Are you buying a job or becoming a real estate investor?

It’s a valid question.  Let’s say you have day job and buy houses on the side.  Regardless of whether you manage the properties yourself or have them managed, there is a management cost involved.  If you take care of them, it’s an opportunity cost … if someone else does, it’s an out-of-pocket expense.  Either way though, there’s no getting around the fact that property management costs money.

Imagine with me for a minute that eventually you buy enough houses to be able to quit your day job and manage your properties full time.  Is that something you would want to do?  Property management, as you know, is difficult, grueling, and sometimes risky work.  There are late-night phone calls, renters missing payments, maintenance, and potential legal pitfalls, especially when you have to go through with an eviction.  If you’re good at it and have developed your own management system, then it very well could be that the best option is to manage your own properties.  You will be working for yourself which could be very rewarding, you can work more or less your own hours, and you can deal with your rentals exactly like you want them to be dealt with.

The purpose of this post is not to hash out the pros and cons of property managers or to talk about how to find the best ones out there.  The purpose is to give you a framework for making the decision on whether or not to hire one.  Just remember this, your time is valuable.  Time is a very finite commodity and not something that should ever be undervalued.  When you have a job, you are selling your time to your employer.  If your goal is to break free from your 9-to-5 job, in other words, to stop selling your time to someone else, then at least consider whether you want to trade one job for another which is effectively what you are doing if you choose to manage your own houses.

Again, I’m not advocating one route or the other.  Trading a soul-sucking 9-to-5 job for the relative freedom of running your own real estate / property management business may be just what the doctor ordered.

If you do decide to manage your own houses, don’t ever lose sight of the time you put into management.  If you use Quickbooks or some other accounting software, consider entering the time you spend on the properties as an expense.  You won’t be able to write it off for tax purposes but it will at least give you an idea of the cost in terms of your time of property management.

Time and energy are finite …. treat them as such!

Yearly Income Report – Fiscal Year 2012 Profit and Loss

This is my profit and loss statement for my 5 rental properties for fiscal year 2012.  I wanted to post this (and will continue to post quarterly and yearly P&L statements) in the interest of full disclosure.  To me, real estate is the best of all possible investments but you have to remember, real estate pays you in 6 different ways, only 2 of which show on the typical Quickbooks profit and loss statement.

FY 2012 FY 2011
Income
   Reimbursable Expenses 736.29 200.00
   Rental Income 42,951.74 37,384.33
     Discounts/Refunds Given (441.38) (425.00)
     Late Fees 1,260.00 268.00
   Total Rental Income $43,770.36 $37,227.33
   Returned Check Fees Collected 20.00
Total Income $44,526.65 $37,427.33
Gross Profit $44,526.65 $37,427.33
Expenses
   Bank Charges 297.50 20.00
   Insurance 2,652.48 1,825.65
   Insurance – Business use of hom 10.10
   Legal Fees 518.00
   Meals & Entertainment 31.86
   Mortgage Interest 14,916.62 11,238.32
   Office/General Administrative E 38.00
   Other Miscellaneous Service Cos 500.00
   Property Management Fees 1,381.76 1,860.21
   Property Taxes 9,595.64 7,359.09
   Repair & Maintenance 9,767.79 3,112.19
     Supplies / Hardware 166.87 9.85
   Total Repair & Maintenance $9,934.66 $3,122.04
   Taxes / Licencing 150.00
   Utilities 2,142.02 1,978.61
Total Expenses $41,630.64 $27,941.92
Net Operating Income $2,896.01 $9,485.41
Other Expenses
   Depreciation 14,290.73 10,799.82
Total Other Expenses $14,290.73 $10,799.82
Net Other Income $(14,290.73) $(10,799.82)
Net Income $(11,394.72) $(1,314.41)

1.  In Quickbooks, “Net Income” is not the same is “Net Operating Income” which is a better metric for measuring the performance of a property.  Net Operating Income does not include the cost of financing as an expense, Net Income in Quickbooks however does.  To calculate Net Operating Income (NOI) I would have to remove both the “Mortgage Interest” and “Depreciation” expenses.A few things to note:

2.  My properties had a depreciation expense of $14,290.72 in FY 2012.  This is calculated as 1/27.5 of the initial value of the property (minus the land) and can be counted for tax purposes as an expense, just like maintenance or management expenses.  This is one of the great benefits of real estate, you can effectively write off depreciation as an expense even though that money doesn’t actually come out of your account.  For tax purposes, I am able to claim a loss of $5,600.11 (see Net Income) even though without counting depreciation it was actually a gain of $8,690.61.

3.  Lastly, in real estate most people (including myself) invest for “Cash Flow” which is simply the amount of money that goes into your pocket (or leaves your pocket) each month or year.  Again, Quickbooks has some trouble with this calculation since the portion of rent that goes to pay down mortgage principles is not included on the P&L statement.  It is included on the Balance Sheet but since it’s not an expense, is not on Profit and Loss.  Therefore, Net Income ends up being quite a bit less than “Positive Cash Flow” since I would have to subtract all debt princlple pay-downs from Net Income to get Cash Flow.

In summary, I was about Cash Flow Neutral for FY 2012 but got to write $5600.11 off of my income  as a business loss.  Real estate is about the long-term investment.  2012 was a rough year for the rentals (some vacancies and some large capital improvements) and I’m satisfied by just breaking even this year.

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