I purchased my sixth rental property a couple of months ago (March 2013), and I just got it rented! I did not advertise it anywhere or even get the for rent sign up in the yard before we had a renter! One of my other tenants, who lives in rental property number four referred her brother to us and his wife loved the house. I was going to ask $1,300 a month for rental property number six and they were fine with that. Their references checked out and we signed the lease last week. I did give them a slight break on the rent for June, since they moved in immediately. I agreed to charge them only $500 for the rest of June even though half the month was still left. That made them happy and I (by I, I mean my wife) do not have to deal with Craigslist calls and showings. Here is a great article on how to rent a house.
The numbers on rental property number 6
Once again, I managed to completely blow my budget on this house. I was thinking it would be a minor rehab and the repairs would be under $10,000, but the final contractor bill came in at about $15,000! I think the contractor got way too caught up in fixing every little detail in the house. We did add a bedroom, take out a brick bar, replaced the floors, repainted, and all that tends to add up quickly. The contractor also took a very long time to get everything done, which bugs me more than the extra cost.
I bought the home for $115,000 and the seller paid $2,000 in closing costs. I don’t know if I mentioned it or not, but this was a Freddie Mac REO property and it had actually been on the market for 54 days before I made my offer. They started out asking $129,900, then lowered it to $119,900, and I actually did not make an offer until it had been listed at $119,900 for a couple of weeks. My first offer was a little lower than the final selling price, but of course another offer come in right after I submitted mine. I offered my max price and luckily the seller accepted it. I then had to wait 3 months while a title issue was cleared up.
Find a great deal off the MLS
At the time I made my offer late last year, I thought I was pushing it on my offer price. The problem was, I was not seeing many good deals at the time and this one was pretty close to my buying criteria. Except for rental property number seven, I have not seen any other great deals this year on MLS that I could buy. There have been some great HUD properties at great prices, and a few Bank of America REOs that were priced well, but I can’t buy those properties since I list REOs for those companies. After repairing the home, I estimate I could sell it for $155,000 no problem and probably closer to $165,000. If you look at the numbers below, I have about $30,000 in equity now on top of my down payment. I am glad I decided to push it a little on my buying criteria!
Purchase price: $115,000
Closing costs: $2,000(after seller paid concession)
Mortgage payments: $1,028(2 months)
Cost basis of home: $130,078
Down payment: $23,000
Closing costs: $2000
Mortgage payments: $1,028
Total cash in $38,078
Yearly Rent $15,600
Mortgage payment $6,168
Maintenance and vac.: $2,340
Yearly cash flow $7,092
I never know exactly how to figure my cash on cash return in the first year because where does the year start? I paid my down payment back in March when I bought the property, but I didn’t pay the contractor until this month, and there were some costs in between those dates. If I start figuring my returns from when the house is rented, I will make 18.6 percent cash on cash return in my first year. I don’t figure any repairs into my first year, since I just spend $15,000 fixing every little possible issue.
Use my cash flow calculator to see what the cash flow would be on potential rental properties with vacancies and maintenance.
I am still looking for more rentals, but not as actively as I had been since we are buying a new personal residence. I still want to buy two more rental properties before the year is up to stay on track with my goal to purchase 100 rentals. Rental property number 7 is done, but needs to be cleaned. I will try to have a video of it up next week.
Here is a before and after video of the property.
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.