It’s been a long time since I’ve written about our real estate “empire”. (I put “empire” in quotes because it is tiny – only 3 properties). I wrote that article back in 2013. Wow! Time flies.
That’s far too long without an update. Now is as good a time as any. Actually, it’s a better time than any because I’ve been doing taxes. I have a lot more data to share. I’ll update this information annually and we’ll see how it progresses. It’s not too exciting to do this kind of overview every few months – things don’t change that much.
Introducing our Rental Properties
To make distinguishing the properties easier, I’ve decided to give them names. I could just name them A, B, and C, but that’s boring. To make it a bit fun, I’d settled on the Pokemon Kanto starters. (Don’t worry, you won’t be tested. I didn’t know what a Pokemon was four years ago.) All the properties are two-bedroom, two-bath condos, but their locations are different. Because they are condos, they have many comparables on the market, so Zillow’s Zestimate is generally very accurate.
Acquisition of the Properties
Property #1 – Bulbasaur
Purchase Date: 2002
Original Cost: $140,000
Current Value: $217,700
Mortgage Left: $49,074
Rented at: $1375 (Zillow Zestimate: $1,829)
My wife bought this property before I met her. It’s an hour west of Boston. It was perfect for her as it was near her work. She didn’t have the 20% down. When we were dating in 2004 and 2005 she was still paying off the private mortgage insurance (PMI).
It became a rental property in the fall of 2006 when my wife and I moved to San Francisco for her job.
Property #2 – Charmander
Purchase Date: 2005
Original Cost: $278,000
Current Value: $378,700
Mortgage Left: $86,246
Rented at: $1900 (Zillow Zestimate: $2,377)
I had been living with a friend for several years. We got a place with his wife for a bit, but I obviously needed to move on. It worked out well as I had started to date my future wife. My company moved about a half-hour west of Boston – which happened to be halfway to my wife’s Bulbasaur condo. I decided to buy there (we were still dating). Prices were really getting very expensive at the time, and there was a fear that we’d never be able to buy a home again. After a long search and pulling strings, I was able to nab an awesome interest rate of 5.875%.
It became a rental property at the same time as the Bulbasaur property.
Property #3 – Squirtle
Purchase Date: 2013
Original Cost: $95,000
Sold: $170,000 (2020)
Current Value: $215,900 (included for fun)
Mortgage Left: $0 (Sold)
We bought this property because it was such a great value. It was in the same condo complex as Bulbasaur and of a similar size but in better condition. I found this, but my wife wasn’t thrilled as we just had a newborn. However, I think I had a winning argument. If she liked buying her place for $140,000 in 2002, why not buy one in better condition for $95,000 ten years later.
When we sold this property, we did a 1031 exchange to buy the next property – 3b. Squirtle evolved into Wartortle.
Property #3b – Wartortle
Purchase Date: 2020
Original Cost: $204,000
Current Value: $303,000
Mortgage Left: $92,088
Rented at: $1600 (Zillow Zestimate: $2,499)
We had $115,000 of equity after selling Squirtle. We had about a $95,000 mortgage in 2020. It’s now about $92,000. This worked out better than we could have ever imagined. The Bulbasaur property went from 140K to 217K. The copycat property we bought in 2012 for 95K is now worth 303K (after the change of location). We have 30K extra in equity and we didn’t spend an extra 10 years paying down the mortgage.
Property #i – Pikachu
The house we live in now was originally bought as a real estate investment. We loved the cheap prices in 2011 and thought that we might retire in Newport (RI) someday. We rented it for one year and then my wife was able to get a job transfer back here. It’s appreciated most of all the properties, but I can’t count it since we need to live in it. That’s why I gave it the imaginary number “i”.
A Brief Timeline of our Rental Properties
Becoming an Accidental Landlord in 2006
We became accidental landlords in 2006. My fiancee/wife’s move was sudden. Her job opportunity had a narrow window. It would have been tough to sell both our condos (Bulbasaur and Charmander) while trying to move our lives across the country. We decided it was best to try to rent them out. Once the great recession came, we were locked into that decision because they were so far underwater. Charmander got to about $178,000 – $100K less than what I bought it for. Interestingly, it is now at $378,000, $100k more than what we bought it for.
