The Rental Property Investment Chase [Part 1]

Rental Property ChaseAn 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!!

— Jim

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9 thoughts on “The Rental Property Investment Chase [Part 1]”

  1. Reading this tells me that we probably don’t have the stomach to be legit real estate investors. We’ll probably just stick with our one house that we rent out. 🙂 Having to scramble for cash after buying at auction sounds dicey, though I’m sure there are ways to do it. And don’t listen to me, since I’m over here sinking more money into index funds, and pretty much nothing beyond that. 🙂 Please report back on what you end up doing!

    1. A lot of people have made a lot of money by sticking with index funds – no shame in that! 🙂 I just think I need to get another property not only to supplement my income, but to be able to show my daughter what can be done. Right now, the schools train you to be a good employee and I don’t want that… I want her to realize that she has other options and those options can give her the freedom to then chase her dreams. Now, let’s see if I can actually pull it off! 😉

    1. It’s true that investing for the short-term can give you an opportunity to learn from your mistakes. And I do try to spread my investing across different avenues, but in this case, I do believe having solid rental properties for the long-term is a great way to go. When I ended up acquiring the property that I wanted based off this post, I did much better than I did the first time around because I learned from my first rental as well as other educational methods. This new property is providing me around $500/mo after all is said and done, so I do have the cash-flow right now, but I also have an asset that will continue to generate long-term revenue as rents increase and even more-so after the tenants pay off the mortgage. I’m hoping to pickup 2-3 more duplexes as well over the next 5 years to follow suit.

      — Jim

  2. Very curious to hear how the auction goes. My partner and I were looking at getting into an REO but decided to pull back just because the cash (cash only) needed was too high for us. This was a condo in a great area in Florida but since we buy and hold the risk was too high. For a fixer upper perhaps a better deal but we don’t play in that environment. Anyways, I like your thought process and hope you get the house. I invest heavily in index funds (core) but also have 3 rental properties. Having that passive income is just sweet so I think the name of the game is diversification … at least for me.

    1. The bad news is that the auction fell through, but the good news is that this post was from a while ago and since then I picked up another duplex the old-fashioned way (through my agent).

      Seems we’re very similar on the diversification between index funds and rental properties. 🙂

      — Jim

  3. Good luck with RE journey. I’m on a similar path myself and it can be tough to get started. It’s great that you have a mentor in the process. That makes a world of difference. I have found a lot of great advice and insights on which I’m guessing you may have already tapped into.
    Enjoy the journey

    1. Thanks, JC! Shortly after this post was published, I ended up finding a gem pretty quickly and bought a duplex. It was in excellent condition for a good price and rent-ready – definitely a win. It’s been cash-flowing nicely for us.

      I’m a huge fan of BiggerPockets. I actually met Brandon Turner at FinCon this year, which was really cool. Great guy!

      Thanks for the kind words and good luck to you!

      — Jim

  4. Pingback: Owning Rental Properties Is Smart, but I’m Out, Jack! - Physician on FIRE

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