KEY BENEFITS FOR US

NOW

• • $1,200 of monthly cashflow ($14,400 annually)
  • 11% annualized return on our investment
  • Mostly tax-free income

FUTURE

• • Mortgage principal payoff
  • Home price appreciation

IS THE WORK AND EFFORT WORTH THE PAYOUT?

These are not a truly passive investment for us. We spent a lot of time on the front-end renovating them and still spend several hours per week on managing them (answering questions from tenants, repairs, maintenance, etc.) The time on these varies a lot – some months we spend no time on them, and sometimes we have multiple repairs in a week. Even if we had a property manager, there would still be some time we’d spend answering questions. If we think about it as a comparison to a typical job, the effort is worth the payout though. Here’s our example:

• • We spend ~3 hours per week on average across both rentals
  • We make $14,400 of net cashflow annually
  • This equates to an hourly rate of $90 per hour

Rentals are not truly passive investments (like a mutual fund), but when we think about the hourly rate, combined with the cash-on-cash return of 11%, and overall appreciation, the time and effort are well worth it for us.

AT WHAT POINT CAN I QUIT MY DAY JOB?

This answer will of course be different for everyone depending on expenses, desired lifestyle, and goals. Using our examples, we’d need roughly 8 rentals to earn ~$56,000 net annual income which would be roughly the equivalent to an ~$80,000 W2 salary. While our time spend on maintenance and management would likely go up with more rentals, we don’t anticipate we’d spend a full 40 hours a week on them to get a full time “salary.” Over time, we expect the expenses on these to go down (as mortgages get paid off) and rents to increase (as they typically do). One option we are considering for future rentals is renting them as Airbnbs and/or mid-term rentals, which should help us increase our overall cashflow.

So far, we outlined the expected cashflow based on a typical year. We’ve also experienced years where we’ve had to make additional investments (e.g., plumbing updates, crawlspace repairs, etc.) which meant we broke-even in some cases on that property. Because we only have two rentals, we lost half of our cash flow in a year where we had a big expense. By owning more rentals, we’d end up spreading our risk out more because the impact of one large rental repair would have a lesser impact across the “portfolio” (e.g., 1/8 of the income lost vs. ½ in our case).

HOW ARE RENTALS TAXED?

The tax code is favorable for rental properties. We are able to reduce rental income tax liability through several deductions:

• • Property taxes, insurance, and mortgage interest
  • Maintenance and repair expenses
  • Depreciation

Below is a high-level summary of how depreciation and expenses help lower the annual taxes required on the rental income.

Below is our own example of one particular year (you should always consult a tax advisor).

Net income is what you end up with in your bank account. Taxable income is the amount you pay taxes on. You can see from our example below that our taxable income ends up being a lot lower than our net income which is ultimately a benefit for us. 

Eventually a small collection of houses can replace a full-time salary (whatever that means to you) without the full-time effort. Rentals are right for us because we enjoy finding the deals, designing and renovating the houses for our desired tenants, and don’t mind spending some time on maintenance and answering questions. This is just a brief intro to a very broad topic with entire books written about it. We will continue to share our experiences with our rentals with you and dive into additional rental topics.