We Bought A Second Rental House!

Yep, you read that headline correctly. We bought a foreclosed rental house!

Instead of me simply writing about it, why don’t I show it to you? …
Check out this 2-minute video:

It started thanks to this website.

A woman sent me an email saying she lives in Atlanta, she’s a regular Afford Anything reader, she owns two rental properties and she aspires to own more. Would I like to have lunch?

Obviously I said yes. I love meeting my readers, and I love meeting people who are passionate about investing.

We quickly became friends … hanging out through several lunches and dinners. One evening, she told me about a foreclosed house that she thought was a fantastic deal. For a variety of personal reasons, she couldn’t buy it herself, but she encouraged me to check it out.

We Checked Out The House …

I toured the house the next day. It’s a 3-bedroom, 2-bath, ranch-style home; 1,450 square feet, built in 1985. It needs cosmetic repairs — cabinets, countertops, carpet, drywall, paint, doors, bath vanities, tubs — but it needs zero structural repair.

The garage door, gutters and water heater need to be replaced. Some roof damage needs to be patched. The deck needs to be demolished and replaced. Otherwise, the house is in fairly good condition.

How Much Did It Cost?

At this point, you might be thinking: “Okay, Paula, enough already! Get to the good stuff … how much did it cost?”

First of all, let me just say that at the height of the housing bubble, in the year 2005, this house sold for $97,000, according to public tax records. The house went into foreclosure last year, and ….

(drumroll, please)

… we bought the house for $21,000. :-) That’s not a typo. We bought this house for one-fifth of its peak value. We bought a house for less than the price of a car!

Of course, “total purchase price” equals the initial purchase cost PLUS the initial repairs needed to make it rent-ready. When I saw the house, my gut reaction was that the upfront repairs would cost roughly $10,000 to make the space habitable. We called in a professional inspector, and he agreed.

In the end, the “total purchase price” (purchase + repairs) will be around $30,000.

Remember when I discussed the “one percent rule of thumb” a few weeks ago? The One Percent Rule states that you should look for properties in which the gross monthly rent equals one percent of the purchase price or more.

One percent of $30,000 is $300. Two percent is $600. I’m fairly certain that I can get three percent, or $900, for this three-bedroom single-family home.

How Do You Afford It?

I paid cash for the house, which sounds impressive — “I bought a house in cash!” — until you consider that a new Toyota Camry costs more than this house. (The Camry starts at $22,000).

I saved that cash last year, in 2011. I put aside roughly $28,000 by the end of last year, which I’d earmarked for some future investment. (I thought I’d use it as a down payment on a rental home … not realizing I’d use it for the entire cash purchase of a house!)

I’ll use a combination of do-it-yourself labor plus contractors to carry out the repairs. Simple touch-up tasks, like painting the front door, changing out the door hardware, and replacing the switchplate covers, I’ll do myself. Time-consuming and frustrating tasks, like installing a new garage door, I’ll hire out to contractors.

UPDATE 04/09/2012: The house is fixed and ready to go on the rental market! See the “after” photos here. And from that page, continue onto Part 3, where you can read about the profits!

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Comments

  1. says

    wow that is crazy cheap price for a three bedroom house. We are looking at one to two bedroom places in San Diego that are 600 to 900 square feet, and they are over $350,000.

  2. says

    Congrats! And you are fortunate to have someone to do the electrical work because it can get expensive. I have had rental property since 1980 when I purchased two units in San Diego, CA.

    Right now I own a rental property in a gringo enclave in Baja CA, MX.

    I made some money during the run-up in values during the bubble and cashed out before the bust. The two places I now have (my rental and home), have lost value but I have not lost actual cash money and will not unless I am forced to sell while still a negative territory.

    I am of the opinion that real estate investing is the ticket to financial independence for most people. My brother got 10mil rich investing in San Diego rental real estate.

    But your apparent path, buying for cash flow is a great model…one house a year with the right numbers and in ten years you’re set for life!

    The ten-year model gives you time to learn the ropes and can be accomplished while keeping your day job.

    Be brave and best of luck!

    • says

      @WRC – Thank you! I’d love to buy one house a year (my current goal is one house every two years). Financing is going to be the hardest part, I think, since lending requirements are much tougher now. But there’s always a way!

      • says

        That’s the trouble I’ve run into as well. The only way to avoid the 20% (sometimes 25%) dp is by buying a HomePath foreclosure, a practice I still have not well adopted, although I’m looking.

  3. says

    Wow that’s a great deal. I haven’t seen anything go that low out here although it looks like housing prices in Atlanta might be a bit lower than out here.

