My real estate empire is bleeding cash. Read below as I review the numbers and come to some conclusions.
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Anno Darwinii is the quarterly report on the growth of my real estate empire.
It’s April, so you know what that means: tax time! Perhaps one of the only good things about tax time is that it forces us to review our actual numbers for the previous year. After we do this, my wife and I can look objectively at the performance of our real estate portfolio. With this objective information, we can come to conclusions and alter our plans for the year to come.
2021 was a year of growth
2021 was a year of growth for my real estate empire. As I outlined in my recent net worth update, we grew our real estate portfolio to $6.88 million in 2021-2022. While this does include my primary home in Los Angeles, the vast majority of this figure is from our rental portfolio.
Much of the growth of our portfolio came from the purchase of two small apartment buildings in Indianapolis and a vacation rental in Palm Springs.
Some of this growth of real estate was due to appreciation of our existing properties, but most of the growth was from the purchase of assets. While I’m happy that we expanded aggressively in 2021, we didn’t buy turnkey assets. We mainly bought properties that required a significant amount of renovation.
Therefore, we saw little to no cash flow from these new assets in 2021. As you’ll see below, it was actually quite the opposite.
Check out this link to see all of my Anno Darwinii posts from the beginning: The Anno Darwinii page.
Our stabilized portfolio
Here is a chart showing our 10 rental units of stabilized assets in 2021. By “stabilized,” I mean that these properties are renovated and rented to tenants. Either I bought them turnkey, or I took them through the “BRRRR” process where we renovated, rented, and refinanced them.
Conclusions from our stabilized portfolio
The average cash on cash for our whole stabilized portfolio was 8.6% in 2021. Our actual cash flow from these properties was only $15,584 in 2021. While not bad, these numbers are lower than our projections.
The major takeaway from this chart for me was that the small margins of long term rental are fragile. One large expense can wipe out an entire year’s worth of income.
Let’s address some of the properties that underperformed. I’ve outlined each of these properties before in a previous Anno Darwinii, but I’ll give you a quick run down of why they underperformed.
Birmingham Single Family Home
- Turnkey property
- Cursed from the start: hard to rent, non paying tenant, septic tank issues
- Sold in late 2021 at a small loss
Little Rock Single Family Home
- Turnkey property
- Solid performer in 2020
- Large tenant turnover costs + vacancy wiped out cash flow for 2021
Indy duplex #1
- Duplex BRRRR with high projected cash flow
- Forgot to pay property tax on this property
- Catch up payments in 2021 + various repairs canceled profit for the year
Our unstabilized portfolio
The part of our portfolio I’d call “unstabilized” in 2021 were our two small apartment buildings and our Palm Springs vacation rental. These all required significant renovation, shuffling of tenants, or both. This part of the portfolio is 16 units of rental property.
Here are the numbers specific to this part of the portfolio:
These properties all have their own stories, but all of them should be stabilized within the next 2-3 months.
Conclusions from 2021
As my wife and I munched on risotto at our favorite Italian restaurant on Sunday night, we reviewed these numbers and came to some conclusions. Since this is a summary post I won’t go into them in much detail today, but I may revisit the conclusions in future posts.
- Turnkey properties have thin margins and are susceptible to unprofitability
- Water is a real estate investor’s worst enemy (much of our expenses in 2021 were water related)
- Even with large incomes, big cash investments are very tough to handle
The first two conclusions are self explanatory, but I’ll expound on the last one just a bit.
Large renovations should be financed
Between the purchase and renovation of our Palm Springs vacation rental, our cash outlay for this property alone was over half a million dollars. We used the cash out refinance from the completed BRRRR of Indy Duplex #4 to help fund this, but that still left us on the hook for over $300k.
We pulled this from a number of places, but the majority came from a combination of cash flow from our jobs and a HELOC on our primary home.
In retrospect, I think it would have been best to pursue a formal construction loan (or similar line of credit) for the renovation. It would have kept our books cleaner and lessened the financial pressure of floating such a large renovation. In the future, I’ll gladly pay the interest costs of such a loan to prevent this financial pressure.
In closing, 2021 was a big growth year for my real estate empire. We cut loose some underperforming property, but mainly purchased and renovated a ton of property.
But we also bled cash like crazy, especially towards the end of the year into 2022. Between this fact and our recent purchase of the vacation rental in Broken Bow, we’ve been feeling a bit financially stretched at the Darwinian household as of late.
I’m really looking forward to having our portfolio fully stabilized in the next few months. Once that’s done, our cash flow numbers should start to pick up. Mid to late 2022 should be a very different situation.
— The Darwinian Doctor
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