Tag Archives: passive income

The Deal’s Off

So, the house that I almost pissed my pants over when I bid on it has gone defunct. We were supposed to close in December, they have asked us to extend till February 10. There was also some vandalism from some very irritating idiots. Good job stealing the copper lines from the AC condensors to the heating units and not taking the condensors themselves or pulling apart the units to get the scrap from there!

My partner and I after much consideration terminated the deal. It was just getting too difficult, too time consuming, and there was another lower comp that came up in the neighborhood that might have affected our appraised value.

Sometimes you just have to walk away and move on to the next one. If you have a manager, once the property is rented it becomes almost completely passive. Getting there, however, can be anything but.

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2012 – Best Year Ever?

December was a crazy month. There were the holidays of course, B’s first Christmas, New Year’s Eve, a trip to CA to visit Dad’s family.

My brokerage let me know they were closing on December 31 so I have had to scramble to get into a new brokerage and get my listings transferred. I’m a firm believer that everything happens for a reason, though. My new broker has a much larger vision. The firm does bulk deals and new construction, a far cry from the 30k properties I currently sell. While things are in the beginning stages, I feel confident that my business is going in a new, better, more lucrative direction.

This brings me to my New Year’s Resolutions:

-Buy 4 rentals

-Complete one multimillion dollar transaction

-Stay physically active

That’s it. Nothing else. Of course, each of those large goals involve a lot of little ones, but I figure that’s pretty straightforward and sufficiently ambitious.

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What’s a Good Deal on a Rental Property? Here’s My Formula:

Fellow blogger The Small Investor asked me on a previous post if I would be willing to outline how I find my rental properties and specifically what returns I’m looking for based on rents, purchase prices, repairs etc. I mentioned some stats briefly in another post,  but I’ll attempt to get a little more in depth here.

NOTE: I’m in Atlanta. This formula varies widely across the country. One of my best friends works in real estate in Los Angeles, and her investors typically get a much smaller return on their investments. I love Atlanta because it’s incredibly affordable. I love calling it our home and I love investing.

My particular strategy is buy and hold. When I first got into real estate here about 6 years ago people were flipping, wholesaling, buying notes, and also doing tons of mortgage fraud. Now none of that works quite as well. Can you flip in Atlanta? Of course! I know people who do. It’s just not my thing right now. My view is I could flip and make a fast 20k, or I could rent and make that same 20k in 2 years, and another 10k every year after that for the same investment. Slow dollar quick dime.

Used to be that we had a 1% rule. In other words, buy for 100k and rent for $1000 per month. This was pretty typical of what was considered a good investment. Now that doesn’t work quite as well. I’ve found that there is a general correlation here in Atlanta between return and risk. The crumbier the neighborhood, the higher return if you can get it. Buy a quadraplex in a nice area, and you’re probably going to get closer to the old 1% rule.

I have a colleague who bought a house in a really terrible area of Atlanta a few months ago for $3500. She put about 10k into it, and gets $500 a month in rent. I do not have the stomach for the neighborhood, but she does and can make it work.

My sweet spot it in an area of a city called Decatur where my goal is to buy (aquisition cost plus repairs) for between 40-50k and get between $900 and $1100 per month in rent. I own two of these currently, I’m about to start the process of buying a third.

To answer Small Ivy’s question – I have not had mortgages on these two. I am doing a cash-out re-fi on the first one to buy a third. However, if I was buying with mortgages I would absolutely have to do BETTER than just making the mortgage, taxes and insurance on the rent.

Here’s the breakdown so far:

Rental #1 – Cost ~50k total (purchased for 27k, put around 23k in.) Monthly rent $950 – Property manager $95 – Taxes $70 – Insurance $70 (The tenant does the lawn maintenance.)

Rental #2 – I did better on this one. Cost ~ 48k total (Purchased for 43k, put 5k in) Monthly rent $1050 – Property manager $105 – Taxes $120 – Insurance $65 (Tenant maintains lawn).

So monthly, if there are no repairs and no mortgages, I would make $1475. I am closing this week on the cash out on Rental #1 and getting 30k, which will cost me an extra $200 a month but will enable me to buy #3 along with the savings I have. Once I get number 3 out of the gate I’m hoping to do approximately 2k per month AFTER expenses.

