Guys, it’s the post you’ve all been waiting for.
If you follow me on Instagram, then you know that Keith and I purchased our first official rental property back in September. And while I wanted to write this post MUCH sooner (you know, out of sheer personal excitement), I waited a few months to ensure at least a small level of success (and paid rent) prior to jumping the gun.
However, 3 months later, all is running smoothly (*knock on wood*), and I wanted to give you all the details behind how we got into this real estate game, the process we went through, and the numbers on our FIRST EVER rental property.
Technically, this is not my first bout with rental income. When I purchased the home I now live in 4 ½ years ago, I rented out rooms on the second floor of my place to some friends to help cover some of my mortgage. It was a fantastic way to keep costs down and earn extra money for essentially doing no extra work, and my experience with that (which is what the pros call “house hacking” – who knew?) planted the seed in my brain that I could do this beyond just the walls of my primary home. But I never made a move on it until this past year.
In the spring, Keith and his brother tossed around the idea of house-hacking as well, where they would buy a duplex, live in one side, and rent out the other for enough to cover the rent. While we were discussing the idea, I thought, “Why am I not jumping on this real estate train, too?”. I had extra money in my savings account that was literally just sitting there, and since I already contributed 15% of my salary to my 401(k) and Roth IRA, I figured it would be a great way to diversify not only my income stream now but also my retirement savings, too.
So when Keith and his brother decided not to go the house-hacking route, I recruited Keith to partner with me on this idea instead.
The only downside? We had no idea what we were doing. And thus began for us the rental property process.
STEP 1: EDUCATION
I overprepare for everything, and when I’m potentially going to be forking over major $$$, you best believe I’m going to soak up as much knowledge as I can before taking the 1st step into it. Here are the 3 main resources we used to become amateur experts in the rental game
At the beginning of the year, I wrote a post about why I’m not paying off my mortgage early, which was partially because of my goal to get into the rental real estate game during 2017. One of the readers (i.e. fellow blogger Jim from over at Route to Retire) commented on the post, pointing me in the direction of Bigger Pockets, and GUYS, this site is a gold mine for anything and everything real estate.
They have articles, forums, webinars, calculators, podcasts…you name it, you can find it there. You can usually find me playing their podcasts in the background while at work or tapping into one of their webinars on Wednesday nights. I’ve even reached out on the forums twice for help with questions and have gotten amazing feedback on both.
I highly suggest signing up for an account if you’re thinking about pursuing any type of real estate investment. It’s a wonderful place to start educating yourself on the process and determining if it’s a route you truly want to take.
And, guys, I am in no way sponsored by Bigger Pockets – it really is just THAT good.
GOOD OLD-FASHIONED BOOKS
I read Rich Dad, Poor Dad years ago, and if you need some convincing on why earning passive income is the way to go, I’d start there.
However, I also scoured my local library and picked up “Rental Properties for Dummies” (because that’s basically what I was), and I now have pages of notes containing information I gleaned from it. It’s a great resource for learning about the laws surrounding the landlord/renter landscape, and it also provides some great insight as to processes to follow when acting as a landlord so that your tenants don’t think you’re a complete a$$hole.
And as the education never ends, I’ve got the following on the radar: The Cash Flow Quadrant (by the same author as Rich Dad, Poor Dad) and The Book on Rental Property Investing (by Brandon Turner, one of the Founders of Bigger Pockets). I’ll let you know how those go once I’ve devoured them!
Nothing is more educational and motivating than actually reading about people who have implemented all the strategies you’re reading about and how they’ve found success with real estate, and let me tell you, the internet is OVERFLOWING with them.
One of my favorites is by my friend Alex, founder of Cash Flow Diaries. He focuses on turnkey properties (which is essentially what our first property is) and actually invests in my hometown of Indianapolis. I remember reading his posts a year ago and thinking how much income opportunity I was missing out on. If he could make money in the rental game here as a newbie to the city, why couldn’t I?
He’s been a huge help in our initial dabble in rental real estate thus far, and I highly suggest heading over to his site. (And if you’re anything like me, you’ll love his posts detailing out the numbers on each of his rentals – he’s up to $3,000 in passive income per month from them!)