    • says

      @FromShopping – Prices vary a lot based on location! Atlanta has good deals, but I never imagined I’d find this. “Regular” sales here are relatively pricey, but foreclosures are cheap!

  4. says

    Congratulations on buying a your second rental! If I remember corretly, it may have even been brought before your deadline was up :)
    Good luck with the repair work.

  5. says

    Wow, that’s crazy :) I thought it was a good deal at $97,000! Just goes to show the huge variations in home prices. This is a great investment, congrats!

  6. says

    Wow. add me to the “that’s an incredible deal” camp. even the height of the market price of 97k seems cheap. Atlanta must be wicked affordable?

    would love to see more details on the neighborhood and what it will be worth/rent for when you are done.

    well played!

  7. says

    Now that’s my kind of deal! Great job on finding the home in the long run you will make a killing off this property. When I read 21k I thought.. “oh shit, someone found my real estate market?”

    I’m in the process of buying a 5b 2 bath home 2400 sqft for 30k.. the repairs are gonna run me 7k (to get it up to insane section 8 standards) but my property manager thinks we can get 1100 in rent for it.. 80-90% be paid by section 8 of course.

    Once again congratulations! I love seeing people who are actually doing real estate rather than just talking about it.

  8. says

    My only issue is the termite damage. Once you start peeling back those walls to alleviate the problem the real fun begins.

    • says

      @YFS — I had three different termite companies come to the property to give me independent assessments, and all three said the same thing: there was a prior termite infestation, but the termites are gone now. Whew! I’ll be putting preventive measures around the house to minimize the risk of termites returning. :-)

  9. says

    You make your money when you purchase. You should be able to get a great cash-on-cash return on your investment and should be able to make a decent profit when eventually selling as well provided the area doesn’t end up like Detroit.

    • says

      @cashflowmantra — LOL! Thank you! I agree, this house was an amazing investment. I thought that my triplex was a good deal, but this house absolutely blows the triplex away!

      My cash-on-cash return will be a little smaller because I bought the house in cash (rather than through leverage) … but, by the same token, my risk is also much smaller because I’m not leveraged into this house. I’m okay with that. :-)

      And I’ve occasionally had the thought that one of the biggest risks to property investing is that the city could end up like Detroit! Fortunately, Atlanta seems to be growing, not declining. But if I lived in Cleveland, I’d be nervous!

  10. says

    I second jlcollinsnh and Jen, I can’t even fathom a 3 bed 2 bath house house being for 97K in California, let alone 21K! Congratulations, I hope you keep us updated us on your DIY progress on the house from time to time. Approximately how long do you think it’ll take you to flip it and rent it out and how do you factor the mortgage etc. you’ll pay before you can start earning rental income that into your total investment?

  11. says

    Paula,

    My wife and I are renting an apartment, and we have to move out because the landlord wants to move back in. Apartments like ours rent for $5000 per month. So after just 4 months of rent, we’ll pay what you paid for that house. Why not just buy? This condo of ours has a market value of $1.8 million. And houses? You don’t even want to know what the average home price is in my city. I’d be guessing $4 million, and I could be underestimating. Think about how lousy the rental yield is on these places. It would be crazy to buy in Singapore right now. Yeap, that’s where I am.

    • says

      @Andrew — Oh, that’s right!! I remember hearing you talk about that! I guess in Singapore, when someone says “My house costs as much as a car,” they mean it in an entirely different context! :-)

  12. says

    Paula, I must say this is impressive. Warren Buffet himself recently in an interview that if a person is handy, one of the best investments that they can make right now is to buy a couple of SF homes and fix them up to rent. Clearly you guys are handy. Having been there and done that with 4 rentals before, I don’t think I’ll be back into that market but the concept has clearly caught Mr. Buffet’s attention.

    • says

      @Parenting and Money — I love that detail about it! Isn’t it crazy how “unintended consequences” shape our lives? If I hadn’t started this blog, I might have never found that deal ….

  13. says

    Property house seems to be a solution to someone who can not afford an apartment. Here in Naples (Italy) prices are ridiculous! $300,000 for an apartment are absolute minimum. Nothing that special – just a regular apartment.

  14. says

    That’s awesome! Sounds like a really great investment and business. Just curious about your rental homes: do you buy them with the intent of always renting them out, of do you plan to sell them at some point?

  15. says

    I’m a new reader and as a real estate investor wannabe, this post got me all excited. What an awesome deal! Do you manage your rental yourself or do you hire a property manager?

