Last week I purchased rental property number 16. I bought my first rental property in December of 2010 and I had a goal at that time to purchase 20 or 30 rentals. I thought it would take me at least ten years to buy 20 or 30 rentals and I would have a great passive income source. After a year or two of buying rentals I realized I could buy 20 or 30 properties in ten years if I kept on the same path buying two or three homes a year. I love goals and challenging myself so I knew I had to change my plan. I decided to make my new goal to buy 100 rental properties by the year 2023. This goal would seriously challenge me and make me do thinks differently and better.
According to my plan I should have 24 rental houses by the end of 2015. With 16 rentals owned in September of 2015 it will be really tough to buy 8 more houses before the year is up. However, I am not worried about being behind on my goal because I have until 2023 to make up for it. Even if I don’t reach my goal to buy 100 houses in the time I allowed, I know I will be better off than if I would have kept my small reachable goal.
Is it okay to buy old rental properties?
Rental property number 16 is an old house! It was built in 1885, which is much older than any other rental property I own. I try to stay away from older homes because of the increases maintenance that usually comes with an old house. However, this house was a great deal and I could not pass it up. I knew I had to buy it whether I ended up flipping it or holding it as a rental. The house has 3 bedrooms, 2 bathrooms, a one car garage and about 1,000 square feet.
The home is in great shape and just about ready to rent as soon as I bought it. There is new carpet, new paint, newer kitchen, newer baths, newer roof and the mechanicals are in good shape. The only issues with the home is there is no laundry room and the floors are a little uneven, which is normal in a house this old. We can add a laundry room in the back porch and we should be able to level the floors with some support work in the basement.
Because the home is in such good shape I was not as worried about it being an older house. I also got it for an awesome price and it should make me a lot of money.
How much did I pay for rental property number 16?
I bought rental property number 16 for $91,500. In the past I have bought 1970’s ranches with 4 or 5 bedrooms for under $100,000. However those houses needed about $15,000 in repairs and that was a couple of years ago. Our market has gone crazy here in Colorado and I think I bought this house well below market value. I just looked on the MLS and the cheapest home that I think is comparable to rental property 16 and is actively for sale, is priced at $135,000.
The seller of the home was a real estate agent who has been around for years and he listed the home for $91,500. I thought this was priced really low and they actually received three offers in the first day. When I first wrote my offer I made it for full price with no inspection or financing contingencies. The seller actually called me to make sure I knew I left out an inspection in my offer. He accepted my offer and we closed a few weeks later.
Why was the home priced so low?
At the closing I talked to the seller about the home and the history. He had owned it for almost 20 years and used a local property management company to manage the home for him. I know the company and I have been less than impressed with their work in the past, but I did not say anything to the seller. He told me they had the home rented for $600 a month the last five years, but the property management company thought they may be able to raise that to $700 a month now.
I now knew why it was priced so low! If the actual market rent was $700 than a list price of $90,000 to $100,000 makes sense in our market. However, I know this home will rent for at least $1,000 a month if not a little more. With rents of $1,000 or more a month the home should be worth $130,000 or more. This shows you how important it is to make sure the property management company you are using is doing a good job. I have seen this many times where property managers will under price their properties so they can rent them quickly and choose the best tenants possible. If the landlords are not paying attention to the rental market they may have no idea their properties are being rented for hundreds below current market rents.
What kind of returns will I see with rental property 16?
After using my cash flow calculator my monthly cash flow is only $339 a month (assuming long-term financing is in place). That is well below the $500 a month I shoot for on my properties. I am okay with only $339 a month in cash flow because I am putting so little money into the house and it is such a great deal. Since I am putting a little over $20,000 into the property my cash on cash return is still 20 percent.
Future plans for rental properties
I did not use a 30 year mortgage to finance this property like I have done in the past. I have over 2.5 million dollars in loans with my portfolio lender. My portfolio lender did not want to give me any more loans until I got my 2014 taxes done and they could get approval from their committee for more rental property loans. I think they will give me more loans, but I need my accountant to finish my taxes! I used a line of credit that I have on my personal house to buy rental number 16. When I get long-term financing in place I will put a 30 year mortgage on the property.
I want to keep buying rental properties, but I also want to make sure I am getting great deals with great cash flow. I want to be extra careful in a market like ours where prices are rising very quickly.
I hope to get my financing lined up for more properties in the end of 2015 and 2016. If my lender will not give me anymore loans I have been exploring more options to obtain financing. I could refinance many of my existing properties into one loan with a different lender, which would put me under the 2.5 million threshold my lender has. I have also been exploring some national portfolio lenders who offer financing on rentals, but charge higher rates.
Don’t forget if you are looking for personal help on buying rentals to check out my Complete Blueprint to Successful Real Estate Investing.