Buying Rental Number 10
Well, we’ve taken a major step back in our mortgage payoff goal that we talked about in our article about our Monthly Mortgage Goals. Like a $98,595 step back. Like an alcoholic who just wants to sit in a bar, it was only a matter of time before we fell off the wagon. Well, maybe our scenario isn’t quite that bad. We weighed our options and decided to go ahead and capitalize on a good deal while we were still working, and had the cash on hand for a decent down payment. The diversification of the deal is definitely an added bonus. To be clear, as I’m sure you gathered from the title, we’ve purchased another rental property.
We have most of our rentals in Huntsville, AL but we have a condo in Madison, AL which is an affluent suburb of Huntsville with good school systems, low crime, and a short commute…pretty much all the things that home-buyers and renters with families are looking for. The problem that this leads to is that Madison is more expensive, so finding a house in the right area at the right price is an effort, especially for investors looking for cash-flow. The good deals are being snatched up quick by owner-occupants looking for a forever home to raise their snot-nosed kids, investors looking for long-term rentals, and house flippers looking for a quick buck.
This is where my obsessiveness of checking the MLS, Zillow, Craigslist, and even Facebook Marketplace pays off. Mrs. RRR and I were enjoying a Saturday morning at the gym and I hopped on the interwebs and saw a house in Madison that had just been listed. Two story 3 bed 2.5 bath with a 1 car garage on a quiet cul-de-sac in a central neighborhood for $115k. According to Realtor.com, the median list price in Madison, AL is $232k, so at literally half price, how bad could it be? We did a drive-by and hit up our realtor to go ahead and put in an offer because she wasn’t at the beach and we wouldn’t be able to get inside for a few more days. We knew because of the competition of the area that by haggling and negotiating, we would be giving other people more time to make offers over asking, which happened on the last two properties we put offers in on. So we came in at full asking price, but negotiated that they pay closing costs, which meant less money out of our hands now.
Based on our knowledge and research of the area, this place should rent for $1,300-$1,400 per month. With a purchase price of $115,000 we still have healthy cash-flow. All of the properties we’ve bought have been 1.5% or better rent to purchase price ratio, while this one will be between 1.1-1.2%. However, this is only our second SFH (single family home) and since most of our places have been duplexes and condos that number has been easier to hit because the purchase prices have been significantly lower.
We are banking on having less turnover with a longer-term tenant since the people looking to rent this property are most likely to have a child or two and are less likely to move around as much as the typical duplex tenant. The house is also move-in ready (all we are doing is painting the kitchen cabinets), so we are confident that the down-time without tenants will be minimal. The only real draw-back is closing on the place right before the holidays. Most families aren’t looking to make a move right now, but with all the industry in the area, people are starting contracts, and moving in year round so only time will tell.
We are only putting 15% down on this property as opposed to the 20% down we typically put. One of the duplexs is getting a new roof, and we wanted to be sure we weren’t cash strapped if something else were to come up. So, we are going to hang on to that extra $5,750 and go ahead and pay the $46 mortgage insurance. Normally we wouldn’t advise doing this, because PMI is literally a waste of money but we plan on paying all the places off at an accelerated rate, so we should break 20% in equity pretty quickly and that PMI will drop off.
The interest rates nationwide are also creeping up. We are getting a 6.125% interest rate on the mortgage, which seems like a lot compared to the 4.75-5% for consumer 30 year loans. But, when you consider that this is an investment property loan, as well as the fact that this makes our 6th mortgage that interest rate looks a little more reasonable.
With a $115,000 purchase price, $17,250 down, and a 6.125% interest rate our monthly payment comes in at $830 including taxes, insurance, and that $46 I mentioned for PMI. With a rental price of $1,300-$1,400 taking out 10% for vacancies, and another 10% for maintenance we are looking at cash flowing $210-$310 per month. Or an additional $2,520-$3,720 per year. Tack this on top of the rentals we currently have, and we are cash-flowing a little over $20,000 a year without paying off a single mortgage. Now that we are at 10 units, have a healthy amount of income based on rental properties, and have a decent amount invested in tax advantaged accounts we are recommitted to our goal of paying off a couple of properties and then pulling the trigger on FIRE.
We know the investment stuff is sexy, but none of this would be possible if it wasn’t for Mrs. RRR and I leading a life of frugality. Foregoing the typical bullshit that most people fall prey to including: new cars, new clothes, new phones, bigger houses, and all other methods of ‘keeping up with the Jones’s’. Finding satisfaction and happiness, not in things, but in each other, our time together, and the journey and adventures we’ve chosen. Frugality not only gives us the means for investing in our future, but it also means that when those investments pay off, we can make do on less and pry our lives back days, weeks, months, and years at a time.
Scott @ Costa Rica FIRE
Congrats on expanding your portfolio – good luck with it! We are up to 16 doors but been struggling this year with expensive repairs and more turnover than prior years. Just found out this week one of our long time tenants lost their job and is moving. There goes another few thousand in turnover repairs! Not a good time of year to fill a vacancy, but hopefully it doesn’t take too long and we can increase the rent. Hoping to get everything all stabilized next year. Cash flow is great if all doors are filled and everyone is paying 🙂
Thanks for the kind words, Scott! It always seems like ebbs and flows when it comes to expenses. We are hoping a healthy amount of cash on hand keeps us from being stretched too thin. We hope you also get everything stabilized and the turnover doesn’t set you back too much on either money or time.
Nick @ Half As Well
Wow 10 units, all with financing? How many actual loans (properties) do you have? We just got our first a few months ago and have started trying to project our when we can buy 2,3,4,5 but not sure how mnay loans most banks would let you have.Nice cash flow as well – impressive!
We appreciate the positive feedback, Nick! But yes, we’ve got 10 units with 6 mortgages (properties). Our lender has been pretty strategic with using both my wife and I individually on mortgages. At the time we didn’t know how many we were going to get, but we haven’t had any issues with getting these 6. Although the low purchase prices help us out for sure. This is our most expensive place by about $30k and it’s still cheap by many standards.
6.125% is a high interest rate as interested have fallen since the stock market collapse. Maybe you can refinance?
Did you guys find a tenant yet? If so, what is the rent?
Looks pretty cheap to me.
Thanks for the comment, Linda!
You are correct that the mortgage rate is pretty high. 6 mortgages within the past two years will do that, haha! The rates look like they’ve dropped about .3-.4% since we got this loan. We are planning on exploring refinancing once we pay off a loan or two this year.
We did find a tenant for $1,200 a month with a one year lease. We discounted the rent a little so we could get a tenant in there quicker. Turns out that a lot of people aren’t moving their families during the holidays. But, we plan on increasing the rent once the lease is up.
Like!! Great article post.Really thank you! Really Cool.