I finally closed on my rental property this past Friday. It was a very smooth experience. I was only at about 80% confidence that the deal would close.
My experience with real estate is that you never know what is going to come up. People get lost on the way to the title company, the financing get’s pulled at the last-minute on a technicality, or the seller can get cold feet.
But thankfully, this time none of that happened!
This has been somewhat of a saga going back a few months. I’ve been targeting another rental property ever since I realized how smoothly real estate investing can go when using a property manager.
But don’t worry, I’m not kidding myself it will really go smoothly. There are always things that come up with the tenant or the maintenance of the property.
But using a property manager makes the process that much easier, especially when the property is an hour away. I am using a different property manager on each of my properties because they don’t service the same territory. I hope the new one is as good as my other one because I have been very pleased.
I’ve been continually updating you all on progress and here are some of the other posts chronicling my previous activities:
As is my normal practice, I won’t be revealing all the details of this deal and the dollar amounts involved. Rather, I will talk through the structure so you can understand how it all worked.
I have been waiting to do this until after the deal closed just to make sure everything was done before I walked through how it all worked out.
I believe I was able to purchase this house for 30% below the market value. We never really got a great understanding from the seller as to why they were willing to sell it for such a low price. But it appeared that they had inherited some property and were in the midst of improving it and moving into it.
They basically didn’t want to bother with listing this property with a real estate agent and waiting for a long time to sell it. The value to them was that the deal be done quickly, on an as-is basis, and that they could have greater control of the timing and details.
This worked out well for me because I was not looking for any particular timing or control over the transaction, but rather was looking to purchase a discounted property.
After discussion with the property manager it looks like the annual rent will be about 20% of the purchase price. I think that is a great result.
It is definitely possible to get a property that has better cash flow. But I have always been more interested in buying a property that is in great condition and owning it for a very long time until it is paid off. Property appreciation is part of my strategy.
So I have been staying away from the lower priced houses in the city that have a two to three-year payback. There is nothing wrong with those houses. They are pure cash flow houses in my mind and I’m not ready to get involved with them right now.
But 20% of the property value per year is roughly a five-year payback. Throw on some maintenance, vacancy, and expenses and it will be more like seven to eight years. That is gross rent though.
With 100% financing, my net annual cash flow is about 6% of the property value. This is after the 2nd loan I have. Once I refinance my other rental and pay off that loan, I should be at 9% for this metric. This was all done with a 15 year loan so the numbers would look better on a 30 year loan. But I want to pay this off fairly soon and grow my equity quickly.
Condition of the Rental Property
The property is in great condition. The owner worked for a property management company and enjoyed doing property maintenance.
He had redone the kitchen and it has granite countertops. The condition of the various rooms was good. The only bathroom in the house is upstairs and it had been redone with tile and new fixtures.
The original layout of three bedrooms had been changed to two. This is a slight reduction in value for a rental. But the third bathroom was the size of a walk-in closet and I don’t think it is a big issue.
The other big downside was that the kitchen did not have a dishwasher. In this neighborhood it is common not to have a dishwasher but the houses that have been more fully renovated do have them.
The thing that more than makes up for these issues is the finished basement.
The property manager said that in that area the finished basement was something that was very desirable. Although it was small, the finished basement was done fairly well and has a bar. There is a separate room with the HVAC and other systems.
Rental Property Location
This isn’t a huge house in a fancy neighborhood. But it is in a very populated location outside of a major city and should have a ready supply of tenants.
Although it is a relatively rough area, it is close to the City but still in the county. It is also situated within a block of a very nice park and a large stream leading to a bay. It’s not so close to the water to have a water view. But it also is not in a flood zone.
Because of the convenient location to major highways and the city, there should be no problem in getting tenants. The challenge will be to get good tenants.
Another List of Chores
Although I am very excited about the new rental property, I now have another list of chores to complete before it can be rented. This is the norm with any property and I knew it was coming. Thankfully, I’m coming into some time off for vacation and holidays and can work on scheduling the work and deciding on what things need to be done now vs. later.
- Complete punch list of items identified in the home inspection
- Remove the above ground pool
- Re-configure the deck once the pool is gone
- Install interconnected smoke detectors
- Get a lead certification
Thankfully, that is where my list will likely end. The other items like listing the property, showing it to prospective tenants, evaluating tenants, and collecting the security deposit (among many other things) will all be done by the property manager.
The good thing is that I have already signed a property management contract and shown the property to the manager.
Any tips for handling a new rental property? How have you made sure that you get your rental making revenue quickly? I need to get contractors there quick and am interested in any thoughts on the best way to locate good ones.