About two years ago as we decided to enter into the real estate game. Done right, real estate has the opportunity to provide significantly better returns than the stock market.
Rental real estate provides some protection against inflation. If we ever see the return of inflation, rents should rise correspondingly, and in retirement real estate should provide cash flow well above any other investment.
We felt interest rates were at a lifetime low and it was the ideal time to lock in a loan and two years ago it seemed as though the market for rental properties was taking off. Properties were sold the week they came on the market and most of the deals being done were to cash buyers.
We were mindful of having limited capital at least compared to most real estate investors. So we decided that a major rehab, or even testing the waters of a foreclosure were probably not in our best interest. Our first property needed to minimize the risk that comes with properties needing to be rehabbed.
We are willing to take risks, but not to the point of walking in a casino and betting our entire net worth on one number at the roulette wheel. Sure if we do more deals, we might have the occasional property that doesn’t work. However we don’t want to be in a position where we are unable to make payments if any property is unable to perform
For our first rental property we decided that we wanted to put our toe into the water of the landlord game to see if we liked it, if it got us the types of returns we thought were out there etc.
We intend on investing money back into our property so that we may continue to attract top level tenants. Over the last two years we have repainted both units, bought 2 new refrigerators, a new dish washer, a washing machine, refinished some of the hardwood floors, replaced carpeting in a room with new laminate flooring, replaced a few windows to make sure we have working windows in case of fire and have done some foundation work. Knock on wood I think we have done most of the heavy lifting, there are a couple of things to get to, but I think overall we have gotten to most of the important items for now.
We don’t intend on taking any money out of our rental property at this time. The whole point of our real estate at the moment is to have it pay for maintenance, to set aside reserves and to pay off the mortgage. We have separate accounts for our rentals and try to pay for any expense using our rental checking/savings/cred cards.
We look for options in all of our deals in order to reduce risk. Can we immediately dispose of any property we buy? Do we have reserves if we needed to make a large repair? Can we live in a property we own? or can we make money renting a property we live in? Is there enough equity where we could still sell any given property to get out from under a loan? Can we afford the payments if one of us is unable to work? (Right now the answer to all of those is yes)
We decided to look for and buy a nicer duplex in an up and coming area a mile from downtown and walking distance from a couple different districts with bars, restaurants etc. Each unit is 1500 sq ft, has two bedrooms and was generally in pretty good condition for a 90 year old house. It is nice enough property where we would be willing to live in it (and we actually did for a year). Because of its location we have access to a lot of potential tenants that are young professionals and leasing has so far not been an issue.
Our strategy has been to purchase in trendy/ up and coming neighborhoods. Our duplex clearly fits this situation, and our current residence does as well. We think in the future there may be a possibility of converting our current residence into a rental.
We will keep looking for properties in neighborhoods that attract young professionals who want to live in urban areas.
The goal is to have 4 or 5 properties each one cash flowing and hopefully paid off by retirement.
We will ‘digest’ our current properties, pay off a loan or two, build up some reserves and then save up a solid down payment for our next property.
We are open to buying a fixer upper, or foreclosure in the future. We might even be willing to do a fix and flip .
I think we are at the end of the recovery from the financial crisis. So unlike two years ago, the ability to just buy rental ready properties that have solid cash flow I think are gone. Going forward I think we will have to have to look at other methods of bringing value, maybe fixing up a property, or buying a foreclosure. Either way I believe we will need more capital available before we make our next move.