The Rental Property Investment Chase [Part 2]

Rental Property ChaseWell that was fast.  Really fast.  One of the things that Robert Kiyosaki talks a lot about in his books is that you should look at 100 properties, make offers on 10, and buy 1.  Well, I was intent on looking at a number of them (maybe not 100) until a great deal pretty much unfolded right in front of me.

If you remember where we left off at in Part 1, I had a potential rental property that my financial mentor had found that was under auction but we knew needed some work.  We just needed to get inside to check it out.

And check it out we did.  It needed probably about $30,000 worth of work put into it… ouch.  However, if I was able to get it for around $60-65k this might still be a pretty good deal.  Either way that’s still a lot of work that needs to be done and could open us up to other problems that we can’t see.

While I was pondering if I should even try to figure out the auction process and make a bid on this one, I decided to check out a few other properties.  That turned out to be the right move.  One of the duplexes that I checked out said it needed some TLC, so I was really expecting the worst on it.  The good news is that it didn’t really need any TLC.  In fact, it’s in excellent shape.

As a bonus, one side of the duplex is currently being rented out right now.  When I first looked at it, the price had already dropped from $115,000 to $110,000 – probably as a result of the misleading TLC statement and also that this isn’t usually the best time of year to be selling.

I was very happy with this find and asked my financial mentor if he would come out and take a walk through it with me so I wouldn’t miss anything.  We met up at the duplex and he told me that he had done some digging and found that the sellers were long-time owners and that it looked like the husband had recently passed away and that she was just trying to get rid of it.

It turned out that he was right about that and while we were going through, my agent let me know that the owner was dropping the price again to $99,900.  I was already ready to try to get this for maybe $104k or $105k, so this was the icing on the cake.  However, we actually threw out a price of $96,500 just to give it a shot.

We settled on $98,000… SOLD!!

Now comes the least pleasant part of the process… paying for it.  Since the whole financial meltdown back in 2008, banks have been a little more particular on giving out their money (which they should have done from the get-go!).  But, that’s bad news for the average Joe like myself.  Unlike a house you’re planning on living in, picking up a rental property means you need to put 25% down – and there doesn’t seem to be much of a way around that.

A property for around $100k is not that expensive.  In fact, some of our friends in places like some cities in California or New York are probably dropping their jaws right now reading this post.  Regardless, 25% of $100,000 is $25,000… actually closer to $30k once all the closing costs and other garbage are thrown into the mix. That’s still a lot of cash to come up with.

I mentioned in my post “The All-Important Emergency Savings” that I have roughly $40,000 in my savings which can cover that.  But, I really don’t want to use the bulk of my emergency savings.  What if I take ownership of this duplex and the furnace dies or I need to make other immediate improvements or repairs?  Bring on the stress.

So, I decided to start digging into doing a home equity loan or a home equity line of credit (HELOC).  My goal was to pull the equity out of my other rental house for this.  However, after talking to way too many banks, the most I could pull out would be around $18,000.  That wasn’t going to cut it.

That helped bring on the stress even more because this property looks to be such a winner.  Then the other night I woke up and had a thought.  I decided that I’m going to break the rule of not using your emergency savings for a non-emergency.  I’m going to pay the full down payment of about $30k with my savings… and here’s why:

  • A home equity loan or line will cost me somewhere in the neighborhood of 3.5 to 4.5% in interest.  My savings is earning a tremendous (note sarcasm) 1% interest sitting there.  It will actually save me a lot of money by putting the savings to work rather than taking out an additional loan.
  • I am still going to proceed with getting a home equity line of credit.  That way, if I do run into issues where I need to do repairs or improvements, I still can.  However, I can just get the HELOC done in a normal number of weeks instead of stressing myself out trying to get it done right this second.

Now that my stress level is down, let’s talk about the most important part… the numbers!

It looks like when all is said and done, my payment should be around $675/month.  That includes principal, interest, taxes, and insurance (still waiting for final numbers on insurance, but that should be a good ballpark figured in).  The duplex is in a good rental area with middle class residents and I should be able to get $650/month in rental income pretty easily for each side.

In fact, I will already have one existing tenant paying that $650/month when I take over for at least six months.  That’s a huge benefit while I look to fill the other side!  If I can rent out both sides, that’s $1,300/month.  After you take out the 10% my property management company gets (I’ll pay that 10% any day!), I’m left with $1,170/month.

If you read my article on “Why You Should Use Other People’s Money”, you know that I wasn’t aiming for making money on my real estate right now (as long as the tenants are covering  the mortgage and repairs).  However, this is a great benefit to help me leverage any extra income to get closer to financial freedom even quicker!

My payment is based on a 30-year loan as a precaution in the small possibility I get canned from work or something like that, but with the extra income coming in on the house, I should be able to pay off the duplex in 15-20 years.

Both units are in extremely good condition so maybe I’ll have to throw $1,000 at it just to clean up some things, but that’s it in repairs (for now!).  There is no central air conditioning in the units, but it doesn’t look like any of the duplexes around there have it either (I see a lot of window units hanging out).  So, if I can make that happen for less than $5,000, I might do that just to differentiate my place and possibly command slightly more rent.

So that’s the plan.  We haven’t set the closing date just yet, but I’m excited to pick up my second rental property.

What do you think – are you adding any real estate to your portfolio to help provide a passive income stream?

Thanks for reading!!

— Jim

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4 thoughts on “The Rental Property Investment Chase [Part 2]”

  1. Congrats on finding a place that you think is a good value!

    Your description of thinking about your funding options highlights for me how *personal* personal finance is. I’m definitely not of the “borrow other people’s money” persuasion. 🙂 It would stress me out every night to know we had that hanging over us. So we paid the 20% down payment on our rental (didn’t have to do 25% even just last year, and in fact putting more down wouldn’t even have given us a better interest rate) out of our savings — we had purposely held some cash there instead of investing it because we knew we were looking to buy a rental. And that decision feels totally right to us. But you’re talking about YOU and YOUR MONEY, and so you have to do what lets you sleep at night! 🙂

    1. That’s a good point about how comfortable you are about things. I hate bad debt due to my past. However, I’ve learned to appreciate good debt. We pay off our credit cards every month and have been pushing to get the mortgage paid off on the house we live in because it does eat away at me every day. But to me, having the bank leverage my money and putting out the majority of it for a house that the tenants then pay off makes it well worth it for me. To each his (or her) own! 😉

      That’s interesting about being able to do only 20% down… not sure if the 25% requirement I ran into is regional or just something recent, but I was told the same thing by several banks and my broker. I wasn’t thrilled about having to put so much down, but if things go according to plan (fingers crossed), I’ll be able to get this paid off in a relatively short amount of time.

      — Jim

  2. This is very similar to my own developing rental property story. Nice comfortable first find. I really think that will end up key when deciding to acquire more. Good job!

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