How to Handle Property Costs
Today, we're diving deep into a topic that every property owner faces—those daunting expenses on your rental property. If you've ever felt discouraged, like I have, by expenses piling up, stay tuned. I want to share a perspective with you that might help you decide whether to keep your property or let it go.
Understanding Expenses
First, let's talk about those of you with rental properties. You know all too well that expenses can fluctuate wildly and cash flow can feel inconsistent at best. You might be putting money into the property and asking yourself, "Is this really worth it?" Perhaps you've experienced rising taxes and insurance premiums and wondered whether your property has become more of a liability than an asset. I hear you, and I’ve been there.
The Bigger Picture: Cash Flow and Appreciation
Here’s a way to look at it that might help. We need to evaluate real estate investments holistically, and for that, I've got my trusty whiteboard. Picture this with me: a timeline of five years. We first look at cash flow, which is essentially your rent minus expenses. And then there's appreciation—your property’s increase in value over time.
In a previous video, I covered why real estate wins by more than just cash flow and appreciation. If you want a fuller picture, check out that video. Today, let's focus on these two aspects.
A Five-Year Case Study
Let's walk through a hypothetical scenario. Say you own a $250,000 rental property, which is quite feasible here in Texas. Over five years, here's what it could look like:
Year 1: Between property turns and unexpected expenses, you might lose $200 a month (total $2,400) in cash flow. But with a 2% appreciation rate typical in conservative underwriting, your property appreciates by $5,000.
Year 2: Assuming stable tenancy and offsetting rises in taxes or unforeseen repairs, you net zero in cash flow but still gain $5,100 in appreciation.
Year 3: With a slight rent increase, you make $100 a month.
Year 4: An unexpected large expense might lead to a $100 monthly loss.
Year 5: More rent increases and improvements see you earning $150 a month.
So, over these five years, you might find yourself $600 in the hole regarding cash flow. On paper, it might seem bleak, but let’s factor in appreciation. Your property appreciated approximately $26,000, which translates to about $433 monthly over the five years. If we offset the cash flow loss, you're effectively up $420 per month.
Zooming Out on Real Estate Investments
Many property owners might not anticipate putting money back into their properties or wonder why they aren't immediately profitable. Real estate often demands patience, and turning a profit upfront isn't always feasible. A bad storm, inevitable repairs, or updating old systems can seem discouraging, but these are investments in the property's longevity. Remember that this "loss" is temporary when viewed against the backdrop of continued appreciation and other benefits like depreciation.
Real estate is not a get-rich-quick endeavor. The initial years can be the toughest with their upfront costs and transitions. But once you weather the first five years, things start to stabilize. You understand the property better, manage risks more efficiently, and, critically, your rents typically increase.
Final Thoughts
If you're seeing stagnation in appreciation and mounting cash flow losses on a property in a challenging neighborhood, it might be time to reconsider holding onto it. However, if the fundamentals are solid and appreciation is steady, remember why you started. The goal is long-term wealth, and sometimes that means weathering the initial storms.
Zooming out to look at the broader picture and remembering the intrinsic value of your investment can help stay motivated. Real estate rewards patience, and with persistence, it has the potential to be incredibly rewarding.