Rental Property Series:Buying Our First Rental Property

After years of getting in position to buy a rental property, we finally did it! We’ve been close a few times but just couldn’t pull the trigger. We always wondered could we make the payment, would it cash flow, would our tenants assemble a meth lab in the bathroom?. You can do as much research as you want, but eventually, you take the plunge or you don’t. Right now seems like the perfect time for a number of reasons.

We have more than enough for the down payment. On any property purchase, you are less likely to become underwater if you have a sizeable down payment. If you are buying an investment property, it is required that you have 20-25% down. We’ve been saving like mad for the last two years. Buying this property means so much more than having the stuff we previously piddled our money away on.

Rates are probably never going to be much lower. You never really know on this one, but we have locked in a rate of 4.25% for a 30 year fixed term. We have every intention of paying this loan off way before 30 years. Because we are new to buying investment property, we decided on the longer term. If we do have a problem finder a renter, this payment won’t break the bank.

I am switching to part time work soon. At the beginning of the year, I will no longer own my current business and am essentially a contract employee. I believe I will be able to earn around the same amount of money as I do now, but it would probably take two years of new employment before the bank would give us a loan. It is possible to qualify sooner like Crystal and Mr. BFS , but to be safe, I’ll assume two years.

We found a house that fits our criteria. I think the most important thing when buying a rental is to write down what you are looking for before you start looking. You can’t search like you might for your primary residence.  It’s all a business decision. Our rules for this purchase included:

Purchase price and cash flow:  Our maximum price was $80,000 including repairs. (I know, it is insanely cheap to buy real estate here.). We got this house for $63, 000. It will need about $3000-$5000 in repairs.  With the 25% we are putting down, our payment will be just under $300 a month, inclulding insurance and taxes. It should rent for $700 minimum, $800 if we really go HGTV on the kitchen.

Location, location, location: We wanted property on the North side of town. The neighborhoods are nicer, and the chances of getting a meth cook are much lower.

Floor Plan: This is a small house, 950 square feet, but it has an open living room/kitchen area and the bedrooms are an OK size. It also has a good sized fenced yard.

Lack of major repairs: We did not want a house that had foundation problems or needed major repairs on the roof or electrical system. Our inspector did not find any major train wrecks. We do need to do some major cleaning ( I think the prior owner cooked bacon and fried chicken every day.) and painting. The kitchen needs a new stove, vent, and counter tops. The refrigerator and dishwasher work fine.  The bathroom has a lovely mint green tub that we will keep for now, but we’ll have to replace the flooring, vanity and toilet.  The owner added laminate floors throughout most of the house, and left us a working washer and dryer, which will be a bonus to the tenant. If they break, we won’t replace them. The house has a huge gas stove, which works well, plus some electrical baseboard heaters, which have to be replaced. The yard is brown, but a little water should fix that right up. Overall, lots of elbow grease, but not much skilled labor required.

Our other dilemma was to determine if we would manage rental duties ourselves or use a property manager. Since we have no time and haven’t done this before, we have chosen to go with the manager. I really don’t want calls at two A.M. to change a light bulb. We live in a small town and renters could be patients of mine, or my husband might have someone’s kid in his classroom (really awkward if we have to evict them). We plan to be pretty anonymous. With the projected cash flow, paying $70-$80 a month to let someone else deal with the headaches makes more sense for us right now. When I am working part time, it might be a different story. Although I’ll have to do some reading on sites like Prairie Eco- Thrifter to become a better repair lady!

This is a really exciting time for our family. This rental property is our first step in diversifying our income streams so we can work less and do more of the things we love. I intend to keep my office building as a commercial rental when I sell the business, so this makes two income properties. Our goal is to have five properties within the next ten years. Of course, this one  could go way South, and we might decide being landlords isn’t for us. We’ve done as much homework and planning as we can, so we’ll see. We want to get everything done and have a renter by October 1. I’ll keep you updated.

What is your experience with rental properties? Should we go with the property management company? Are we going to end up with a meth cook anyway?

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