STEP 2: STRATEGY
Once you dive into the real estate world, you’ll quickly realize that there are 14,572,201 different ways that you can make money off of it. There’s flips, house hacking, BRRR, rentals…the list goes on and on with variations of each.
Thus, I would say one of the most important parts of this process is figuring out which one you want to pursue and sticking to it. For Keith and I, we sat down and had a “Come to Jesus” meeting where we determined that what we really wanted out of this, and for us, this ended up being a steady stream of income each month that we can use as a source for retirement.
On top of that, we knew we needed to follow a path that did not require a lot of our time. If we had just 8-to-5 jobs, it would be a lot easier to be involved in big projects, but more often than not, we don’t even get home until 8 or 9pm. The nights we eat dinner at 8pm are considered “early” nights for us. Thus, we don’t have a ton of time to pour into the real estate projects themselves, which means we needed something that didn’t require a lot of our personal time. And that is why we decided that we wanted to invest in rental properties rather than home flips as this strategy better fit our goals.
Now, we’ve definitely come across opportunities that had large cash potential, but because they didn’t fit our model, we didn’t pursue them. You really have to be disciplined in your strategy, even when the return is there, so that you don’t end up wasting time in the midst of a deal that doesn’t pursue your goals.
STEP 3: FINANCING
First, let me say this: on paper, this property is 100% in my name. Keith and I are not yet married, and I am adamant about not jointly owning assets of this size with anyone who doesn’t share my last name. Because I had the extra funds (and killer credit score), we decided I would fully purchase this home on my own. Others down the line might be funded differently, but that’s how we structured this one.
Now, there are a myriad of ways to finance an investment property, but because I had quite a bit of extra cash saved up, we decided to pursue a traditional mortgage with a 20% down payment. And with a traditional mortgage comes a traditional mortgage process, meaning that I had to get pre-approved.
Thus, I sent in my bank statements, paystubs, the movie rights to any future documentaries based on my life, and my left arm and was pre-approved through two different lenders, neither of which I ended up going through. Why?
Because they didn’t provide mortgages for less than $50,000. Before buying this property, there was another single-family home in the same price range that we wanted to purchase, but when we went to put our offer together, we found out this little tidbit. We were SCRAMBLING trying to find a lender that would offer a low-value loan (we actually reached out to Alex from Cash Flow Diaries and he was a huge help here), and ended up not getting the house because it was sold before we had time to put in our offer. Oy vey.
Thus, learn from our mistakes and ask your lender if there are any limitations on the loan types they offer. We did end up finding one that provided low-income loans, and that is the one we used to purchase this property.
In addition, know that the interest rates on investment property loans are going to be higher than those on a primary residence. We have a 5.125% interest rate on our investment property, and I’m pretty sure the going rate for primary homes is hovering around 3% right now. If you’re analyzing a rental, you’ll want to factor that difference into your calculation when making a decision on what’s a profitable venture and what isn’t.
STEP 4: THE SEARCH
Keith and his brother had already been working with a realtor when they were looking into their house-hacking idea, so we kind of inherited him to help with our search of finding rental properties. We defined our price range, location, and property type we were looking at, and he set up an MLS notification so that whenever something new came up, we would be notified.
And then we monitored that. And scoured the Realtor.com app. And drove for dollars. And perused Craigslist. All looking for a good deal we could use as our first tryst in being landlords, and guys, that search was lengthy. I literally looked at more homes during this process than I ever did for my primary home. No lie.
Now, I will say this: If you want to be successful and grow in this business, you have to be vigilant in the search. You can’t simply depend on one method to give you the ideal property. It takes time, patience, and a lot of dedication to pour over home-after-home-after-home on the market, but in doing so, you’ll come across these great deals. Neither this first property we bought nor a second one we are currently looking into were on our MLS notification, and if we would have just depended on that, we would have missed out on both.
Another thing very different than a primary home search: what you’re looking for changes. You’re more focused on number of bedrooms and bathrooms than the perfect layout. The flooring and cabinet color don’t matter as much because you’re looking for functionality. You find a clean garage, and you’re thinking how much rental value that adds.
