For tax purposes, the IRS defines rental income as passive income. The idea of generating passive income from rental property sounds great. Let other people pay your mortgage while you kick back in your chair with a pineapple drink in hand. However, in my honest opinion (IMHO), owning a property is really not passive but hard work that does payoff. Owning the properties have not only created the rental income stream my wife and I were looking for but also increased our overall net worth. Another residual benefit of owning a home is learning from DIY projects where we even impressed ourselves. This post will explain some of the responsibilities from being a homeowner and how my wife and I manage our cash flow.
Owning Homes in the Bay Area
My wife and I are very fortunate to own homes in the Bay Area that have experienced equity growth. During the time of purchase is the most nerve-racking experience because we especially felt that we were overpaying for our Peninsula House in 2015. The house was attractive to us because of its unique downtown location and walking proximity to Caltrain. However, having a bidding war against newly minted IPO millionaire millennials (aka rich “Minions”) is no laughing matter.
IPO Millenial Millionaires (rich “Minions”)
What kept us motivated in bidding for this home was our unique Do-It-Yourself (DIY) talents. My wife and I have always excelled at making lemonade out of lemons. We are never the ones to shy away from a challenge and the Peninsula House needed some work. Imagine a kitchen with brand new cabinets but no handles and only a stove oven and dishwasher for appliances — no refrigerator, no microwave. The beautifully tiled master bathroom shower was missing the shower door. The backyard was big enough for the kids to play but it needed work. It honestly looked like a poor attempt at creating a fruit orchard with overgrown orange, apple, and fig trees and a disaster of a storage shed that was described in the listing as a “garage”.
Sweat Equity projects
Here is the list of sweat equity projects put into the house thus far:
- install master bath shower door
- replace front door
- replace single pane windows
- open up wall between dining and living room
- convert brick fireplace to electric
- tile fireplace
- cut down orchard trees
- build walkout platform deck
- install sliding door to backyard
- build front yard fence
- replace back yard fence
- install automatic gate opener for carport
- install electrical for doorbell camera
- renovate shed “garage”
- built backyard pergola for deck
- remove overgrown trees
As you can see from the list of projects, this is not exactly HGTV where the show’s hosts are tap-dancing through each project without scratching a nail or getting dirty. Renovations and maintenance for a house is not for the faint of heart. I am reminded of the time when I literally had rat droppings falling into my hair while pulling down ceiling panels. While most of the projects can be outsourced to contractors, most good contractors will avoid small jobs if they have better offers from other homeowners with larger projects. So just when you thought owning a home meant no more bidding wars, guess again when it comes to contractors. This is primarily why my wife and I have become so good at DIY as you should too when you own a home.
Buy a Finished Home to Rent Instead of DIY
My wife always reminds me that the math has to work out in your favor so that the rent can cover the mortgage. If you purchase a home that requires a mortgage loan that is much too expensive for the area and for the market, it will not matter how many renovation luxuries you put into the property due to no interested renters (no market demand) who would be willing to pay such an exorbitant price for rent.
Manage the Cash Flow
Over the course of 11 years, my wife and I have maintained a real estate portfolio that totals over $1.8 million in mortgage debt. The monthly mortgage payments equal to almost $10,000 which excludes property taxes (~1.2% for California and ~2.3% for Illinois). My wife and I were not lucky enough to be born into rich families like in the movie “Crazy Rich Asians” (which I found to be a very entertaining movie) so we have to rely on positive cash flow from rental income in order to pay off the mortgages. We will own this mortgage debt for the next 30 years or less depending on where we are in the amortization schedule.
| Property Type | Monthly | Rental Income | Cash Flow |
| Peninsula House | $2,806.26 | $2,000.00 | ($806.26) |
| South Bay House** | $4,365.97 | $0.00 | ($4,365.97) |
| South Bay Townhome | $1,225.82 | $3,500.00 | $2,274.18 |
| Chicago Multi-Unit | $1,589.81 | $2,600.00 | $1,010.19 |
| ——– | ——– | ——– | ——– |
| $9,987.86 | $8,100.00 | ($1,887.86) | |
| Total Monthly | Total Income | Total Cash Flow |
**South Bay House still being renovated therefore no rental income yet which is why I have negative cash flow at the moment.
Value Long Term Tenants
Managing this debt is not passive at all. My wife and I are always strategizing how to keep our tenants long term. Some readers have countered with the idea of raising the rent for the next tenant, however they fail to realize the lost time in rental income by interviewing and showing the unit to potential renters. For example:
- Tenant-A agrees to stay 3-years at $1,000/month, covering a monthly mortgage of $800. After 3-years, Landlord now has +$7,200 in the bank.
- Landlord wants to increase to $1,100, therefore, Tenant-A leaves and now Landlord spends 2x months trying to find Tenant-B. During these 2x months, Landlord spends $1,600 on the mortgage.
- Landlord now has +$5,600 balance remaining once Tenant-B is found. Had Landlord left the rent at $1,000/month, Tenant-A would have stayed and Landlord’s bank balance would have increased to +$7,600 during the same 2x months.
By offering our tenants more amenities, our tenants want to stay longer with us. Some of the amenities we offer in our units are laundry on-site, shared Wi-Fi, fully furnished, or even utilities inclusive with rent price. Renters are always on the move therefore our strategy in keeping renters long term is to try to make our rental units better than the competition.
Do you have a rental experience that you want to share in the comments? Was the landlord fair with his renewal offer or did he/she try and raise your rent?
To help track my expenses and rental income (aka cash flow), I created a RTM Monthly Mortgage Cash flow sheet that I have made available for my readers in my Downloads section.
RTM Monthly Mortgage Cash Flow sheet
Track your monthly mortgage expenses and rental income to understand your cash flow.
