it’s been some work, but with huge variations from month to month. This summer, we’ve only been to the apartment a few times for minor things (replace six window blinds, replace kitchen sink sprayer, re-paint backdoor stairs). Compare that to seemingly endless showings you have to do sometimes to get a renter. I wish I could estimate how much work it is on average per month. Five hours possibly? I have no idea.

Here’s our income statement for the past two years:

 Income Statement 2016 2017
Total Income $18,317 $20,467
Mortgage Payments ($9,099) ($9,099)
Home Equity Loan Payments ($1,364) ($1,572)
Property Taxes ($4,813) ($5,024)
Insurance ($3,961) ($1,000)
Maintenance ($6,044) ($1,575)
Utilities ($1,987) ($2,363)
Miscellaneous ($35) ($80)
Profit ($8,986) ($246)
Mortgage & Loan Principal $5,845 $5,913
Profit Plus Principal ($3,141) $5,667

So after two years, we have finally turned profitable to the tune of… $2,526. Not huge, but everyone has to start somewhere, right? And if my 5 hours of work per month is correct, that is $21 per hour.

On the plus side, our profitability has seen a huge swing from Year 1 into Year 2. We basically ended our second year with $9,000 more in income than we made in the first year. The big swing is due to a few things:

  1. Spending $4,500 less on maintenance. We repaired the chimney, had electrical and plumbing work done, and replaced several appliances in the first year. Much less this year.
  2. Taking in $2,000 more in rent.
  3. Spending almost $3,000 less on insurance… although that’s due to a timing difference. Whoops! Looks like we paid part of Year 2’s insurance in Year 1.

What is our Return On Investment?

That may be a silly question after just turning profitable, but let’s do the math anyway.

Out of pocket, our down payment and closing costs were $12,456 in cash, so let’s call that our initial investment. $25,000 of our 20% down payment came from that home equity loan.

ROI = ($2,526 profit/$12,456 investment)/2 years = 10.1% annualized

OK, that’s actually not so bad. Ten percent is good for passive investment income, but income from a rental property isn’t truly passive income, no matter what the personal finance commentators might suggest. I’ve never had Coca-Cola ask me for a lawn mower or ask to have the heat turned up. They just pay me dividends! So maybe the better measure of rental property income is the hourly wage I attempted to calculate above.

Do you have an investment property? What is your return and how do you measure it?