How I Bought My First Rental Property: 10-Year Update

The year was 2008, and I had decided for sure that rental properties were how I was going to invest my money. While I knew I wanted to buy a rental, it would be the end of 2010 before I bought my first. Even though I was in the real estate industry, it took a long time to figure out what kind of rental I wanted, how to pay for it, and how to get the guts to actually pull the trigger. Once I bought the property and found a tenant, I felt awesome about the investment, and ten years later, I wish I would have bought many many more (I bought 16 residential rentals from 2010 to 2015 and 10 commercial rentals from 2017 to 2020). I bought the property for $96,900 and recently sold it for $275,000. In this article, I go over why I decided rentals were the best investment, how I decided what kind of rental to buy, how I got the money, who I chose as a lender, how I sold the rental with a 1031 exchange, and how my first rental has performed over the years.

Why I chose rental properties

When I was in college, I thought I was a genius at picking stocks. I researched companies and trends, and it seemed like every stock I picked was a winner. Of course, this was during the tech boom, and just about everyone was making money in the stock market. Then the market crashed, and I lost a lot of money…as did many other people. The annoying thing was that it didn’t matter how great a company was doing: the stock price plummeted. I realized I had no control over the company or the stock price. Even if I picked a great company, the stock price could go down.

I had some money invested in the stock market when I graduated and eventually got my real estate license. I started to make really good money as an REO and HUD listing agent but had little to show for it. I knew I had to find a better way to invest my money. You would think that I would have been trying to buy rentals for years since I was an agent and flipped houses with my dad. However, no one really encouraged me to buy rentals. In fact, many agents discouraged me from rentals. They said they were money pits and were a horrible investment. I did not let them discourage me, and I researched what I thought was the best way to invest my money. It seemed like every book I read led me to rentals as the best investment. I also realized that the people who were discouraging me did not invest in rentals the right way or at all.

Are rentals really that great?

I know a few real estate agents who lost rental properties to foreclosure during the housing crisis. I know one agent in our area who lost more than 50 houses! As an REO agent, I listed some of those properties for the banks after they went through foreclosure. I could see right away some huge problems with how these rentals were bought.

  • The investor usually paid full retail value for the property.
  • The investor bought a house that did not cash flow, meaning the expenses were higher than the rents.
  • The investor was simply hoping property values would continue to rise to make their money.

I realized that I should not be listening to the people who invested in rentals haphazardly. The right way to buy rentals is not quick nor easy, especially after the housing crash, when it got much more difficult to finance investment properties. If I got a good deal on a rental, bought a rental that cash flowed, and invested for the long-term, I would be in good shape. I decided I needed to buy as many rentals as I could, especially since rental properties have amazing tax advantages as well that would help offset the income I was making.

Why did it take me so long?

I knew I wanted to buy rentals around 2008. However, I did not buy my first one until 2010. I was making really good money, but as many of us know, it is not always easy to save money. I got married, went on a honeymoon, bought a house, and it was amazing how fast I could spend what I made! I was also super busy working on my REO and HUD accounts as I built my real estate sales business. We got settled into our house that we bought as a foreclosure, and then we got pregnant!

I wanted to buy a rental but was struggling to save the 20% down that I needed. Not only did I need 20% down, but I also needed 6 months of reserves for all my mortgages as well. I did not want to spend all the money I had on a rental property either. I wanted my own reserves for repairing a house, paying carrying costs while it was vacant, and other costs that could arise. Ironically, the house I lived in provided me with the money to buy a rental. I refinanced the property and was able to take about $50,000 out since I got such a great deal on it.

I bought the house for $210,000 at the foreclosure sale after borrowing money from friends and family. Then, I refinanced the house to pay them back. I refinanced it again to take out the $50,000. Getting a great deal is a key to any real estate transaction. That house was worth close to $290,000 when I bought it, and that is why I was able to pull so much cash out.

Below is a video of the house I live in now:

What kind of rental property did I buy?

Many people want to buy multifamily rentals, but I never had that urge. I wanted to buy single-family homes for a number of reasons:

  1. I knew single-family really well. I had been dealing with helping people buy and sell single-family houses as well as flip single-family houses for years.
  2. There were many more single-family houses in my area than multifamily properties. There were also many distressed properties at the time, and most of them were single family. Because there were more single-family rentals, I could get a better deal on them.
  3. I liked the idea of a tenant who thought of the place they rented as their home. Most people don’t want to live in an apartment their entire lives, at least in my suburban area. I thought the tenants would be easier to deal with since they would mow the lawn, water the grass, pay the utilities, and have more pride about where they lived.
  4. Single-family houses are cheaper than multifamily properties. It would take me less money and time to buy a single-family house than multifamily.
  5. Multifamily cap rates and are really low in Colorado, even after the housing crash. I could actually cash-flow better on single-family houses here than I could on multifamily.

I kept my eyes open for a single-family rental that would cash flow and was a great deal. After refinancing my primary residence, I found one for $96,900. It was a newer house that needed a little bit of work. I knew it was worth at least $130,000 fixed up. The house was an estate sale, meaning the owner had passed away and the heirs were selling it.

