I purchased my first long-term rental property in December of 2010, and I did not buy my second rental property until October of 2011. I did not plan on waiting this long to buy another, but life happens and sometimes in a big way!
For more information on my rental property strategy check out my complete guide to long-term rentals.
Why did I wait so long to buy my second rental property?
The big change that occurred in my life, happened on June 1st, 2011. I guess you could say changes, as my wife and I welcomed boy/girl twins to the world. There was quite a bit of time, money and preparation involved in having twins as you can imagine. We were not able to become pregnant naturally so we had to use in vitro, which was not covered by insurance and cost a pretty penny. While we were going through the pregnancy, the birth and taking care of two newborns, buying another rental was not a priority.
When was I ready to buy my second rental property?
At the end of the summer things calmed down a bit, we began to save up some money, and I started to watch the MLS for properties. I had noticed rental property number two on the MLS before, but it had been under contract as a short sale. One day I was looking at my hot sheets (hot sheets list new listings and any status changes on the MLS) and noticed the property was back on the market. I quickly set up a showing and looked at the property that afternoon. It was a 5 bedroom, 2 bath ranch with a 1 car garage, across the street from a school and park.
Rental property number two details
The home needed some work; the inside needed carpet, paint, windows, doors, appliances and someone had added the best gas fireplace I ever used in the basement. To add the fireplace they ran the chimney right through the master bedroom closet! The other issue with the house was the front patio had settled and the roof wasn’t completely level due to the support post settling with the patio. After looking at the numbers, I made an offer the same day I looked at the home. They were asking $96,000 and I offered $90,000 with $2,000 in closing costs. The seller countered me at $94,000 with $2,000 in closing costs and I accepted.
Getting my offer accepted on a short sale
Short sales can take a very long time to get approved, and there is never a guarantee they will approve your offer price. I didn’t get too excited about this house because it could take months to get the short sale approved. I was pleasantly surprised when the listing agent called me and said they had approval about 6 weeks later!
Getting a loan on rental property number 2
Before I made my offer on this home, I had talked to a number of lenders about getting a loan on another rental property. I was having serious problems getting financing lined up because I had multiple mortgages in my name. The problem was I had my principal mortgage, rental property number one and two other rentals I had purchased with my parents years ago. My name was on the mortgage on those properties, so technically I had four mortgages in my name. It gets really tricky getting a fifth mortgage!
How to get a loan on more than four properties
I talked to my mortgage broker, a couple of traditional lenders and the consensus was I could get a loan, but it would cost me. I had to put at least 25 percent down and my interest rate would be at least 1 percent higher than a regular investor loan. I was not happy at all with these terms! I continued searching for better financing and I found a local bank that loaned their own money; a portfolio lender! They said they could do 20 percent down, with a regular investor rate, the only catch was I had to move my accounts over to them and they did not offer a 30 year fixed. They offered a 5 and 7 year ARM and a 15 year fixed rate loan. The 5 year ARM works perfect for my model, and I was able to get loans on as many properties as I wanted with this lender!
Closing on rental property number 2
I am never sure how it is going to go with a new lender until the home closes. We made it to closing, and I was blown away at how easy it was to get the loan done. Basically they used common sense to do the deal. They saw I had plenty of equity, plenty of cash, made a decent income and decided to give me the loan.
I closed on the property, had my contractor complete the repairs including removing the bio ethanol fireplace, chimney and put the house up for rent. I actually ended up renting the home to my brother-in-law who just moved back to the area from Texas after a divorce. I rented it to him for $1,100 a month, even though I know I could have gotten at least $1,200. He moved in at the end of December 2011 and is still living in the home now.
The numbers on rental property number 2
This home took a lot more out-of-pocket cash then my first property but I had more built-in equity and cash flow potential. Here is a look at the numbers.
Purchase price $94,000
Down Payment $18,800
Closing Costs $2,500
Closing cost Credit -$2,000
Total Cash $32,450
My cash flow was $7,800 with no vacancies or repairs the first year. My cash on cash return was 24 percent my first year and my rents were low! I was able to refinance this house in October of 2012 and take out $26,000 while only raising my payment $120.
Check out my complete guide to investing in long-term rentals for more details on how to get mortgages, where to find great deals and how to get started investing.
As of March 2015 this house is now rented for $1,500 a month. My brother-in-law moved out and bought a house. The house is still making a ton of money, and I wish I could still buy houses this cheap! As of 2016, the house is worth over $200,000.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.