    • says

      @Hilda – I manage the properties myself. I like being hands-on, especially during the first few years, and (frankly) my time isn’t so super-valuable that I can justify a property manager (yet!) I hope to one day have a manager who takes care of everything, but during the first few years, I find that I’m learning a lot of valuable lessons by doing it myself.

      Here’s a book review I wrote about a guide to property management: http://afford-anything.com/2012/01/13/property-management/

  16. says

    My wife and I have a different plan:We are looking to move further out in the country….Found a couple of great lots that have been on the market for a few years…soon going to make some reasonable offer(s)
    Then build our own house…..using as much recycled materials as possible….This should top off our Frugal Living into retirement..

  17. says

    Paula this sounds like a home run in the making and the fact that you paid cash for it is just icing on the cake.

    My first impression was that the house needed too much work for a rental but when I saw that you bought it for $20k then I think it’s worth the fix up.

    My main question is, what will it rent for? I don’t know what part of town it’s in but I will guesstimate that you can rent it anywhere between $750-900??

    BTW I am in Atlanta and have rehabbed a lot of properties so if you need any contractor referrals feel free to ask.

    • says

      @Luis – Perfect guesstimate — I also think I can rent it for $750 – $1,000. I’m going to start by asking for $995/mo and lower the price if that proves to be too high. I can ALWAYS use contractor referrals, so I’ll definitely email you for that!

  18. says

    That is great! Rentals are a great way to make money. I am a licensed real estate sales associate is PA. I’ve shown some houses in condition like that. Have fun fixing it up.

  19. says

    Congrats, Paula! This is exactly the type of post I need to be reading about right now because I’m looking to purchase my first investment/rental property. Thanks for the inspiration/motivation!

  20. says

    Wow, that is a stupid crazy cheap deal! even with all the repairs paying about 30k for a house in unheard of. I hear there are a lot of pains with buying a fixer-upper then renting it out, but with something as cheap as that, it seems like a no brainer!

  21. says

    Im 23 I live in Canada, I live in Toronto. I live at home still. Our real estate didnt go down its still going up. Most average detached in my area are 500k(Nothing special). My parents have bought and sold a few houses 2 hours north of here in cottage country. The first was a cottage they paid 30. There was 20 pick up truck loads of garbage on the front lawn. We spent around 25 on it and alot of sweat equity we sold for 130. The second one was in a small town we paid 60, this was an eaiser project. Paint, flooring, new fridge and stove. 2 weeks and it was on the market. 99 sold in 1 day. Now I am looking to buy and hold my first house in a town for around 80 with some work should rent for around $900. My point here is sometimes there is money in a different area code and people who are hungry can make money with less downside risk if there willing to travel. You are lucky enough to already live in a area like that. Cheers

    • says

      @Cory — How wonderful that your parents did that! What a great thing to do, and a great example for you and for the rest of their children. …. There’s certainly a lot of opportunity, and some people need to look outside their immediate surroundings to find it. I know someone who buys rental properties hundreds of miles away from where he lives, because that’s where the hot deals are.

  22. says

    I just landed on this post (and your blog) today. I’m now a subscriber. Great stuff! One Question: How the hell did you FIND this buy?! I know one of your readers turned you onto it, but need more deets. I can find cheap places in Austin, but not THAT cheap! Well done!

    • says

      @Zach – Welcome to the site! I’m glad you subscribe! … this particular house is about 30 minutes outside of the “cool” part of Atlanta, in a nondescript location where not much happens. This reduces its value. The school district performs poorly, further reducing value, and many of the houses in that area have been foreclosed upon, depressing values overall.

  23. says

    I’m a bit late on this one, but really want to congratulate you for buying your second rental property. Most people aren’t able to buy one and here you are on to your next! Well done and hope this brings in a good amount of passive income!

  24. says

    Its amazing what you can do in real estate when you are able to fix and clean up. From the short video, it looks like a lot of work but I’m sure you will step up to the challenge. Great page and very inspiring to those who sit on the fence and wish they could make it happen. Good luck

  25. Jason says

    A great way to buy rental homes that many people do not know about is using a Self Directed IRA account (not a typically brokerage IRA). The account purchases the house with your funds and all income from rent etc. goes back into the IRA account. Obviously you need to have a large enough balance in your IRA to buy the house. You cannot live in it either. It must be used for investment purposes. See Midland IRA for more info. It is quite interesting and I plan to do this eventually with the account I have. Also 401ks, 403bs etc can be rolled into a Self Directed IRA to boost your balance and combine accounts.

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