Our lives changed this week. We became real estate investors and landlords for the first time in our lives. This is an exciting and scary time for us, because we just took on a new challenge, and we’re heading into the unknown. This article is about the thought process we went through before deciding to real estate into our investment portfolio. Here are some tips on what to look for if you want to buy an investment property or real estate for the first time:
I love taking risks, and experimenting in life, because every time I take on new challenges, I always seem to learn, grow, and become a smarter, better human being as I find myself navigating through the decision making process. In fact, I think I just summed up the path to wealth: Find every opportunity you can to learn, grow, and become smarter every chance you have.
Here is a thought nugget I just realized: The more wisdom you can attain, the greater your potential to create wealth will be.
Since it’s ultimately wisdom and learning I’m after ⸺ I realize that every learning opportunity presented to me is EXTREMELY valuable. The money I accumulate is just a by-product of the adventure of learning I am on.
So here is a list of reasoning for why I chose to buy my first investment property. As you read this, ask yourself, if you were in this position, would you have done it?
REASON FOR BUYING MY FIRST INVESTMENT PROPERTY, POINT #1:
First and foremost, it’s an awesome property, in a perfect location. I wouldn’t have entertained the idea unless I loved the property and would want to own it for the long term.
Before I get into the positive financial aspects of the property, let me describe to you why I like it so much. Here it is:
The property is actually a twin-home, and I’ve actually owned my half of it for the last 3 years. The property is NOT a duplex. It’s zoned as two single-family homes with a shared firewall between them. We share our sides of the roof and driveway, but both units are independent homes with separate utilities and addresses.
We’ve lived here for three years, and we’ve ABSOLUTLEY LOVED owning our half! It’s quiet, scenic, and peaceful; in a very desirable neighborhood. It’s been a great deal to live here too. We probably saved around $100K when we bought it just because it shared a wall with another home.
We were also lucky when we moved into it. Our neighbors were a great family, who we enjoyed living next to and sharing a wall with. But as their family grew, they needed a larger space, which is why they were interested in selling their side of the home.
My first thought when I realized I had a chance to buy the other half was: Since I’ve loved owning my half, there’s a great chance I’ll enjoy owning the entire property. I would now have control over the entire property and would never have to worry about negotiating with my neighbors for a new roof, or landscaping decisions, or getting a terrible neighbor.
My second thought was that buying the other half of the property was that it would fit in line with my life goals. Our dream is to adventure more, and maybe even one day just jump into an RV and disappear for awhile like our friends, Steve and Courtney @ thinksaveretire.com did.
If I owned the entire property, this dream would get even closer to becoming a reality. At any moment, we can now rent our side out; hire a management company to serve our renters while we’re gone; and jump into the car and just disappear! It would lessen our fears of taking more risks, because we know if we’re not happy wherever we go, we can always come back and live in the home we first started out in.
So what are the reasons I love this property so much? That I was willing to risk $183,300 of my hard earned money to buy it? Here are my reasons why I think it is a great investment property:
- Real estate investing is all about location, location, location. And this property is in a PERFECT location!!!!! It’s location alone should create demand for it many years into the future for these reasons: It’s one minute off a major freeway that takes you to both downtown Minneapolis and St. Paul in 12-15 minutes. But it’s far enough away from the city to be in a quiet neighborhood, on a quiet street, that backs into a nature preserve so it feels like you’re living in private woods even though you’re right on the edge of a big city. Trails right out of the backyard lead into three HUGE country parks with trail systems that lead to dozens of miles of forests, lakes, and swimming beaches. A peaceful, convenient place to live should always be in demand as our culture gets busier and busier.
- Both units, individually, are the least expensive properties in an otherwise upper-end neighborhood. Both of these units are valued around 199K. There’s very little housing in this area for under 250K. In fact, it’s unique because it’s in a neighborhood full of 300K single-family houses. I can see a cul-de-sac of 500+K houses from my driveway. There are million dollar houses within a few blocks from me. Those homes, should help keep my home value high.
- It’s in a top-fifteen school district in Minnesota that families try to move into. In fact, the school district that it’s in is in such high demand, that they made a requirement that you have to reside within the city boundaries to attend their schools. The school district alone should attract ideal renters: smart, responsible, family-orientated people who care about education.
So now that we’ve established it’s a cool property, protected in a high-value neighborhood, let’s evaluate the financials of this deal to make sure my love for the property isn’t over-riding the right financial move to make.
