The year was 2008, and I had decided for sure that rental properties were how I was going to invest my money. It would be the end of 2010 before I bought my first rental. 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. 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 found the money and a lender, and how my first rental has performed over the years.
How did I decide that rental properties would be the best investment?
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 as 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 as well. 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 was to invest my money. It seemed like every book I read lead me to rentals as the best investment. I also realized that the people who were discouraging me did not invent in rentals the right way.
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 more than the rents.
The investor was simply hoping property values would continue to rise to make their money.
Why did it take me so long to buy my first rental property?
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. I got settled into our house, which we bought as a foreclosure. It was a great deal but took a lot of money to buy.
I wanted to buy a rental but was struggling to save the 20% down I needed to buy one. 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 which took so much of my cash 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.
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.
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 suburbia 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.
Single-family houses are cheaper than multifamily properties. It would take me less money and time to buy a single-family house than a multifamily.
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. 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.
Below is a video I recently created that talks about the property as well.
How did I finance the rental property?
I used a mortgage broker who I knew well and had financed my personal house to do the loan. I thought it would be fairly easy because I had money to put down and made a decent income. I was wrong!
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.
We had to extend closing because the bank kept asking for more docs and more explanations for my finances. Luckily, the seller agreed.
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 spent less than $5,000 fixing up the property, and I ended up renting 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 what I thought would happen did. You can plan all you want and run scenarios, but you never know for sure what will happen until you do it.
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.
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 $500 per month.
Colorado has had some incredible gains in the real estate market in the last 8 years. This house is worth close to $300,000 if I were to sell it today. It is rented out for $1,500 per month and has been one of my easiest properties. I now use a property manager, but we have spent less than $5,000 on repairs and improvements over the years.
The house was hit by a massive hail storm that destroyed most of the siding and roof, but insurance took care of the damages. We have had quite a few tenants in the property, but it has never been vacant long. The property has been an amazing investment. Not every rental has worked out as well, but the good ones make up for the bad ones. Below is one of my properties that was trashed by tenants.
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 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!