How the House I lived in Paid For My First Rental Property

Last Updated on March 29, 2023 by Mark Ferguson

I bought my first rental property in December of 2010. My wife was pregnant with twins, and it was not exactly the best time to buy rental properties, at least according to all my peers in the real estate business. I was an agent and flipped some houses but I knew I wanted to invest in rentals to grow my wealth. Up to that point, I was making decent money but I was never able to save much or have much to show for it. The more I made, the more taxes I paid and the more expenses I had. I had to do something different and investing in rentals was the next step. The problem was I did not have the money for a down payment to buy a rental. Luckily, I had gotten a great deal on my personal house and I was able to use that to buy my first rental.

Why rental properties?

By that point, I had been a real estate agent for 8 years! I had helped my father flip houses during that time and finally found my niche in real estate with REO listings. REOs are bank-owned foreclosures, and I was fortunate enough to list them for many banks and HUD. I was selling a lot of houses but real estate agents have a lot of expenses as well. I also had to pay part of my commission to the team.

I knew I wanted to buy rentals, but I could not find the perfect property or the perfect time. I was also worried about using all the money I had worked to save on one property and then not knowing how I would save all that money again. I was also not sure if rentals were a good investment. I had convinced myself they were the route to take, but other people kept telling me not to buy one—even other real estate agents who should have known they were a great investment.

Eventually, I convinced myself it was time to invest. I was tired of seeing my money stagnate in the stock market, tired of not having control of my life, and tired of knowing I would have to scrimp and save for 30 years to have a chance at getting ahead with my current investments.

The first house I lived in

Even though it is not the most popular investment right now—in fact, many people call it a liability—my personal house was the catalyst that allowed me to buy my first rental. I bought a house in 2003 right before the real estate crash in Colorado. I bought the house for $190,000, and I sold it for $180,000 in 2009. I had put some work into it and was sad to see all those years go by while the house depreciated! However, I still loved that house and saved money by not paying rent the entire time. I had paid the loan down as well and had equity in the home.

I loved my first house but I did not get a smoking deal on it. If I could do it all over again, I would have bought many houses over those 6 years and been moving all the time, but you can’t change the past! My wife and I had gotten married the year before, and we started to look for a house of our own. We were not in a hurry, and I had learned from my first purchase to get an amazing deal. We looked at a few auction houses and even found a really neat four-level that was not for sale but was going into foreclosure. We tracked down the owner, but he was not interested in selling.

Taking my time to get a great deal on a house

We looked for houses for months because I knew I had to get a great deal this time. After making a few offers and not having any luck we found the house. I was showing a foreclosure to my sister (who was looking for an investment) when we saw a vacant ranch-style house. It looked like a foreclosure, and I looked it up on the local public trustee website. Sure enough, it was a foreclosure, and it was going to the foreclosure sale in a month or two. We had no idea if the price would be right at the foreclosure sale, but we kept an eye on it and prepared.

To buy a house at the foreclosure sale, you must pay cash that same day, at least in Colorado. I did not have a lot of cash. I had a little bit of cash and some equity in my house. I started to ask friends and family if they were interested in a short-term loan. I asked my sister and my father-in-law. They said yes! It was not easy to ask my family for money, but I had no other choice and I knew the worst that could happen was they would say no. I knew this was a great deal and their money would be protected.

It made sense to them as I was paying a fairly high-interest rate to them to use their money for a few months. I wanted to pay cash for the property and then refinance it into my name and pay everyone back.

How the foreclosure sale works in Colorado

I was able to get some financing lined up, but I still did not know if or when we would be able to get that house. Finally, the week came when it was supposed to go to the foreclosure sale. They show the initial bids for the foreclosures on Monday, and in Colorado, the sale is on Wednesdays. The bid came in at $209,950, which was a great price. It was about $75,000 less than the total loan on the house, but it was common to see the bids come in lower than the debt at that time.

I figured the house was worth about $280,000, and I was hoping that no one else would bid on it. There was enough room for someone to flip it if they really wanted to. The big question was what kind of shape was it in? I could see through the windows, and it looked decent, but I could not get inside the house to see everything.

The big day came, and we went to the public trustee to bid on the home. There were a number of other investors at the sale, which was common. There were a lot of foreclosures at the time and a lot of people looking for good deals. Other houses were bid on, but I was not paying attention to them. My dad and I had bid on and bought many houses at the foreclosure sale in the past, but this was different. This was for me and me alone.

At the sale, the bids went very fast. The public trustee would announce the address, the bid amount, and then ask if there were any bids. It felt like she gave people about 4 seconds to announce a bid before she moved on to the next property. I was nervous, but I was ready.

Finally, our house came up for sale, and she asked if there were any bids. My plan was to bid fast and confidently and hope no one else would bid. I bid $210,000 and waited. No one else bid. She asked a second time. No one else bid, and she announced we were the winning bidders!

Yes! Except we did not own the house yet. Colorado has a 15-day period after the foreclosure sale for junior lien holders to redeem a house from the foreclosure sale. It is rare that a junior lien holder redeems a property, but it does happen, and we knew it might happen on this property as there was an HOA lien against it.