Reason for buying my first investment property, point #2:
We became friends with the previous owners for the last few years as we lived next to them, so when they were ready to sell, it took us about five minutes to negotiate a price directly between us. Doing it this way meant that we were able to avoid hiring realtors and paying their 6% commissions on the sale.
- Buying it directly from the owners saved me the headache and heartache of a bidding war that may have erupted on it in this current HOT real-estate market. The sellers also saved themselves 6% of the sale cost, or around $10,000 in realtor commissions by selling it directly to me, so this sale should work out for both of us.
The sellers and I agreed on a purchase price of $183,300 for their half of the twin home. I was pleasantly surprised to see it appraise for 189K by our mortgage company, so the deal-finder in me smiled knowing I am buying it for 6K below market value in a HOT sellers market!
This arrangement and price brought the sellers good value too. Since they sold it directly to me without the 6% realtor fees, their cash payout from the sale was really like they sold it for 195K, which was 5K above the appraised value. So in this situation, we found a way to make everyone feel like they got a great deal when they walked away from the negotiating table. This is how I ALWAYS try to do business.
- Owning the entire property, I believe, will also make it more valuable if I ever choose to sell it because now the investor crowd will be attracted to it. Now, not just first-time home owners will be interested in the less-expensive units sold as individual properties. Now, the investor crowd will be interested in buying it for all the reasons I described above. What investor wouldn’t want an awesome property that has 2 rentable units in their portfolio, with only one roof, and insurance policy to worry about? #money
- Owning the entire property should also increase my net-worth by about 50K instantly. After I do some updates on it, I am expecting each side will be worth around 199K. (My side is completely updated) So if the entire property is worth 400K, and I owe about 260K on it, that means I suddenly have about 140K of equity built up in it. Before buying it, I only had about 65K in equity on it. Now, I have twice the amount of equity, and I have an easier property to sell because my scope of targeted buyers has increased to include first-time home buyers only able to afford a half, and the investor crowd who can afford the whole thing.
- I feel comfortable with the loan I took out to buy At a purchase price of $183,300, I had a few different interest rates offered to me depending on the size of the down payment I had.
First, for new real-estate investors out there, I learned I had to pay an interest rate of about 1% more for an investment property than a conventional loan. With 20% down, the investment loan rate was 5.125%. But with 25% down, the loan rate dropped to 4.75%. The payment with 20% down was approximately $1100. But with 25% down, it dropped to $980 per month. Since this is our first investment property, and I couldn’t even get a 2 bedroom apartment in this area for $980 per month, we decided to go with 25% down, just so we can sleep better at night knowing that even if rents do go down, this loan should help us be profitable on rents no matter what happens in the economy. Sure, a stock-guru could have argued that I’d get a better return on my money if I would have put that extra 5% down payment in the stock market, and hoped for 7% return, but for us, being able to sleep soundly at night, knowing that I’m in good financial shape even if the market does change, is priceless to me. I always choose with the sleep-better-at-night-financial-decisions. They may make less money, but they always lead to a better life.
- Writing a check for 25% down, rather than 20% down, means I’m that much closer to paying it off early. 25% of $183,300, with closing costs and pre-paids, was about $53K. That means I have a balance of about 137K left on my loan on it. $137K is a lot of money, but for me and my frugal ways, it’s a manageable amount of debt. If I want to, I should be able to pay off the remaining loan in 10 years or less. I like the sound of that debt-free, passive-income sounding life.
- Its cash flow is exciting now; and beautiful when it’s paid off. Property of this size and quality, in this area, rents for about $1,600 per unit. And I now have two of these unites under one roof!!!! That’s $3,200 per month, or $38,400 per year in passive income generated off one property! Considering we live a great life with about 35K a year, that sounds like the quick lane to financial independence if you ask me!
- As I was preparing to buy this property, I was also pleasantly surprised to discover that even though it’s two individual homes, I only need one insurance-policy to cover both of them now that I own the entire property. And since I live in one, I can buy a cheaper residential policy, rather than a more expensive commercial policy. So there’s another savings of about $1,000 a year just on insurance to insure the property. That’s a way better deal than having to buy 2 commercial policies if I’d own two individual single-family properties.
- The 1% rent rule is something I see recommended out there for a great investment property. The 1% rent rule states that you should look for properties that will rent for 1% per month of the purchase price. Since I paid 183K for this one, I probably won’t get the 1% rent, because $1,830 per month is a little high for a twin home. However, since I bought my completely-updated side in a cooler, buyers market three years ago for a now-bargain price of 164K, when I add both properties together and average them out, I really paid $347K for the entire property, or 173K each. $1600 or $1700 per month is the market rent for a comparable property in this area, so I’ll be able to be pretty close to the 1% rule on a HUGE property.
