I bought my fourth rental property in the beginning of 2012. Rental property number four was listed in November of 2011 and was perfect for my long term rental strategy. The house is a 5 bedroom, 3 bath ranch with a finished basement and a 2 car garage. It has central AC, a privacy fence, sprinkler system and a decent yard. The home was listed as a short sale, and I made an offer on it the first day it was listed.
▼ Continue Reading Below
How did I buy my fourth rental property?
The asking price on this house was $115,000 which was a very low price. I made an offer of $106,000 asking the seller to pay $2,000 in closing costs. I figured I would be the first one to make an offer, and I may be able to sneak in and get my offer accepted. I was right! The seller accepted my offer and I hoped the bank would approve the short sale price.
My fourth rental was a VA short sale
VA is the United States Veterans Association and they offer special loan programs to veterans. VA has certain guidelines they follow on all their short sales. VA determines whether they will accept the short sale offer based on the appraised value. Even though my offer was accepted by the seller, I had no idea what the appraisal value would come in at and if it would be low enough to make the deal work.
One nice thing about VA is they are usually pretty quick at getting the appraisal ordered and the short sale approved. VA will accept offers as long as they net VA a certain percentage within the appraised value. The appraisal came in a few weeks after my offer was accepted and the net was only slightly higher than my offer. I had to raise my price to $109,000 with $2,000 in closing costs, which was just fine with me. I closed on the home 1/24/2012 with a 5/30 year ARM at 3.75%. I used my portfolio lender on this property.
What condition and what repairs were needed on rental property number four?
This home was not in bad shape, but it still needed some work. We had to have the interior painted, new floor coverings installed, new appliances, new fixtures and we had to finish a room in the basement to make a real 5th bedroom. The MLS advertised five bedrooms, but the fifth bedroom had no closet and was not completely sheet rocked. I made the repairs and rented it April 1st for $1,300 a month with tenants paying all utilities. Here is a great article on what repairs to make on a rental property.
Here is a look at the numbers on my fourth rental
$109,000 Purchase price
$21,800 Down payment
-$2,000 Closing costs paid by seller
$2,500 Closing Costs
-$3,000 Commission as buyer’s agent
$500 Utilities while not rented
$600 Maintenance over the year (new dishwasher and minor repairs)
$34,400 total cash invested the first year
$550 mortgage payment including taxes and insurance.
$9,000 in cash flow in first year
That equals 26% cash on cash return in the first year. This home has been rented to the same tenants since I first rented it and it is now February of 2014. The home is worth around $170,000 and has been a fantastic investment. Remember, this home was fully rehabbed and will have little maintenance costs the first year. I am not including maintenance or vacancies in my numbers, but those are likely to occur after the first year and possibly in the first year as well. Use my cash flow calculator to see what the cash flow would be on potential rental properties with vacancies and maintenance.
I had the same tenant in this house until May of 2014, when she moved out. Our rental market has been great and I decided to use $1,500 a month for this property. Two days after it was listed for rent, we had a tenant in the house. I almost always use a one year lease on my rentals, but I agreed to a four-month lease on this house. I did this because the tenant agreed to pay the full four months, plus the deposit upfront! The tenant also is in the market to buy a home after they are done renting, and as a real estate agent I can help him buy a house and make a commission on that sale.