It started in October 2010. Will and I had just moved to Atlanta and didn’t know a thing about the city.
We picked a neighborhood at random – eeny-meeny-miney-moe – and rented the first listing we found on Craigslist. We struck gold.
Our neighborhood has a vibrant rental market brimming with young professionals with great credit scores. We live two blocks from Atlanta’s most beautiful park, a rolling greenscape with spectacular skyline views. It hosts huge outdoor concerts, festivals and farmer’s markets, and it’s less than a 5 minute walk from our front door.
Obviously, Will and I shared the same thought: This neighborhood holds an advantage that can never be replicated. There’s strong rental demand in this neighborhood, especially as Atlanta booms -– jobs are growing and young talent flocks here for the warm weather.
We started looking at real estate prices, but they were astronomical. $600,000 for a 2,000 square-foot home. Yeech.
Multi-unit buildings – houses that have been subdivided into two or more rental units – are cheaper. People buy their own home based on emotion: it represents their dream home. But people buy multi-units on cold calculation: does the rent justify the price? As a result, duplex and triplex buildings in our area are much cheaper than single-family homes.
Will and I checked the price of the building where we were renting. Our landlord purchased the building in 2004 for $323,000. The unit Will and I rented, a 3-bedroom, goes for $1,200. The other two units are 1-bedrooms. I’ll assume our landlord collects $600 each, bringing his monthly income to $2,400.
Assuming our landlord put 20 percent down and has a 5 percent interest rate, his monthly mortgage would be $1,725 per month. Our landlord’s water bill – he outright told us – is $300 per month (last month he paid $320). Trash is $100 a month ($33 per month per unit). Insurance (he needs “commercial” insurance since it’s a multi-unit building) comes to $250 a month. In other words: his baseline expenses equal $2,375 and his income is $2,400.
That leaves tiny room for error. If the water bill spikes an extra $25, the landlord has to cover the difference out-of-pocket. And he has NOTHING set aside for management or maintenance. In other words, his investment is “negative cash flow” – it removes money from his pocket every month.
He does this because he hopes (he speculates, he gambles) that the building will rise in value.
No matter how nice the neighborhood is, Will and I are dead-set against buying a negative cash flow property. It’s a gamble. Housing prices can rise OR fall.
There’s also a limit to how many negative-flow properties you can afford. There’s no limit to how many “positive cash flow” properties you can afford – property that lines your pocket with cash every month.
In fact, if your properties put cash in your pocket each month, then the more you buy, the more you can keep buying. It’s classic “the rich get richer.”
(Note: Please never get angry that the rich get richer. Instead, ask yourself: how can I put myself in that same position?)
So we started searching for properties. But our neighborhood isn’t “up-and-coming.” As I like to say – with a fake Southern accent – “It done up-and-came.” Despite the housing crash, home prices are still higher than the rents they fetch.
We searched high and low. Nothing near the park could create a positive cash flow. We almost gave up.
And then we discovered the house no one else wants.
Check out Part 2 of this real estate series to learn why the house is so cheap (what’s the catch?) and to discover how we cobbled together the funds to make the deal sail through.