We Bought a Third Rental House!

I can’t believe I’m saying this: Dear Readers, I’d like to introduce you to Rental House #3.

“But Paula, didn’t you just buy a house? A couple months ago?”

Yep, it feels fast to me, too.

Check out the pics, and meet me below the photos to hear the details.
(If you’re reading by email, click “display images” to see the photos.)

bought rental house - making repairs

We removed the 1970’s wood paneling from this room …

bought rental house - repair wall

We removed a closet to add more space to a bedroom …

bought rental house - repair kitchen

The kitchen is decent, but not amazing …

bought rental house - repair man

… so we’re adding a skylight to the kitchen. Hooray for natural light!

bought rental house - repair stairs

These used to be the steps to the front porch.

bought rental house - repair porch steps

These are the new steps to the front porch! Much better!

The LowDown

The basic stats are normal: 3 bedrooms, 1.5 baths, built in 1965, neglected and needs repair. Up to this point, the description sounds remarkably similar to House #2.
repairing the home
Its location sets it apart. Will and I have “stuck to our core competence” by only buying rental properties that cash-flow. We’ve diversified pretty heavily, though, when it comes to location.

As background: the Atlanta metropolitan area is encircled by a highway, 285, which we call “the Perimeter.” City lovers look for homes “inside the Perimeter,” while suburban-dwellers live “outside the Perimeter.”

Generally speaking (there are many exceptions), the suburbs north of Atlanta are more educated and moneyed; the suburbs south of Atlanta are less.

House #1, the triplex, is in the urban heart of the city, with a view of the skyline. House #2, a single-family home, is “outside the Perimeter” in the faraway suburbs to the south of Atlanta. (That’s why it only cost $21,000.)

House #3 is in a location that Atlantans would call “AT the Perimeter” — in that grey zone where urban meets suburban, within a mile of the 285 highway. It borders the suburbs to the north of Atlanta, in an area with good school districts.

Sorry if I’ve bored you with too much detail, but location is the most important aspect of this project. Many real estate investors decide to specialize in ONE location — sometimes limiting their search to only a few blocks — and there’s a ton of merit to that strategy. If I start flipping houses, I’ll most likely follow that approach.

Will and I are taking the opposite tactic for our rentals, because we’re buying-and-holding for the long run. Neighborhoods will fluctuate in unpredictable ways over the span of the next 40 years. By diversifying our buy-and-hold locations, we’ll defray the risk of holding a bunch of houses in an area that might experience a collapse. (Of course, if ALL of metropolitan Atlanta plummets, we’re screwed.)

C’mon, Get Talkin’ Numbers, Already

rental property - repairThis house went on the market in August 2011 with an asking price of $175,000. If that sounds like a lot of money for a home in disrepair — in a city where you can pick up houses for $21,000 — you can thank the location. This property sits on one acre of land, which is a rarity inside the Perimeter.

The asking price was a little high. The next-door neighbor’s house is currently on the market with an asking price of $155,000, and it doesn’t need repair.

So one month later, in September 2011, the owners dropped the asking price to $148,000. That’s in line with homes on that street that are in good condition, but this place needed a deeper discount to compensate for the work that needs to be put into it.

So in October 2011, the owners dropped the price again, down to $125,000, and that’s where the price remained when we stumbled upon the house in February 2012.

Negotiation Time

We toyed with our offer for a long time. We had a very strong sense that the owners would accept $115,000, and we were ready to pay that. But we wanted to make a smaller offer, so that we could “negotiate up.”
bathroom renovation
Will wanted to offer $105,000. I argued that we should offer $95,000. We volleyed the idea back and forth. We both worried that the “reverse sticker shock” of a less-than-six-figure-offer would cause the seller to dismiss us.

We consulted Mom and Dad. My dad, a tough negotiator, liked Will’s idea. My mom, an even tougher negotiator, agreed with mine.

Mom knows best: we submitted an offer of $95,000 and waited for the seller to retort with a counter-offer. To our amazement, the seller accepted it!

You know, real estate just blows my mind. You can “save” $10,000 just by asking for it. I don’t know any other area of life in which that’s possible, unless you’re running a major business.

We bought the house for $94,000, after getting another $1,000 concession when the inspector found mold in the basement. (It’ll cost $1,000 to treat the mold, so we’ll “break even.”)

The “REAL purchase price” is the purchase PLUS initial repairs. Our repairs are going to cost about $6,000, so the “actual cost” of the house is $100,000.

According to the One Percent Rule of Thumb, this house would be a good deal if we collect $1,000 per month in gross rent. ($100,000 x .01 = $1,000).

I estimate that this house can rent for $1,000 – $1,200 per month, thanks mostly to its zoning and its school district. The return on investment isn’t as hot as the $21,000 house, but the quality of tenant is likely to be much higher.

What’s Next?

rental house team sportThank goodness we’ve started delegating out the repair work: instead of sanding cabinets and hammering nails in House #2, we outsourced that work and used the extra time to search for House #3.