You can see the house in the video below:

Getting a good deal is not always easy!

We had inquired about the HOA lien, but the company that held the lien said they no longer had it. That could mean it was paid off or someone else bought it. If someone else bought it, they could redeem the property away from us. They would have to pay us interest for the time we owned it, but that would be a very short time.

After we bought the house at the foreclosure sale, we had the right to get into the house. We had it re-keyed and went inside for the first time. You never know what to expect in a house you just bought and have not seen yet!

The house was awesome. It was a little dirty, but the carpet was in decent shape. The paint was fine and the baths and kitchen were fine. The house was only 5 years old, and nothing needed to be updated. The only thing in bad shape was the yard, and we could fix that.

We could not believe how nice it was, but we still did not own it all the way yet.

We waited patiently, and then it happened: a junior line holder placed an intent to redeem against the property, and the public trustee asked us to provide them with payoff information on our bid. My wife and I were devastated. We loved that house and knew it was meant to be ours.

I was not going to give up.

While the junior lien holder had every right to pay us off and take ownership of the property, I had every right to pay him off, or at least try to pay him off. I knew who the person was since I had their contact information on the payoff request. I had heard of the investor before, although I am not sure if we had ever talked previously about this deal.

I called him up and asked him if I could pay him to let us have the house. He said no. He said it was too good of a deal to pass up, and he was going to flip it. I told him I would give him $3,000 to go away and let us take the house. That was 6 times what he paid for the lien and was easy money. He said no.

Things were not looking so good. I was hoping he would go away for a few thousand dollars. This was common practice in the foreclosure world back then. Someone tried to redeem; someone really wanted a house; they paid each other off; and they were all happy. There was nothing illegal about it.

But this investor really wanted the house. as did we. I talked with my wife a few times, and we decided we had to try harder. I offered $5,000 for him to go away, and he said no. Hmmmph.

Finally, we decided to try again. This time, I told him this was going to be the first house we lived in together. We loved the house. It was not an investment but a home. We could give him $7,000, and he could go away without doing any work! He said he would think about it. Well, that was progress, but it was also nerve-racking!

My wife and I waited a day or two, and he finally called me back. I waited patiently through some small talk, and he finally said he would go away for the $7,000! Yes! We now had our house—well almost. We still had to pay everyone back who lent us hundreds of thousands of dollars.

We ended up getting the Deed, and the house was ours. We moved in, and then we had to work on getting a loan. I knew a few lenders since I was a real estate agent, and they said it should be no problem.

Refinancing the house to pay everyone back

They were right! We had the house appraised and ended up getting a loan for about $230,000, which paid all our costs, including closing costs to get the loan, interest on the loans from our family, and the payoff to the junior lien holder. We even had a little left over.

Shortly after refinancing the house, we put my other house up for sale and sold it. I got a little money from that sale—but not enough to buy a rental. I was lucky enough to be able to qualify for two mortgages at once.

A few months after that, I really wanted to buy a rental again. I had wanted to buy a rental for years, but the timing was never right. The problem was I did not have a ton of money. Story of my life!

I talked to a bank, and they said I might be able to get a line of credit against the house or refinance. I knew the house was worth more than the $230,000 loan we had against it. I talked to a couple of banks, and they said I could take cash out, even though the housing crash was in full effect.

I started the refinance process, and the house was appraised for $280,000. I refinanced and was able to take out almost $50,000 in cash. I had just bought the house, and not only had I gotten all the money I used to buy it back but $50,000 more! Now I had the money to buy a rental.

Buying my first rental

I searched for a while for the perfect rental and did not find it, but I found a few possibilities. Then a great house popped up for sale. It was an estate sale on the MLS and listed for $96,900. The house had three bedrooms, two baths, a two-car garage, and was five years old!

It was ugly. It was basically a box with windows, but I knew my rental did not have to be the Taj Mahal! I made an offer, and I told the agent to please let me know if any other offers come in. I waited a few days, and then I saw the house went under contract. I called the agent and said, “Hey, I saw the house went under contract, did I get it?” The other agent said, “Nooo. We took another offer that was higher.” I replied, “What?! I told you to tell me if any other offer came in!” He responded, “I am sorry. We got a great offer, and the seller decided to go with it.” I was not happy, and I let the agent know about it.

I started looking for rentals again when, a week later, that same agent called me. He said the other buyers walked away after the inspection and wanted to know if I was still interested. I said yes, even though I wanted to say no out of spite. He said he would get my offer signed for $96,900. Yes!

We went through the inspection. I saw no major issues, and I closed on the house. It took my lender about 8 weeks to close, which was stressful, but we got it done. I made a few thousand dollars in repairs and rented it out for $1,050 a month. I had my first rental!

This was all in 2010. I was 2 years married; my wife was pregnant with twins; and I had my first rental. It was not the perfect time, but I had done it. As soon as we rented the property out, I knew I wanted to do it again…and again. I was addicted. That property was sold in 2019 in a 1031 exchange for $275,000 and I ended up buying 16 more single-family rental properties from 2011 to 2015. I then switched to commercial real estate and have bought about 25 more properties and I am still buying!

My free book goes over how I jumped from the first rental to buying so many more after that!

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