Rental Property Investment Breakdown

Here is some overdue financial record keeping from our latest rental investment in August 2011. This breaks down all our out of pocket costs to purchase the property and get the 1st tenant in place.

Out of Pocket Investment in Rental Property
Earnest Money $ 1,000.00
Due Diligence To Seller $ 75.00
Inspection Fee $ 500.00
Pest Inspection $ 75.00
HVAC Inspection $ 110.00
Cash Needed at Closing $40,239.13
Appliances (W/D, Fridge) $ 1,570.94
Rental Advertising $ 59.95
Supplies (light bulbs, batteries, keys) $ 39.06
Repairs $ 900.00
Total Initial Investment $44,569.08

The property was ready to rent when we bought it. We negotiated for a couple minor updates to the property to make it more rent-able with the sellers which helped reduce our time to value (the time it took to turn it into a cash flow positive investment). The main things we needed to do after close was install a washer/dryer, fridge, and a small punch list of minor updates/repairs that our handyman took care for $900.

We rented the place for $1,205/month which produces up to $213.92/mo after the mortgage payment (PITI). For planning purposes I reserve $100/mo for maintenance and repairs which yeilds us approx. $113.92/mo in free cash flow. I'll spell out the investment return a bit better in a future post, but as is you can tell it not something particularly exciting at least yet.

Related in Rental Property:

2012 Passive Income: Rental Property (Feb 10, 2013) Its been several years since I did a thorough analysis of our rental property performance and investment return. Here is an analysis of our 3 rental properties for 2012 that should give a pretty reasonable view of how these investments...

Why Invest in Rental Property (Mar 13, 2012) The real estate investing infomercials of the housing boom suggest that real estate could make you rich - the benefit of real estate being exponential returns of your investment. While I only have a few small real estate investments there...

Thoughts On Buying Another Property In This Environment (Aug 15, 2011) We recently put a contract on a property to serve as an expansion to our rental properties. We weren't looking to expand, but an opportunity popped up that was compelling enough for us to make an offer. As we have...

Comments (8)


It is cash flow positive, nonetheless which is certainly a good thing. If you look at that over 12 months using your $113/month figure, your cash-on-cash return is 3% which is the equivalent of a nice dividend stock.

That sounds like a great investment. My motto with rental properties is that if it is positive, you are in great shape. As rent goes up, I am sure you will like this investment even more.

Thanks for this posting. Currently I am looking for a rental property and I am comparing my calculation against yours.
I have several questions:
- Should I not include the Principal portion to calculate the monthly cash flow?
- Is it better to buy a town home or a single family home for rental property? With a town home, I have to pay an association fee (~200/mo and it can increase in the future) but I don't need to worry about outside maintenance.
What is your opinion on this?

J,
There are several different investment metrics you can use - some take into account the principal, others don't. I think the common criteria I hear is cash flow positive -- meaning after your mortgage payment and other expenses you still have cash left. In this metric you wouldn't include the principal portion as part of the equation.

I've written about investing in a townhome share the similar concern - my view is generally speaking the fees kill it.

Did you ever calculate how much you would have earned by putting your investment in the rental houses into REITs? I'm just wondering how much of a difference that would be. I have no experience in the rental industry, but I would imagine it would be a pain dealing with tenants.

Good luck with this one...I hope it works out well. Given that it is cash flow positive up front, it should be a moneymaker. However, the return seems low...My wife and I are buying homes with about $30k upfront and they provide $400 per month in cash flow for a 16% return (plus another $100/mo. for principal reduction).

Jonathan,

Wow that is great. What part of the country are you able to find investment opportunities like that? From a number perspective they look very attractive.

Your right at face value the return is nothing to get excited about, but I do have some value add opportunities that may allow me to significantly increase the rent.

2million, we live in Southern California (coastal) and buy inland. We only have one house so far bought about a year ago, but are actively trying to buy another (have been in and out of escrow on a short sale for months). We have a friend who's been buying with cash - the return rates are lower, but obviously the overall cash flow is much better. The houses cost $100-$120k and rent for $1,000-$1,100.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
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