Again, you have to define these things as part of your strategy and remember that this home is part of a business, not an HGTV special.
STEP 5: RUNNING THE NUMBERS
After touring what seemed like 300 hundred different homes (one that we think may have been a crack house, another that definitely had an amateur skin flick theater in the basement), we found one that fit our criteria: a small 3-bedroom, 1-bathroom home that needed little-to-no renovations. And then we had to ask ourselves: Is this a good investment? And if so, how much do we offer to hit our goals?
I think the key to any good real estate deal begins and ends with the numbers, meaning you need a good way to analyze them. It isn’t just simply a factor of rent minus mortgage; you also have to factor in future renovations, repairs, maintenance, vacancy, appreciation, etc., which can have a significant impact on the profitability of the house.
Thus, we relied heavily again on Bigger Pockets for their Rental Property Calculator, which allowed us to factor in all those things previously mentioned (and then some) to figure out what our monthly cash flow and capitalization rate would look like. (Spoiler Alert: All signs pointed to this home as a “go.”)
Because I’m extremely Type A (if you don’t believe me, ask Keith), I also wanted to double check the figures to ensure that this was a solid investment. I downloaded the Turnkey Property Calculator that my friend Alex has over on his site and plugged in the numbers there as well. And guess what? It verified that this was a property to pursue.
So we made an offer, negotiated a bit, and ultimately ended up the proud (and slightly nervous) owners of a rental property.
And then the real work began.
STEP 6: RENTING IT OUT
We closed on the home the Friday of Labor Day weekend, and by Saturday, we were in the house with tools, paint, and cleaning supplies to get the place in shape for renters ASAP. With a little elbow grease (and a lot of help from Mama and Papa Knies), we were able to get most of the major fixes done in two days, and Keith and I decide to list it that Sunday, two days after our official close.
We bought a sign to put in the front yard to advertise the property for rent, but guys, we didn’t even have to use it. We had heard Craigslist was one of the best and most overlooked places to list your rental, so we started there, and within the first 24 hours, we had 5 responses with another 5 coming in within the two days after that.
But that was the easy part.
Any landlord will tell you that the key to having a successful rental business is finding good tenants, and Bigger Pockets (again) provided us with a great resource to help us screen potential renters called SmartMove. Essentially, this does the background and credit checks for you for a small fee, which you can either pay yourself or make the tenant pay as an application fee. (And FYI, anything we read stated that if a tenant didn’t want to pay it, you don’t want them in your place anyway). It also gives an “Approve” or “Reject” suggestion, which is extremely helpful, especially as a newbie landlord.
We used this, along with our personal screening method (AKA Keith met them at the house to give a tour and felt out the vibe), and ended up finding a great candidate within a week of listing the property. And 12 days after closing on the place, the tenants had moved in, and we were officially landlords.
Now to the part you were all super curious about: How much are we actually making on this?
Here are all the numbers:
Purchase Price: $44,000
Down Payment (20%): $8,800
Mortgage Pmt (including insurance & taxes): $290.14
If you look strictly at the rent vs. mortgage payment, we are making close to $460 per month; HOWEVER, a lot more plays into this that reduces that number significantly, like repairs & maintenance, building an emergency fund for future CapEx projects (think new roof or furnace), etc. Here’s how our cash flow is estimated to look after factoring all of these other items into the equation (and yes, this is the Turnkey Calculator from Cash Flow Diaries!):
A 14% cap rate is pretty legit in the rental property world, so for our first dive into this passive income stream thing, we feel like we did a PHENOMENAL job. Now, we have had to do some minor repairs and replace a few appliances, but after 3 months into it, we’ve netted an extra $800 in total. Because our strategy is to build a future retirement stream (and don’t need the money now – we both work full-time jobs), we plan to reinvest all of what we earn into future rentals so that eventually, it will snowball into some serious income for us in the future.
What I’ve detailed here just scratches the surface of rental property investing – there is so much more background knowledge that goes into actually finding, renting, and managing a property, and I am no expert by any means.
However, if I’ve sparked your interest and you want to learn more, let me know what topics you have questions on, and I’ll cover it in a future post (or at least point you in the direction of some great resources).
Here’s to building more real estate millionaires!