An enormous help to financial freedom is owning assets. The key to assets is that they pay you even when you’re not working. I’ve talked previously about my rental house and how it’s currently paying for the mortgage and a little extra. The big payoff though will be once the mortgage is paid off and I’m done with my full-time job. That will be a nice stream of income coming in every month.
You can save a ton of money in your savings and IRAs, but the problem with those is that they’re finite. Sure, your IRA will hopefully grow over time, but regardless, it’s still something you sure as heck better have saved enough of if you’re going to live off of it.
An asset, on the other hand, will continue to provide a nice passive income for you… possibly forever if you maintain it. I’ve talked about dividend stocks being a nice way to gain some income regardless of whether the stock itself is going up or down. However, today I’m back on real estate. I’ve been looking (though not too actively) for a new rental property over the past few months.
When I talked to one of my financial mentors this past summer he recommended that I don’t use any of my own money for the rental property I’m after. His recommendation was to try to pull out the equity out of my current rental house and use that as the down payment for the next rental. This would help protect my savings to be able to use it for emergencies – like it should be used for.
Apparently that’s not that easy to do any more after the financial train-wreck from a few years ago. I talked to a number of banks and most did not do that anymore. However, I did find a couple that will still do but I haven’t gotten things going very far on this.
I’ve been kind of dragging my feet though over the past couple of months (inertia – the best way to prevent financial freedom!). My thinking was that if I did get pre-approved for a new loan, it’s usually only good for a few months… and the problem with that is that this is not a good time of year to start looking for renters. If I found a property, fixed it up, and started looking for renters, we’d probably be in the dead of winter. Winter is a tough season to find renters as most families wait until school is out for the year before moving. In other words, they wait until the spring to start looking and then move in the summer. Granted, this is not always the case, but it’s what helped me to procrastinate! 😛
The good news is that my financial mentor has been on the lookout for me. He’s been sending me emails with properties he’s been finding that meet the criteria I’m looking for and other interesting financial articles as well. For the most part, I’ve just been perusing the things he sends but not really doing anything with them… until last week.
I was anticipating finding another single family home as my rental property, but he sent me an email of a property that really got my attention. This one is a side-by-side duplex with a pretty good size lot.
The downside is that each unit is only 2 bedrooms so that eliminates a lot of potential renters. However, it’s in a very good location (location, location, location – the 3 most important factors in real estate)!
The other interesting factor in this one is that it’s an auction. I don’t know a lot about real estate auctions, but I’m starting to do my research and I’m realizing just how careful I need to be if I go after this one. The hardest part is that I wouldn’t be able to set a contingency based on a home inspection… it’s basically as-is. I would also need to come up with the money to buy it within a couple of days after the auction is over if I won.
I’m hoping to do a walk-through sometime this week. I talked to my financial mentor and he’s willing to go through the duplex with me. He is very hands-on with his rental properties and has always taken care of the renovations and maintenance himself, so he should be able to let me know if this is going to be worth it. He’ll also be able to give me a pretty good ballpark on what it would cost to get it fit for renting. So far, he was able to stop by and check things out from the outside and thinks it needs about $10,000 worth of work based on what he saw and the pictures they have posted online. We’ll get a better number here soon once we can get inside though.
I’m hoping that should this all happen and I win the auction, I might be able to hire my mentor as my contractor for the work that needs to be completed. I’ve seen his before and after pictures on his rental properties and he does some really impressive work. Plus, he’s retired so he’s got a little more time on his hands (when he’s not working on his properties!).
The auction has a reserve, but it’s undisclosed. After talking with my mentor about this for a little bit, he did some math and is guessing that the reserve is probably around $60,000. I’ll need to do some of my own math to determine what my max bid would be, but if the winning bid doesn’t jump too exorbitantly, I could have a really nice deal on this.
My mentor is very familiar with the area (he lives there and has a couple of his rentals nearby) and he thinks I should be able to get roughly $600-650 a month per unit. Even if I got this for $100,000, a 4.5% interest rate (shooting high), would be a payment of $507/month for 30 years. So $1,200 a month in rental income from the two units would be a fantastic return on investment even after all the other expenses (such as insurance).
In addition, the county appraisal is currently over $140,000 for the property. So although my end goal is not to sell it, it’s nice to know I’d have a rental property already worth a lot more than the purchase price.
I’m excited to be on the chase again for a new rental property, but a little nervous about this potential property being an auction. The auction is in mid-November, so I’ll follow-up then with Part 2 to let you know if this pans out or goes nowhere.
Have you done a real estate auction before? Any insight you might have would be appreciated!
Thanks for reading!!