My Third Rental Property Purchase; Cash flow and Rents

I did not waste any time trying to buy my third rental property after I had purchased rental property number 2. I always look at the hot sheets (MLS reports that show new listings) at least twice a day to see what is new on the market, back on the market or has had a price change. I also search through the entire MLS periodically to see if there are any good deals I overlooked when checking my hot sheets. Rental property number three was a property I had overlooked on my hot sheets, but that I found when searching all the MLS listings.

For more information on my rental property strategy, check out my complete guide to investing in long-term rentals.

How I found my third rental property on the MLS

Rental property number three was found when I was doing my periodic check through the entire MLS. At least every week, I will search all the active listings in my county for homes under $150,000. I saw this property was priced pretty low at $109,000, but at the time it wasn’t a great deal (I would love to buy 10 houses at $109,900 now like this one). I took a look at the property and it needed work, but the work was mostly cosmetic. I looked at a few other houses at the same time and I made three or four low offers that day. By low I mean about 20% less than asking price.

My offer on rental property number three

I offered $88,000 on this home and asked the seller to pay $2,000 in closing costs. The listing agent on this property responded with a counter at $92,000 with the seller paying the closing costs and I quickly accepted. It turns out this was an estate sale, and the current owners had to pay all the proceeds to the state to take care of nursing home bills. They didn’t care how much they got as long as it was somewhere close to market value. My offer was accepted October of 2011 and we closed in November of 2011.

The details on rental property number three

The home has 5 bedrooms, 3 baths, a one car garage and a covered patio. It had hardwood floors that needed re-finishing, needed new paint throughout and carpet in the basement. It also needed some drywall work, appliances, new windows, new doors and other minor repairs. I spent about $14,000 on the repairs and had it ready to rent in January of 2012. I asked $1,300 for rent which was a bit optimistic and had no takers for a week or two. I lowered the rent to $1,250, had a few interested parties and then a family that wanted to sign a two-year lease! We checked references and the home was rented. I did have a few extra expenses on this one in the first year. The AC went out in the summer of 2012, and the plumbing system had to be rootered a couple of times.

The numbers on rental property number three

Here are the numbers:

$92,000 Purchase Price

$ 18,400 Down Payment

$ 2,500 Closing Costs

-$2,000 Seller Paid Closing Costs

-$2,760 Commission

$14,000 Repairs

$500 Utilities

$2,200 New AC

$250 Rooter Plumbing

$450 Mortgage Payment before rented

$33,540 Total cash in

$15,000 Rents Collected

$5,400 in Mortgage Payments, Insurance and Taxes.

The gross income was $9,600 the first year, but with expenses the net income was closer to $6,500.

Refinancing rental property number three

This property took more cash than I like to spend on a single home, but as you can see my return was fantastic. I am in the process of refinancing this property to get cash for more rental properties in 2013. I estimate the value at approximately $160,000 today.

Update: The house ended up appraising for $142,000, which was a horrible value, but I was still able to take cash out of it in order to buy more properties.

Conclusion

Rental property number three was a great deal at $92,000. Sometimes it pays to make low offers on homes although I have made many low offers that were never accepted or even responded to.

Update 4/9/15

This home is rented for $1,300 a month and has not needed any maintenance or had a vacant month since bought it!

Check out my other rentals

Rental Property #1

Rental Property #2

Rental Property #4

Rental Property #5 (I have since sold this one)

Rental Property #6

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.

13 thoughts on “My Third Rental Property Purchase; Cash flow and Rents”

  1. I’m reading your “Build a Rental Empire” book, and I know how much you stress cash flow as one indicator of the health of an investment. I also know that renting out one’s current home can lead to poor cash flow. Here’s my situation/question: We have two properties, one to rent and one to live in. There is equity in each, but not enough in the rental yet to fund another purchase. My current home’s mortgage is at 2.875%, with 10 years to go on it. It would sell quickly, but I don’t want to let go of that mortgage deal. It’s in great shape (but not fancy) and is 12 years old. Renting out would pay down our mortgage, but would not cash flow, once all expenses/vacancies are considered. Since our home is in the rental range that does not stay vacant for long, and homes with higher selling price tags are softening, would it make sense to rent our home and buy another home for ourselves that better meets our needs? We are currently in a growing market.

  2. Hi Mark,

    I’m also an investor and I have enjoyed reading all the great info you have here. I was curious however in the above calculation you state you pay $5,400 in mortgage payments, insurance and taxes on a $73,000 loan. I was curious what the term was on this and how the payment is so low. I mean a traditional 30 year even at 3% would run you close to $6000 a year on just the mortgage payment not counting tax, insurance, and HOA.

    • Hi Branden,
      Thank you for the comment. I just used bankrates mortgage calculator and it shows $73,000 loan at 3% interest would have $307 a month payment and interest on a 30 year amort. That would be $3684 a year in mortgage payments (my interest rate was somewhere around 4% on the ARM. My taxes were only $800 a year and insurance about the same.

      • Thanks for the reply. Yeah I was using bankrates but I didn’t realize that it was also adding tax into my monthly value. I have a few properties myself but I’m in Texas and I suppose that our property tax is much greater here. No state income tax but property taxes are getting a bit out of control. Great website I love hearing strategies from another investor.

  3. Hi, Mark,
    I recently purchased my very first home as owner occupant. I’ll plan to live in this property for at least a year, but without waiting for a year, I’m planning to purchase my second property (which will be my first rental property) . The problem is I don’t have enough downpayment yet. Can you please share how you saved your downpayment when you had only one or two or three propertis. Or where the downpayment came from? Thank you very much for sharing your knowledge!

  4. Do you ever buy properties that already have tenants in them or do you usually purchase vacant properties? I’ve seen the great work you did with having your realtor’s license and it’s starting to make me reconsider my thoughts about not getting one. It seems the pros may outweight the cons!

    • I have always purchased them vacant, except for one property where I rented back to the old owners for a couple weeks. I am not opposed to buying houses with tenants, but the better deals are usually vacant. I think a license is a huge benefit!

  5. It’s really good seeing these proof points of your strategy. This sets you apart from many of the other “gurus” out there who are giving advice, but may or may not actually be successful.

    Quick question–what are hot sheets? Are they only available to agents?

    • Thank you!
      Hot Sheets are from the MLS and only available to agents. They list the new listings, price changes, properties that go under contract or properties that come back on the market. Hot sheets are an incredible tool and a great reason for anyone thinking of becoming a serious investor to get their Real Estate license.

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