In July of 2011 I bought my first rental property.
My palms got sweaty and my heart fluttered away. I offered about $5,000 less then the asking price of 59,900. What a gutsy move especially considering the house was vacant and had been on the market for awhile. I was nervous, excited, and eager, plus I liked the property. At this point however, I was like a nervous boy asking a girl on a date. I just wanted her to say yes. A house is not a girl, so in the future these emotions would need to go, but at the time, my stomach was in knots.
Numbers, investing is all about the numbers.
Negotiating is an essential skill for anyone interested in real estate investing, and it is a skill that I didn’t yet possess. Pathetically, I was able to negotiate $4,900 off the price, saving me about 4%, in other words I convinced someone to jump from the 7th story instead of the 10th. I took this as a moral victory, and placed it under the heading “costs of learning,” in my spreadsheet.
I now usually make my opening offer at least 20% below the asking price.
Incredibly these offers have been accepted without a counter offer, which tells me I could have gone lower still. Also a low offer leaves some room to negotiate.
Once the papers were signed, I walked over with my toolbox and immediately the cursing commenced. As this was my first rental purchase, and only my second foray into home repair, I made several blunders. At this point, I believed the window replacement was beyond my pay-grade so I contracted out. The house now has nice windows, but I missed a valuable learning opportunity. Once the windows were completed, I set to tearing out the kitchen.
Demolition I can do.
Conveniently, there were three lays of vinyl flooring. Happily this provided me with extra practice opportunities, and with all the extra headroom, the kitchen now seemed to have vaulted ceilings. I smartly piled everything in the backyard, and killed the grass so I didn’t have to mow. I learned that the old floor glue gets slick and gooey from the rain, and after gathering everything for the trash, I spent an afternoon looking for lost nails in the grass.
Productive work this was not.
The kitchen cabinets were hideous, so I took them down and placed them in the front yard, hoping a enterprising passerby would seize the opportunity. None took the bait, confirming my opinion of their appearance. My father, without realizing the quantity, agreed to let me burn the cabinets in his backyard. The cabinets were coated in some type of wax or resin which turned out to be highly flammable, making for a lively afternoon. My dad was less then impressed when he arrived home and noticed all the hinges and hardware were still attached. Needless to say, I spent the remainder of the afternoon raking metal out of the ashes. For $30 I could have just taken everything to the dumb. I did not yet value my own time.
Conveniently, I had gained experience when I remolded the kitchen in my primary residence.
This job was made remarkably easier and less inconvenient since the house was vacant. I eliminated some decisions and put in the exact same ceramic tile floor. I’m not sure of the best technique for this job, but I’ve created something I call Tetris flooring (named after the video game). Laying out the tiles in a vertical and horizontal line, I create a lower case t, and then simply adjust the rows in order to cut the least number of tiles. It’s easy and fun. Along with the floor, I installed basic finished wood cabinets and a vinyl counter top.
It was then time to paint.
Actually, it was well past time to paint, but being new to the remodel game, I did things out of order. Soon I was taping here and cutting in there and growing to hate painters tape. Looking to save some cash, I used some leftover paint from my own house.
“Let’s make the bathroom red,” I thought, “the future tenants will appreciate the color and contrast to the the other rooms.”
The future me would soon rue this decision, as I added coat after coat, while once again brushing in around the shower and fixtures. I may have saved some cash by reusing the red paint, but I surely gave that money back in the form of lost productivity, and hours of additional labor. I almost put the house back up for sale and walked away at this point. The description would have read,
“homeowner realizes he’s to dumb to be a landlord, needs someone to save him and finish painting.”
Luckily, I prefer self loathing to actual failure, so I kept painting until the room was the size of an English phone booth, the finish however, was nice and uniform. It felt good to be done. Knowing little, I met and screened my first prospective tenants. Ultimately settling on a nice young family. The father loved to fix things, and he ultimately took care of most of the small repairs. He’d simply call, inform me of the problem, get my permission to fix it, and then submit the receipts for his work.
It was a great relationship.
I’m now renting to my second family at this location, and the kitchen and bathroom are simply funny memories and productive learning experiences, which I have used to my benefit with subsequent properties. Now that I’ve bored you with stories, I’ll share the exciting numbers.
– 3 bed / 1 bath
– Sale price 55,000 (savings of about 9% off the listing price) (current value = approximately $75,000)
- 25% down plus closing costs = approximately $17,000
- $8,000 spent on repairs and materials
– Current mortgage payment including principle, interest, taxes and insurance = $505
- Home equity line of credit = $219 (I borrowed back $20,000 after fixing it and renting it, this was used as a down payment on my current primary residence, and will be explained in a later post)
– Current Rent = 825
- Monthly cash flow = $100 (minus maintenance costs)
The monthly cash flow isn’t too good right now, but that is due to the line of credit. I am able to deduct the mortgage and line of credit interest which helps, and I did use the line of credit to fund another property purchase. Also, after factoring the line of credit, I only have about $5,000 of my own cash tied up in the property.