I have seen quite a bit of information from seasoned investors that say over time, typical costs of maintenance, taxes and insurance will cost you approximately 50% of your rent, so over a period of years if your rent is $1000 you should typically expect to spend about $500 of that, NOT INCLUDING any loan costs.

Some people would say get rid of the property manager and do it yourself, but frankly I think she’s worth every penny. She’s gotten me two amazing tenants on 2 year leases. I wouldn’t have known the first thing about screening them and would have lost far more than she costs in time and days on market for rental. The other cost not stated in the monthly cost is that the initial fee for rental is one month’s rent, which has to be factored in to your total return.

If you are really just barely making the mortgage and expenses I can’t see doing it. You need to be making actual passive income regardless of whether the property value goes up. If you can’t do this in your area, consider investing elsewhere or try to get a screaming deal.

Hope this helps! Let me know if I didn’t answer anything.

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Thoughts on Vacationing

Our family travels A LOT. B has already been on 3 plane trips and she’s not even 7 months old. We tend to go on at least a trip a month (some of them are just a 3 hour drive to my parents’ house).

Last weekend was no exception. This is the year of weddings for us. Dad and I have been married over 6 years, but we were pretty young and now all our friends are getting married too. This weekend’s wedding was in Asheville, NC, which I highly recommend. My dad came with us to watch B (both parents were going to come but mom was at a funeral and couldn’t make it). We went to the Biltmore Estate, which Dad had never seen before and loved. At $50 per ticket at a discounted price it’s a good thing he did! The wedding was beautiful, as was our B&B.

On the way home Dad and I were talking over the financial situation of the weekend. The B&B was $600 total for 3 nights, we spent probably $100 on eating out, $100 on the tickets to the Biltmore, plus about $75 worth of gas.  Let’s just say the weekend cost us $1000. We really could afford to do a long weekend every month if we had complete flexibility with scheduling.

If we were making 10k per month passively after taxes and had no debt (no mortgages) we could easily afford not to work AND take weekend trips every month. How much would you need to have your current lifestyle and not work?

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Taking the Plunge – Signing the Mortgage Papers for Rental #1

It’s a little scary, and expensive, to cash out your equity. I signed all the paperwork today to do so. When all is said and done I’ll be paying about 4k to get 50k out of Rental #1 (as long as it appraises).

We bought Rental #1 in May 2010 and had it rented by September 2010. Definitely spent a little too much money and time before renting it, but we now have a wonderful tenant who is on a 2 year lease.

Now I’m dying to buy #3 but don’t yet have the cash. It should be in my hands in two weeks, but I should really stop shopping and checking availability on listings as I have to submit proof of funds with any offer I submit.

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Rental Property Timeline

I’m excited. This morning I figured out a timeline for making us 70k in passive income in 2 years. It’s ambitious, but I think it can be done.

Basic information is that it costs 50k to buy a rental property that I’m comfortable with (this is the total including repairs, purchase price, and other costs). Paying 50k should yield 1k per month on average for a rental price. Subtract from that management fees, taxes and insurance and I net $700-$750 per property if I pay cash, minus any repairs that might come up.

I already own 2 which have nice tenants and have not caused any issues so far. I bought them for cash so there is no mortgage cost. I’ve been debating about taking out mortgages so I can buy more. I never used to believe in it, but if the mortgage on a 50k house is $250-$300 per month, and the rent is $1000, I really feel like I can’t go wrong.

Here’s the timeline: (each number represents one rental in the order I purchased/will purchase)

May 2010 – 1 – Cash

June 2011 – 2 – Cash

November 2011 – 3 – Mortgage 1

January 2012 – 4 – Mortgage 2

June 2012 – 5 – Cash

August 2012 – 6 – Mortgage 3

November 2012 – 7 – Mortgage 4

February 2013 – 8 – Cash

June 2013 – 9 – Mortgage 5

September 2013 – 10 – Mortgage 6

Because I can’t finance the new purchases I’ll mortgage the rented properties and pay cash for the new ones. Net $500 per mortgaged property after expenses, $750 per unmortgaged property after expenses = $6000 per month across 10 properties. Will there be expenses here and there? A new roof? Broken pipes? Electric problem? Water heater issue? Crappy tenant? Of course. I’m hoping to lower my risk by putting newer systems in the properties with my initial 50k investment and buy in nicer neighborhoods similar to where my current properties are.

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