Buying an investment property might be one of the smartest things you can do… if you do it right.
Most of my money is in the stock market because of the ease of investing in it, the company match offered, and other incentives. However, I don’t fully trust it.
The biggest reason why is that you don’t really have control over what happens. Sure, you can choose your specific investments, but it’s not up to you to determine if that stock will go up or down.
When you’re buying an investment property, though, you have the ability to determine your own path. If you understand the numbers, you can put yourself in a position where you’ll likely be successful.
We all know that people will always need a place to live and there are a lot of folks who don’t have the money or the desire to buy. Rental properties give you the ability to provide this housing to those folks.
Not only that, but you have many different ways to come out ahead buying an investment property. I was naive when I bought my first rental property and made a number of mistakes.
I also thought that rent is the only benefit of owning property. However, cash flow is only part of the equation. Other great facets include:
- Tax shelter – you can make good money on your property but still end up showing a paper loss when filing your taxes
- Amortization – your tenants are paying down the mortgage and eventually can pay it off, which will increase cash flow tremendously
- Possible appreciation of the property – don’t buy based on this alone though – this is just icing on the cake!
- Leverage – this can be a double-edged sword, but if used right, it can really help you come out further ahead than the stock market will allow
Check out my The 4 Ways to Make Money with Rental Properties post with more details on each of these benefits.
The house in question
Robert Kiyosaki introduced me to the idea of assets versus liabilities probably around 2002. His books Rich Dad Poor Dad and Cashflow Quadrant were true eye-openers and I decided (among other things) that I wanted to get in on buying rental properties.
I bought a single family home in 2003 in my twenties with the sole intention of it being an investment property. I was young and stupid and bought a house that wasn’t in the best area. But between luck and determination, I was able to make it work.
This was the first house I ever owned and we lived there for a few years first while fixing it up. We then moved out and started renting it out in 2009 – crazy gap of time, right?!
I hired a property management company right out of the chute because I didn’t want to deal with the day-to-day. They ended up getting tenants in the house that lived there from 2009-2018. How awesome is that!
To put this house into perspective, here are some of the related numbers and stats…
- Purchase price: $68,500
- Down payment: $3,500 (30-year fixed)
- Starting rent (2009): $695 / month
- Ending rent (2018): $715 / month
- Mortgage payment: ~$550 / month (including taxes and insurance)
If you live in a higher cost-of-living city than in northeast Ohio, these numbers might raise an eyebrow. But yes, housing can be this cheap in certain areas like Cleveland or Akron.
Overall, our tenants paid us over $65,000 in rent throughout their time living there.
Throughout their stay, I went through a couple different property management companies that charged fees differently (one at $35/month and one at 10% of rent). Obviously, this was an optional expense, but one in which I wanted to have in place.
After all costs (including property management, repairs, etc.), we ended up pocketing around $5,000 during their stay.
Pathetic, right? It just goes to show you that you need to understand your numbers when buying an investment property.
If you think your income will basically be your rental income minus your mortgage payment like I did, you’re setting yourself up for a problem and need to start learning first. I got lucky on this that we didn’t end up losing money on it.
Nevertheless, we had some indirect wins as well. Because we were able to take a paper loss on this house almost every year, that dramatically helped on our taxes. Additionally, they helped pay a good portion of the mortgage on the house… about $40,000 of it!
More importantly, we gained the knowledge and experience to not keep us from making those same mistakes on our next property down the line… our duplex. But that story’s for a different day.
When you own a rental property, you gotta expect a little wear and tear. Having the same tenants in this house for nine years, I knew there would be some rehab that would need to be done.
For instance, we had installed new carpet in the house before they rented from us. That was nine years ago, so of course, that would need to be replaced.
However, what we found was a disgusting mess. I seriously doubt they ever cleaned the house while they lived there – and that’s not some off-the-wall exaggeration.
Most of what we found just requires some TLC and some elbow grease to get the place cleaned up.
It does suck that they treated the property this way. However, that really doesn’t even bother me.
What does bother me is how they lived in filth for all this time… with kids. I feel bad for their children having to live like this.
Why I should have hung onto this house
We used a HELOC on our main home to pay off our mortgage on the rental house in 2016. Then we paid off the HELOC in the summer of 2017 so the house was now free and clear.
That means that our rental income got a lot larger in 2017. It’s nice to own an asset like this without a mortgage hanging over your head.
In other words, if I hung onto this house, our income would be pretty nice every month. After buying an investment property, this is the hump landlords look forward to reaching for years.
This spike in monthly income would allow me to start paying down the mortgage on the next rental property more quickly. Then with that rental being paid off, the additional income from both properties could be used to pay off the next one faster… and so on and so on.
In other words, it creates a debt payoff similar to a debt snowball or avalanche that many folks are familiar with in the world of consumer debt.
My bad understanding of numbers that caused us to make barely any money on this property won’t be so terrible now! We can start to bring in some good income now!
Sounds like things are looking good, Jim… let the good times roll!
Why I decided to sell it instead
Not so fast! As I mentioned earlier, rent’s not everything.
The first problem we have is that this house is old. It was old when we bought it and it’s even older now. It was built in 1917 and needs a lot of work done to it… a LOT of work.
I learned on our first go-around with this house that no repairs are easy because it was built in a day when nothing was really standard. Here’s an example:
Between the cost of repairs and the headaches we’re bound to come across, this made me think twice. I would bet we’d be talking about $10,000 in repairs and cleaning.
The other big reason we decided to sell the house is location-based. It’s not in a very good area. It wasn’t great when we lived there and, in the 15 years since we’ve owned it, the neighborhood’s gotten much worse.
In fact, just a couple weeks ago, a shooting took place only a couple doors down from the house. And, unfortunately, that’s not the first one. A few years ago, there was a shooting almost directly in front of the property.
Hmm, guess I should have paid more attention to the first rule of real estate when I was considering buying an investment property, eh? Location, location, location.
You can change the appearance and even rebuild the house, but that’s not going to help… lipstick on a pig, anyone?
Fortunately, there’s still a slight demand in the area. There are a lot of refugees that the city has been bringing in that need housing and they tend to look to this area for housing.
Additionally, we’re at a good point in the real estate market. Hard to say how much longer we’ll be in a seller’s market, but this was likely a now or never opportunity.
Even so, we still sold the house for a loss. We’re expecting to close on it later this week with a sale price of $50,000… a loss of $18,500.
That’s rough, but at least we’ll be able to capitalize on that loss when we do our taxes next year.
Buying an investment property… take three?
This puts us in an interesting position. We still own the duplex, but I’d like to have more property.
With a single-family house, that means that when it’s empty, there’s no money coming in. With a multifamily property, when a tenant leaves, you still have other tenants hopefully picking up some or all of the slack.
And now that I’m better with calculating the numbers, I’m able to make sure we get a better deal.
That’s one option. Another might be to hang onto it and look at buying an investment property when we make the move to Panama in 2020.
Another choice we have is to take the money and run with it. We can save it or invest it your normal stocks or bonds. Or we could put it toward something else like shares of a real estate investment trust (REIT) (though we already own some of these).
Overall, I think it made sense to sell this house. There are much better properties out there and this was really the opportune time to sell… even at a loss.
Only time will tell if we decide to buy another property in the near future. Either way, this puts us in a good position to be ready for a good deal, should it arise.
Have you considered buying an investment property to grow your wealth? Was I stupid to sell one of mine?
Thanks for reading!!