Do you remember the Home Affordable Refinance Program (HARP)? We were able to refinance Bulbasaur and Charmander in 2012 to interest rates of around 3.5%. We had that timed perfectly – it’s amazing to get a 3.5% mortgage on investment properties. We didn’t want to “start over” with another 30-year fixed mortgage, so we went with 15-year mortgages. Now that it’s ten years later, we have five years of mortgage payments left. With the low-interest rate, we’re not in any hurry to pay them off.
The 1031 Exchange of 2020
I covered the 1031 exchange of selling Squirtle and buying Wartortle above. The math on the last 9 years of the purchase is fairly amazing. We put $23K down and now have $211,000 in equity. That’s nearly a 9x gain in 9 years. Of course, a lot of that is due to the recent run-up, but even our similar Bulbasaur property didn’t perform like that.
What About Cashflow?
I don’t track cash flow as well as I should. It’s simply very difficult. It wasn’t until the last couple of years that we segregated them into their bank accounts. That was my wife’s idea because she wanted to see how much maintaining these places was costing us. It was a great idea and something we should have done long before.
Bulbasaur mostly breaks even. The 15-year mortgage means a higher payment. The property has had to do a complete overhaul that meant taking an additional loan for tens of thousands of dollars. Condo fees just keep going up.
Charmander loses about $500 a month. That’s way too much. Like Bulbasaur, there have been big property fixes with high bills. They had some fires recently and the insurance shot through the roof. Again the condo fees are high.
Squirtle and Wartortle are also the only two properties where we’ve consistently made some cash flow. However, Wartortle has cost a lot in maintenance over the last year. It was much closer to breaking even than it should be given the low mortgage payment and the rent. Recently the condo association changed the by-laws so that they don’t have the responsibility for the water pipes inside the walls. They keep failing and it’s costing the condo association too much money. We’ve been getting calls every 6 weeks about problems with the pipes, so this new law may be started just because of our unit. I’m not sure what to do, but it sounds like it might not be legal to me. We were on vacation when they sent the email, so we have to look into it now.
About Those Rents
The rents are way less than what they should be.
Bulbasaur had been at $1500 for a long time and we love the tenant, so we had been sticking at $1375. The market has moved a lot, but I don’t know if the Zillow Rental Zestimate is accurate. We’ll look to raise the rent, we’re going to need to if we are to cover renovations.
We’re going to look into selling Charmander and do another 1031 exchange. We’d rather manage a property that is closer to us in Rhode Island. Going 90 minutes to Massachusetts is a pain. It’s the perfect time to sell, but then buying is difficult and mortgage rates are sky-high now. Maybe we should sell, pay all the taxes and wait for a crash before getting back into the market?
The Zillow Zestimate of Wartortle of $2499 doesn’t seem right. It seems to have been stuck on that number for a long time. I think Zillow doesn’t really know and it is just putting a number out there with a link to a real estate agent for a finder’s fee. In any case, we should realistically be able to get $1900 a month. We need to start working our way there if it continues to have maintenance problems.
If we were able to rent all the property at Zillow Zestimates, we’d have an income of $6,705/mo., but we are only getting $4,875. That’s leaving more than $1800 a month on the table or $22,000 a year. Again, realistically the Zillow numbers are off, but we should be able to manage $10,000 more a year.
Cash flow of 2021
I almost forgot about the main reason why I started writing this article. We have the cash flow numbers from doing our taxes recently.
Bulbasaur’s income was $16,500 and expenses were $10,441. We made a little over $6,000 in cash flow! We were also lucky that we paid zero dollars in maintenance.
Charmander’s income was $22,800 and expenses were $15,483. We made $7,316 in cash flow! This was better than I thought. We only had $1,012 in maintenance.
Wartortle’s income was $16,355 and expenses were $15,142. We only made $1,200 in cash flow. The $5,200 in maintenance costs sunk us.
We did quite well earning $14,588 in cash flow in 2021. Wartortle’s maintenance problems were tough, but I guess it balances with the good fortune of the other properties. If we can raise rents to reasonable market rates, we should be able to get to $25,000 in rental income a year. That’s way better than I thought we’d be while we still have mortgage payments.