- That being said, I don’t look at the 1% rule as a law set in stone for real estate investing for this reason: I am a natural, skilled sales person in my day-job, so I have a ton of experience evaluating and negotiating wholesale deals that have healthy profit margins for me, and good value for my customers, so that I can keep my clients and me in business. I have learned over the years that good business deals aren’t 100% about the margin you’re getting. For example, I’d rather take a 50% profit margin on a $750 sale ($250 profit using crude math) , than a 100% profit margin on a $200 sale. ($100 profit using crude math). $250 profit is almost always better than $100 profit. I have learned that profit margins aren’t always what you seek when searching for successful business deals. Profit margins that lead to larger cash flow opportunities is what interests me the most.
So these are all of the decisions I’ve been thinking through the last few weeks. I remember being lost in my own thoughts when the opportunity first came up to buy the other half about a month ago. I asked myself, should I do it? What if I fail? What if I succeed? What if it’s the wrong investment? Should I have kept my money in stocks? What if I regret not taking this risk? But then it’s too late when the property gets sold to a terrible neighbor? Or in 15 years when the property is worth 600K and fully paid off, and pumping my bank account with cash, will I regret not buying it forever?
But then as I thought through my decisions, these answers came rushing back at me:
- Following your dreams is always the best decision! Anytime you have a chance to chase a dream in life, do it fearlessly!!!!!! What’s the worst that could happen? You’ll just learn what you should do better next time, and you can grow into a better, smarter, human being in the process.
- My Accountant helped me see something that I missed. He reminded me, “If you can find an investment property that you can hire a management company to run, and still have it cash flow for you, BEST DEAL EVER.” Bam, that insight hit me hard! I had been so afraid of getting bad renters and all the headaches that come with them. But my accountant, who is a friend and BIG experienced investor, made me realize that our profit margin is strong enough for us to hire a management company to deal with the headaches if we hate being landlords (10% monthly rent), and we’d still make money on the deal (A few hundred bucks a month) while having nothing to do with the renters or the property!!! So in this case my butt is covered. If I hate it, call up a management company, pay them their monthly fee and give them the keys to deal with the headaches while I get a monthly check mailed to me! That does sound like the best deal ever.
- I can afford taking this risk. Here’s a life-truth nugget: It’s impossible to win in life unless you’re willing to lose occasionally. I remember calling up my friend and fellow blogger, Miss Mazuma, as I was considering the deal, and she helped me ask myself the question, “What’s the worst thing that could happen? “ As I answered her question, I realized the worst case is that home prices drop and I sell the property for 20K-50K less than I paid for it. It’s only money, and ultimately, I can afford to take the risk. I wouldn’t lose my identity ,happiness, or purpose in life. It’s just money. And another truth-nugget in life is: Sometimes the most expensive learning lessons are the most valuable, and I am fully aware that learning and growing is the source of all wealth. If I want to accumulate wealth, I have to be willing to win, lose, learn, and grow as a person every chance I get.
- Finally, like I said in the beginning of this article, we simply love living here. Now that I own the entire property, it’s cool to know that no matter where we go in life, and whatever risks we take, even if all of my other adventures and ideas fail, we can always come back to this house and be happy where our adventure together first started.
So what do you think? Do you think I made the right decision? If you were in my shoes, would you have pulled the trigger and done it? Do you have any recommendations for me, a first time landlord?
It’s cool to know that I finally own the whole thing. I have dreamed about it ever since we moved in to our side and I looked over at the other side, and said one day it would be really cool to own this entire property. And three years later, here we are!!! Landlords, and real-estate investors!!!
But now the hard work begins, because I am fully aware that a bank will give any idiot a bunch of debt. But you have to be a great investor to find ways to pay off that debt early, and make a profit on that debt, and I am on a mission to become a great investor.
And it’s not just investor work I have ahead of me: Look at how ugly this shower in the new property is!!!!!!
I was anxious to get the work done with, so I already demo’d it tonight:
Luckily, I have tiling experience, so I’m going to Home Depot tonight to buy some white subway tile, cement board, and I am planning on putting in some beautiful new showers into this place right away. Stop back soon as I plan on doing a Do-It-Yourself post in the next few weeks on how to tile a bath shower, and show you how to increase your home value at the same time!!!!!
This is the shower I built in my house to prove I have the chops to do it!
I’ll be using white subway tile in the new house because it’s cheap, easy to work with, and has a classic-but-modern clean look. Stop back next week and check it out!