Dashing off a quick and unexpected entry today. Suddenly, we are interested in buying a rental property!
A little background. I have been bouncing around the idea of buying a rental property ever since we bought our house in 2008. Since then, I’ve probably bought four Rental Properties for Dummies-type books on the subject.
On the plus side, it would create a new income stream. It seems like everyone who is financially independent has rental income. On the negative side, things can go wrong. Owning a rental property means work. And the biggest of all, buying a rental property runs roughshod into my biggest financial goal: Destroy All Debt Forever.
See, the only way to make a good return on an investment property is to take out a mortgage, thereby establishing a cash flow with only a small down payment. If you were to pay cash for a building outright, the rental income would be the same, but ROI would suck.
So while I haven’t been super-serious about searching out rental properties, I have kept it in the back of my mind. I am really only interested if it meets my critera:
- Close to home, ideally within walking distance and the historic district.
- Between 2 and 4 apartments.
- Costs less than $50,000 per apartment.
Luckily, where we live, housing is affordable. Our 1,900 square foot house cost us $130,000 in 2008. Rental properties are even cheaper. Marge and I have even tossed around the idea of basically owning our entire block, a rental empire! At these prices, this is not so far-fetched. So I had an alert set up for multi-family homes in the area. It went off yesterday. Ding ding ding!
About the house: It is a two-family and lists under $100,000. Both apartments have two bedrooms and one bathroom. It’s a historic building that the listing claims was built in 1890, but from the outside at least, it looks just like our house built in 1860 which is just down the street. The outside is really pretty. Green painted brick with red accents. They even have a walled-in porch. It doesn’t look like many abuses of history have occurred, like vinyl siding.
I can only speak to the outside, because there are no photos of the inside. A previous listing shows photos, but only odd fisheye lens photos with an HDR filter applied making it impossible to tell what size the rooms are, or even if those are stains on the carpet or just effects from the filter. Yes, this house was previously on the market last year for $10k more and didn’t move, which concerns me. Although this new listing says there is all new plumbing, carpet and paint.
A 30 year mortgage would probably mean monthly payments of $350, and a 15 year mortgage would mean payments of around $510. Not bad! Those crazy low payments of $350 are very appealing, but the rates on 15 year mortgages are under 3% right now and that’s even more appealing. Of course, I’m not sure if the rates for multi-families will be that good. Property taxes are probably around $3,000 a year, and you have to add insurance.
If everything went right with this building, the return on the investment of our down payment could be 70%. Of course, that’s given that the two apartments are both rented out, and there are no maintenance issues! I don’t see many empty apartments in our neighborhood, so I don’t forsee big vacancy issues. Apparently, the current owner is also an accountant who thought “the numbers looked good.” But he lives out of the area, had a bad tenant, and wants to get out badly. The real estate agent told us this. Is this house cursed for accountants who think the numbers look good? Uh oh.
But you see my point. Nowhere could you make a return like that on your $18,000 down payment investment. I even looked ahead to age 55 when I could begin to collect my pension, and a two-family rental would produce almost as much as the pension! Meaning that a couple rentals like that and I wouldn’t even have to worry about how much my pension was. And so I think I have to swallow the idea of Destroy All Debts Forever, shove it deep down inside for a while, and think about this cash flow.
Anyway, we’re going to look at the building in person tomorrow. I guess I’m here to ask, does anyone have any tips on what to look for when inspecting this house? I mean, we should be the best judges since we live in a very similar house in the same neighborhood and would be familiar with the problems. It is totally vacant right now, so we should get a clear look at everything. I just have never looked at a rental before.