This week (July 2014) I bought my third rental property of 2014 and 11th rental property total. I am slightly behind my goal to buy 6 rentals, but there is a lot of the year left to buy more properties.
There are a few reasons I have not bought more rental properties in 2014. It takes a lot of money to buy rental properties, and I have 9 fix and flips going. Since I have to put 25% down on my fix and flips and pay for the repairs out-of-pocket, I have a lot of capital tied up in those properties. Once those properties are sold, I will have a lot of available funds to buy more rentals.
The second problem I have had buying rental properties is the inventory is extremely tight in Colorado. It is tough for owner occupants to find a home under $300,000 that is around market value. Imagine what it is like for an investor trying to find a great deal for under $150,000!
For more information on my rental properties and investing strategies check out my complete guide to purchasing long-term rentals.
Even with a tight market you can still buy real estate below market value
When the market is as tight as it is now, you have to be aggressive when you find a great deal. Rental property number 11 came on the market for $94,900 and was listed on the MLS. The house was about .5 miles from my office, has 4 bedrooms, 2 bathrooms and an over-sized 2 car garage. Any house under $100,000 is an awesome deal in this part of town. It’s rare to see an 800 square foot, 2 bedroom, 1 bath house with no basement and no garage for under $100,000. When I saw this house so cheap and it had a finished basement as well as a garage, I knew I had to jump on it.
Why was rental property number 11 so cheap?
The house was an estate sale and I learned at closing the old owner was a World War II veteran. The heirs wanted to sell it fast with no issues and that is why it was priced so low. I think they were hoping to generate multiple offers and choose the offer that looked the most likely to close. I was not looking for a rental property, because I have so many flips going but I had not seen a deal this good for months.
How did I end up buying rental property 11?
There was a lot of competition for this house. When I made an offer they had already notified me they were doing highest and best. I did not let the list price influence my offer on this house, because I knew I had to be aggressive. I made an offer of $109,318 with the seller paying $2,000 in closing costs, no appraisal and no inspection.
It is not often I offer $15,000 more than the asking price, but I knew this house would cash flow great and is worth at least $155,000 fixed up. After the highest and best was complete, the listing agent let me know the seller had accepted my offer!
What condition is rental property number 11 in?
Rental property number 11 needs some work as you can see in this video. The kitchen is outdated as well as the baths. The carpet is old, but there are hard wood floors underneath. The windows are old and the home needs paint. The nice thing about rental properties and our crazy rental market is I do not have to make the home perfect to get it rented. I think I can refinish the floors, paint everything, paint cabinets, add a dishwasher, remodel the baths and add some fixtures and it will look good. I figure $15,000 should be enough to get everything done, hopefully less.
Below is a before and after video of the property.
What will rental property number 11 rent for?
I rented rental property number 9 for $1,400 a month pretty easily. Rental property number 9 had 4 bedrooms, 2 bathrooms, an over-sized garage and was in a similar neighborhood. I think rental property 11 will rent for at least $1,400. This property had a larger garage, a nicer yard and an office, which number 9 did not have.
What is my cash flow and cash on cash return?
My mortgage payment including taxes and insurance is about $550 a month. That leaves me $850 in room between my rent and payment, but we have to account for vacancies and maintenance when renting a home. With my cash flow calculator I come up with $510 in cash flow every month.
I have to put $15,000 of cash into the repairs on this house, but I also get back a commission thanks to being a real estate agent. Here is the estimated cash I will have to invest.
Down payment including closing costs: $22,500
Repairs on the home: $15,000
Carrying costs until rented: $1,500 (mortgage payments and utilities)
Commission coming back to me: -$3,200
Total cash invested: $35,800
If I plug in these figures to my cash on cash return calculator, I get a return of 17%, which is lower than some of my other rentals. However, on my other rentals I did not always figure on maintenance and vacancies in the first year since the home will be newly remodeled. In real life, my vacancies have been much lower and my maintenance has been lower as well.
Future plans for rental properties
I am not going to buy any more rental properties for at least two months. At that point I should have a couple of my flips sold and much more capital available. That assumes I don’t do something dumb like buy four more flips. In a couple more months, I should have capital available to buy more rentals and hopefully there are some great deals available!
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.