We closed on our second investment property in December of 2016. I was still a newbie, but had begun educating myself much more. Also, this property was bought right after I finally read the mindset-altering book, Rich Dad, Poor Dad and man was I fired up! I didn't know exactly how, but I was all ready to stop working for money just like it was outlined in the book, and real estate seemed to me like the best way to do it. I also discovered around this time the amazing tax benefits from real estate, mainly after reading Tax Free Wealth, which laid out very clearly that it is entirely possible to pay little to no income tax if you do the right things (i.e. invest in real estate). Few people think about it this way, but most ordinary citizens' biggest expense is taxes. Reducing your taxes (legally) is one of the best ways to give yourself a pay raise!
Anyways, you get the picture - I was stoked, had one property under my belt, and was ready for more! I didn't know it at the time, but I was finally starting to develop a vision - financial freedom through rental properties!
I reached out to the same agent that I used to buy my first property, and started going through the painful process of looking at small multifamily properties. I made sure to share my newfound vision and goals with the agent - I think this is very important! I make it a point to tell all members of my "team" (agents, rehabbers, property managers, insurance agents, accountants, lawyers) where I would like to go and what my goals are. How can your team give you what you want if you don't TELL them what you want?
After I told my agent that I aspired to be a real estate mogul like Robert Kiyosaki, he asked if I had some time after our scheduled showings. He said there was a property that he was thinking of buying as a rental himself (he is also an investor) but he didn't currently have the funds. We drove over to the property and checked it out - a pristine, 3 year old townhouse in a hot area, within walking distance of shops and restaurants. Since he was considering buying it himself, he had already done the analysis on sales and rent comps, which he shared with me.
The property was listed for $179K and I purchased it for $176K. It needed zero rehab.
Rent comps were $1550. Similar to my first property, I still didn't know about the 1% rule or how to determine cash-on-cash return. The rent to value ratio comes to .88% on this property, which is not ideal.
Also, I decided to self-manage this property in order to make the numbers work, which I think is a huge mistake. I respect people who want to self-manage (I would never do it again) but I think you should always factor this into your analysis, for many reasons.
Although I generally shy away from rentals with an HOA (which can sometimes be a cash flow killer), I only have to pay $58/month so this seemed worth it. Plus, this means a maintenance-free exterior, so I bumped my maintenance allowance down in my analysis.
My wife and I qualified for the purchase loan together. We put 20% down (the minimum requirement for a single family investment property) and got a 30 year fixed conventional loan at 4.5%.
I learned how to do a cash-on-cash return analysis (total up-front investment divided by annual cash flow) while in escrow on this property - and realized that I could get better returns on other properties! Here was my analysis:
Tell people what you want, so then they can give it to you!
Always factor in property management as an expense, even if you are doing it yourself.
Your time is valuable and you should be compensated for it. Is it worth it to spend 5 hours a month managing to save $120 a month in property management? For some people, the answer is yes, and for others (like me) the answer is no.
Circumstances could change and maybe you will want to outsource management later on. You don't want to be in a situation where you feel "stuck" because you don't have a buffer built in to pay the manager.
Consistently factoring in management allows you to more accurately compare returns of different properties.
- Try not to buy properties in the middle of winter (unless a tenant is already in place)! I closed on this property in mid-December - right before the holidays - and it was a huge pain getting a tenant at that time of year.
Hopefully you've learned something that will help you buy your next property - if you liked the post or have a question, please leave a comment below!