As a finance blogger I have read a ton of online literature on real estate investing, the do’s and don’t, various strategies, and even the absolute horror stories that some have endured. I’ve generally stayed away from investing in real estate for several reasons. First, my time is scarce. I work a day job that has always taken top priority when it comes to my professional life. I have been married for nearly 4 years now, and I do like to spend time at home with my wife. I try and see my friends and family as often as I am able too. And, oh yeah, I own a few dozen websites and have been consistently growing my online endeavors each and every year. Second, I’ve always thought my time and money was better invested in building out my websites or snatching some additional ones on the cheap. Last, but not least, I figured that outside of my online business, I was best to invest more money into my online brokerage account and keep stuffing money into dividend paying stocks.
So, why the sudden interest in rental and investment properties??? Well, there are a few reasons. The simplest one being that the bull market run appears to be over. It’s been a wild 6 year ride, and I have socked a ton of money into investments between my after-tax brokerage account, multiple 401k’s, and SEP IRA as well. Also, in case you are new to this site, I have long been preaching multiple income steams and overall diversification of earning money. I have a day job as a corporate finance manager, I actively invest in dividend growth stocks, I have an online business (with multiple income streams in and of itself I might add), so it only made sense that I continued to branch out more. Maybe this whole website thing will go belly up one day, and maybe I will get laid off my job at some point (it did happen once before!), and we have certainly seen the stock market hit the skids before so that wouldn’t shock anyone. This just allows me one more cushion to fall back on, and just maybe, an additional stepping stone towards financial independence and early retirement!
The biggest deterrent to buying a rental property was the unknown. Would I be overpaying for the property? Would I be able to find a tenant to rent to? Would that tenant live up to the nightmare horror stories I have heard about? I probably had a couple hundred more worries than those as well. In the end, I don’t mind taking risk, I just needed to make sure it was somewhat mitigated. So allow me to explain how I alleviated my initial fears of buying a rental property.
I think a big deterrent for people making the leap into real estate investment is the potential for cash killing repairs like needing a new roof, furnace, or even a dilapidated foundation! I cured this fear with two decisive solutions. First, I only looked a condo’s. A condo might come with a homeowners associations (HOA) fee, but it also provides you with the peace of mind knowing that all exterior problems are covered by the association and aren’t your responsibility. When you own a condo you are typically responsible for things inside the four walls. This is precisely why I made sure to negotiate a a one-year home warranty into the purchase agreement. It’s by no means a guarantee, but at least I know if any of the major or minor appliances breakdown within the first year of renting the property I will be covered. After the first year is done I will have a reasonable cash cushion from renting the property that will allow me to cover maintenance and repairs if needed.
Whenever you make a big purchase it can make you nervous! Just think about how you felt when you bought your first home…it’s a huge step, and one that inherently comes with risk. I already have one house, so taking on another mortgage is a considerable risk. Anytime you leverage debt it means you owe somebody money. I’m ok owing money and taking out another mortgage in this environment because I have substantial savings, and because interest rates are ridiculously low and literally have nowhere to go but up. Regardless, I wanted to keep my first property on the lower end of the price range I was looking at…so I purchased the condo for $105,000. This is well within my range of affordability, and the cash outlay is a $21,000 down payment plus the lenders fees and upfront escrow funds. When all is said and done I will have put down about $25,000 to invest in my first property. This is something I can comfortably afford without having to worry about the consequences of not being able to find a renter. The worst case scenario is that I will have a roughly $850 mortgage to cover each month, which includes P&I, taxes, and the HOA fees.
Despite my ability to comfortably afford the down payment and the mortgage even if I am unable to find a renter this is certainly not what I am hoping for. I chose this specific condo complex because I know two other people who are currently renting here and the amount they are paying each month. Also, I can use Zillow to find several other rental units in the complex and the average monthly rent they are generating. I know that I can charge around $1,200 per month for rent. This leaves me an excess monthly cash cushion of $350. I’m not retiring on an extra $350 per month, but don’t forget about the equity I will be building as well. The renter essentially pays for my monthly mortgage payment, of which a portion includes the principal on the loan. One day I might choose to sell the condo and I will be able to keep all of the paid in equity and appreciation that has built into the property value.
My ultimate hope is that this just a test rental and I will be able to take advantage of interest rates while they are still at all-time lows. Ideally, I’d like to snatch up 3 or 4 more properties like this one over the next year and build up an investment property portfolio. First, I just need to make sure that all of my assumptions above will come to fruition. Second, I need to make sure that I find the right kinds of properties at the right prices. If I don’t feel comfortable I have to make sure not to jump the gun just to take advantage of low rates. I have patiently looked around for the past year before I finally pulled the trigger, so I’m typically not one to rush into anything.
Right now I am just setting up the home inspection, which takes place next week, and still about a month out from closing on the condominium. I will keep you all updated on my progress and future forays into this and other investment properties.
In the meantime, if you have any questions, comments, or experiences, I would love to hear them!