My real estate portfolio currently consists of 6 rental units. The monthly reports highlight the income and expenses associated with each property as well as the total monthly profits or losses.
Total Income: $4,975 – Ahh, if only that was all profit. Now for the expenses.
- Mortgages / Loans: $2,913
- This number should remain the same throughout the year.
- Repairs: $0
- Utilities: $0
- Insurance: $0
- Taxes: $2,441.08
Monthly Cash-flow: $-379.08 (this is a pre-tax number) A red number, never good!
But wait, there is some more hidden profit. Where you ask? The portion of the loans applied to the principal is a hidden profit, to be realized upon selling the property.
Hidden Profit: $732 (This number actually increases a tiny bit each month, but I don’t get monthly statements showing the principle payment for all my loans, thus I will calculate this amount once per year)
Total February 2017 Profit: $352.92 (Back in black)
Total 2017 Profit: $4,539.92
Monthly Average Profit: $1,513.30 – This is an important number, as it will smooth out the fluctuations caused by insurance bills, taxes, repairs, etc.
March brought the joy of spring taxes. Most homeowners don’t get to enjoy this large bill since taxes and insurance are typically escrowed into the total mortgage payment. Commercial loans don’t do this, thus I have the joy of knowing what my taxes actually cost. If you read the newspaper or follow Pennsylvania’s never ending discussion on property tax reform, you would realize that older people are about the only ones who actually get to experience a tax bill.
Personally, I think placing taxes and insurance into escrow accounts serves two primary purposes, neither of which benefit the homeowner. One, by wrapping these expenses into the overall payment, I would suspect that the majority of homeowners have little to no idea of their true costs, allowing for a much more passive group of citizens. Two, if you ever look at your mortgage statement, you will realize that your escrow account holds a balance of several thousand dollars at all times. When you multiply this balance across the thousands / millions of accounts owned by the big banks, you will find a large source of additional interest bearing capital benefiting their balance sheet.
I find these two issues troubling, but since politics generally just annoys me, I’ll move on. If anyone has any other explanations for required escrow accounts I’d love to hear your thoughts.