Awhile back you may remember that I purchased my first rental property. This was a HUGE step for me! Traditionally I had always thought that equity investing (i.e. stocks) was the way to go. I figured if I could keep compounding my investments into dividend paying stocks, over the years I could all but guarantee at 5% return let alone the appreciation on the value of the stock itself. Historically returns are much higher, but notice I mentioned “guaranteed” above, since they pay out actual cash dividends to my brokerage account. I’ve been so focused on diversification lately, and yet somehow I was missing the low hanging fruit. I typically think of diversification as a mix of stocks, bonds, international and domestic, and commodities and currencies. On the flip side, I have written about wanting to diversify my income streams as well. I have a day job, a website marketing business, and have even branched out to offer other services online as well, such as content creation. Yet somehow the thought of real estate as a tool to diversify further never came to mind, at least not in a positive light. I had heard about nightmares involving flooded septic fields, full pipe and plumbing replacements, and houses that basically needed to be torn down and rebuilt from scratch. I have also heard about how difficult finding and managing tenants can actually be. All of this sort of intimidated me. I have enough going in my life and certainly don’t need anymore headaches than I already have. Yet, it was the fear of the unknown that was holding me back, and so far my leap of faith has paid off.
I closed on my first rental property 3 months ago, and the tenants have been moved in for 1 month now. I turned over my condo to a local property management company that is virtually 100% online, other than showing the property to potential tenants. Within two weeks I had over 31 interested applicants for the condominium. I actually think I underestimated rent and probably could have charged more. I had always heard of the 1% rule used as a baseline for determining rent, or if a property was worth the risk of buying anyways. Say you buy a property for $100,000, then you should at least be able to command $1,000 a month in rental income. Fortunately for me, I paid $105,000 for my first property, and am charging $1,200…though it’s looking like I probably could have gone north of $1,300 based on demand. Obviously I’m not too far into the entire process, but let me explain how I mitigate all of the potential pitfalls of buying and renting property!
Housing Types
When you buy a house there are a million and one things that could go wrong. The roof might need to be repaired or replaced, the foundation might crumble, or your entire basement might flood. Those are three of the many many scary possibilities that could happen to any house! That’s why my search criteria is strictly limited to condo’s. Condo’s get a bad rap, usually because you don’t necessarily own the “land”, and it comes attached with a monthly homeowners association fee. Lastly, they appreciate a bit more slowly in value than a single-family home, but they DO appreciate! That monthly HOA fee provides me a massive peace of mind. I’m basically only responsible for maintaining, repairing, and replacing anything within my 4 walls (not including pipes though). All of the foundation, roofing, and even the patio outside my property is fully covered and maintained by the condo association. My worst case scenario is replacing a furnace or hot water heater, both of which are covered under a 1 year warranty to boot. So, right now I am paying a $600 monthly mortgage payment which is more than offset by a $1,200 monthly rent payment…easy math here, that is double my money…and I’m building equity to boot. That is over $7,000 in positive cash flow. If I could find a way to own 10 similar properties then I would bank $70,000 a year in passive income. Not a bad deal when you think about it.
Hands Free Management
I love anything with a “set it and forget it”mentality that earns me money. Who wouldn’t? This is precisely why you want to shop around for a reliable, but affordable, property management company. Mine went out and took professional photographs, web-blasted the application everywhere, and went out and showed groups of people the property in different intervals over a couple weeks. They took care of the legal paperwork, collecting a security deposit and first months payment, and then direct deposited the whole thing into my online bank account. It’s still early on so I haven’t had any service issues, but if something breaks then my property management company is available 24/7 for my tenants and will deal with everything and simply bill my account for whatever I owe after all repairs have been made. No need for me to wake up at 3am on a worknight due to a busted furnace at the property.
Location, Layout, and More
The rest of my search criteria outside of the property being a condo is actually quite specific. First, I’m only interested in properties with 2+ bedrooms. You can still rent to a single person, but if you have one bedroom you take out the potential for a roommate. This cuts your potential tenants in half, if not more. I lived with roommates for nearly a decade after moving out of my parents home when I was younger, I actually preferred the company at the time, and many others in their early stages of life might share that same sentiment. Second, I ONLY want turn key properties. Sure I’m not getting a “steal” like the days of buying up distressed properties in foreclosure etc. But that process can be extremely cumbersome and tends to only pay off for those that are handy enough to do their own repairs. At the very least you have to know a rough repair estimate when putting an offer into a property since you will have to pay someone to do the work. A foreclosure and busted up property works best for experienced home flippers, but not rental property investments. When you buy a rental property you want to actually RENT the property, not let it sit idle for months while you do work to it…that is an opportunity loss of income if I ever heard of one. Lastly, and certainly not least, location is everything! I live in the Metro Detroit area, and it always helps if you know the area you are buying in. We have several nice suburbs outside of downtown Detroit and there are a select few that have a vibrant and walkable community, usually centered around a main street. Over the years I’ve found this is where the highest rental demand exists. So that’s what I did. I found one of those popular downtown cities, and bought up a condo within a half mile of the city center. Buy where people want to be!
The Property Investment Bug Has Bitten Me
So now I have had a huge yearning to buy another property, several more in fact. Right now I am focusing on buying a condo in Florida in a red-hot rental market that has a very good rate of appreciation and HUGE rental demand. A 2 bed / 2 bath condo in this area of Florida can command gross rental income in the six figures if it’s nice enough and located accordingly. On this go around I am investing with a close friend of mine that lives nearby. We are certainly getting an education in how to buy property out-of-state, and with a partner, all of which has taken a significant amount of time to educate ourselves on. I expect us to close on a beachfront condo before summer’s out, and will keep you posted once I do so.
After we close out this deal then we are thinking about potential investments in other properties locally afterwards. This is precisely why we created an LLC to handle this and any other real estate investments we might partake in in the future. But those details are for another time. I will keep you posted as I learn more.
How exciting! Congrats on purchasing the first rental property 🙂 this is definitely something I want to look into in the future.
Congrats! Though check with your condo. At least one other blogger I read posted about how she was expected (with the rest of the building) to pitch in for a new roof. Maybe that was a one-off. I know I was surprised.
Once we get to the point where we’re fully funding our retirement accounts, we’ll pay off the mortgage and buy a rental property. I know that most people buy a rental property and use profits to pay off their mortgage. But my husband is on disability. If anything happened to my job, I wouldn’t want at least one of the properties to go into foreclosure. (Especially because our profits will be cut into by cheap rent in Phoenix and a property manager.) Still, it’s a goal, which is good.
There is always a risk of increasing HOA fees, but part of my due diligence is reviewing their current financial statements and how adequately the condo reserves are built up. They have enough to replace all of the roofs on the entire complex at once, and still have money left over, so im not worried there. They also have a 30 year history of never increasing monthly dues, which is nice to see.
Agreed, definitely fully fund retirement and tax advantaged accounts first! And make sure to see out a fee only property manager when you do buy one…dont ever use a realtor or realty company as a property manager. Ridiculous fees for the same work!
Great post! I have been looking into buying a rental property, so I am happy that I stumbled across this post. There are lots of little details that you don’t think about until you read about them. Thanks for sharing!
Good luck with your purchase! Its worked out well for me so far