I made an offer and asked the listing agent to let me know if any other offers came in. I made a full price offer but was willing to pay more if they got more offers. A day or two later, the listing agent called me and said, “sorry, we took another offer.” I could not believe it! I was pretty annoyed and let the listing agent know it without being too rude. He apologized and said he forgot to let me know there was another offer.

I went back to looking for more potential rentals. A few days passed when that listing agent called me again. He said the other offer backed out and wanted to know if I still wanted the property. I said yes! We got a contract together, and the seller accepted it without the listing agent putting the house back on the market.

How did I finance the rental property?

I used a mortgage broker who I knew well and had financed my personal house. I thought it would be fairly easy because I had money to put down and made a decent income. I was wrong!

  1. The lender was concerned about me being self-employed. I did not have pay stubs or a regular income. The lender made me send them and explain every deposit in my account for the last year over $1,000. It took me forever to get all that together since I had a lot of commission checks over $1,000.
  2. We had to extend closing because the bank kept asking for more docs and more explanations for my finances. Luckily, the seller agreed.
  3. The mortgage broker convinced me to put 25% down, even though I didn’t need to. I could have put 20% down and had a .25% higher interest rate. I should have listened to my gut that told me it was better to have the cash than a slightly lower rate, but I didn’t do it. I got a 30-year loan because the payments were so much lower than a 15-year loan.

For my future rentals, I used a local portfolio lender that was much easier to work with.

How did my first rental property perform?

I spent less than $5,000 fixing up the property, and I rented it out for $1,050 per month right away. My wife and I managed the property, and it was a fairly easy process. As soon as I rented out the property, I was ecstatic because all my planning and research had come to fruition! You can plan all you want and run scenarios, but you never know for sure what will happen until you do it.

We had some hiccups along the way like a massive hail storm, but the insurance paid for the new siding and a new roof.

storm damage

One plan I had was to use the snowball method to pay off this rental as fast as I could. The snowball method involves taking all of your cash flow from your rentals to pay off one property at a time. I thought it was a brilliant idea to pay off my rentals. I was able to pay off this house in three years!

I remember having some arguments with people on Bigger Pockets when I used to write for them. They told me it was not a smart move to pay off the rental. I was good at arguing and think I made some valid points, but in the back of my head, I was wondering if it was smart to pay off the property. After doing some more thinking, I realized I was wrong. I should not have paid it off. I could have used all that money to buy more rentals and made much more money. After figuring the cash flow, getting a great deal, tax advantages, equity pay down, and appreciation, I was making more than 50% per year on my money.

By paying off the mortgage I was saving 4% per year on that $70,000 I had spent. I could have bought 2 more properties with that money and been so much better off!

I can admit it when I make a mistake, and although it seemed like a waste, I got a line of credit against the rental after I paid it off. I could use that money to buy more flips or rentals instead of saving 4% interest on my money.

pay off mortgage mistake

How much has the value increased?

Colorado has had some incredible gains in the real estate market in the last 8 years. This house was worth at least $130,000 when I bought it, and I recently sold it for $275,000 9 years later. It was rented out for $1,500 per month before we sold it, and it was one of the best rentals we have had.

Obviously, when you have value increases like that, it makes me want to have purchased more rentals when prices were lower. However, even if prices had stayed the same, I wish I would have bought many more rentals than I did. The house:

  • Made me $400 to $700 a month in cash flow ($64,800 total).
  • Saved me $800 a year in taxes thanks to depreciation ($9,600).
  • Made me $100 to $200 a month in principal pay down (had I not paid off the loan $15,000 total).
  • Created $30,000 in instant equity as soon as I bought it because I got a great deal.

The house made me $119,400 over 9 years from a $25,000 investment without any appreciation! If we add in the appreciation, it was a wonderful investment!

My best selling book Build a Rental Property Empire goes over everything with rentals including financing, finding deals, renting, management, repairing, and even selling. It is available on Amazon as a paperback, ebook, and audiobook.

Why did I sell the house using a 1031 exchange

This was a great property that made me money every year I owned it. However, I had to take a long look at my rental property portfolio because I had so much equity in the properties. On this property, I was making $700 a month after all expenses, which was a great return on the $25,000 I initially invested (33%). With the price increases, I had $150,000 in equity after paying selling costs and the line of credit off. I was only making a 5% return on my equity, which is pretty low for me. I know I can make at least 15% cash on cash returns on my money without even considering tax advantages, equity pay down, appreciation, and getting a great deal.

I decided to sell some of my rentals and use a 1031 exchange to buy bigger commercial properties. I chose to sell rental number 1 because the tenants were leaving and it is much easier to sell single-family homes when the tenants move out. I had a lot of equity in the property, and the rent-to-value ratio was lower on this property than some of my others. I sold the property in 2019 for $275,000 and used the proceeds to buy a 10,000-square-foot commercial building for $602,000 that could be worth more than one million dollars after we rent it.

You can see the video of the properties below:

Conclusion

My first rental property has been a great investment. I did not count on prices increasing as much as they have, but it would have been a great investment even without any appreciation. I bought 15 rentals in the Greeley Colorado area (1 more in Cleveland) from 2010 to 2015, and my only regret is I did not buy more of them! I cannot cash flow with residential rentals anymore, but I am able to cash flow with commercial properties. I will keep buying rentals, although I do not expect any of them to increase in value like this one has. I still invest for cash flow and hope for appreciation!

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