Plus, we forged great relationships with the contractors who worked on House #2, so we knew exactly who to call for quotes on House #3. This streamlined the process immensely, allowing us to coordinate the repairs much faster.

If there’s one lesson that Houses #2 and #3 have taught me, it’s that you’re only as strong as the team around you. Business is a team sport. My focus from this point forward is to build that team.

UPDATE, NOV. 2012: We rented out the house! Check out the final numbers.


Comments

    • says

      @Naomi — Nope, my goal remains the same: a minimum of 5 houses over the span of 10 years // one house every two years. I consider myself to be “ahead of schedule” in achieving that goal. I want to maintain the same goal until House #5 is crossed off the list. Once that happens, I’ll set a new goal.

  1. says

    AWESOME Paula! You’re portfolio is going to be fantastic with all of your real estate, as well as other investments you’ve been making. Kudos to you!

  2. says

    Wonderful! I love the detail you put in your posts. I’d love for you to talk sometime about the delegating piece. If we ever did something like this we would definitely have to farm out the work. I’d like to know how to find a contractor reliable enough to work with, how to make estimates on repairs, and how to get a contractor on the same time frame as you are, since time is money when it comes to getting a home ready to rent.

    • says

      @Julie — Whew, those questions merit a post of their own! Long story short, I was incredibly s…l…o….w…… at getting contractors lined up for House #2, for a few reasons: first, I needed to learn the “order of operations.” Fascia before gutters. Paint before cabinets. Second, I needed to call contractors, talk to them, get quotes — basically, I needed to begin a new relationship. That took a lot of time.

      But through that process, I figured out who I liked and who I didn’t; who I trust and who I don’t; who gives fair prices and who charges too much. So when we bought House #3, the phone numbers that I needed were already programmed into my cell phone, and those relationships were already formed.

      Figuring out cost estimates come with practice. House #2 I was pretty clueless about. That was the definitely the “learning curve house.” (Some investors refer to your first few homes as your “tuition.”)

    • says

      @Krantcents – The seller’s initial price was WAAYYY too high; I think he realized his mistake pretty quickly (which is why he lowered the price twice within the next two months). As for why he agreed to $95K, I’d chalk that one up to seller desperation.

  3. says

    I love that you diversified neighbourhoods. To be honest, I wouldn’t have thought of doing that but you have a very good point about market flucuations

    • says

      @Vanessa — Thanks! I think that’s an especially important tactic if you’re going to hold a property for a long time. If I was “flipping” quickly, I might stay tight in one area.

  4. says

    Congratulations on your ongoing success. Out of curiosity, how are holding these properties in regard to personal liability protection? You could be exponentially vulnerable with each property purchased. Also, one cannot forget the opportunities available to business structures that aren’t based on personal liabilities.

  5. says

    Whoa, you do move fast! :) You are amazing.

    Yep, it’s all about location. I’d hate to think how much houses are still going for in the Garden Hills* area, from about Peachtree Battle to around Lindbergh Drive west of the Lindbergh MARTA station. Same thing with Morningside around Emory. Those houses seem to go for “California” prices.

    I assume you have an 80% 30-year loan on the $95,000?

    I’m wondering why the new stairs on the front porch are better than the old – presumably cinder block/brick – stairs. The photos are too tight for me to understand the difference.

    *Real estate agents will mistakenly include Garden Hills in Buckhead, but us old-timers know better. Buckhead seems to be an ever-expanding reference.

    • says

      @DemosCat — Since you’re familiar with the Atlanta area, you’ll understand what this means: House #1 is in Midtown, House #2 is OTP South Decatur, and House #3 is in Chamblee. I love the Morningside/Emory area, but that’s way too expensive as a rental location.

      Why the new stairs? The simple answer is that the old stairs weren’t up to code, so they presented a liability hazard. The second answer is that — based on the location of the driveway — it makes more sense to approach the front porch from the front rather than the side. It’s a more intuitive traffic flow.

  6. says

    I’m so glad you’re sharing this! I’ve always wanted to invest in real estate. It’s not part of my investment portfolio now, but when my income substantially increases and becomes more consistent, I want to refocus my energy on it. I’m not sure how many investment properties I’ll obtain in the metro DC area however. The prices up hear are ridiculous!

      • says

        The DC area would make those high prices in Morningside look tame by comparison. :)

        I’ve often wondered if, as you say, the DC area would be good for flipping, particularly after an election, and especially after a “flip” of party in power when so many political appointments change hands.

        And there’s been tremendous growth in the area, especially in Virginia. When I visited the area in the early 1980’s, Tyson’s Corner was a few houses and businesses surrounded by farm land. A decade or two later, it had become an unrecognizable densely populated traffic jammed area. I’ve no idea what it’s like now.

  7. says

    Congrats, you’re moving quickly on these! At this pace you’re going to have 3 times the houses you wanted in your 10 year plan, haha.

    Question about your financing – you’re holding each house in separate LLCs, but you you own them outright or do you have mortgages on them? Are they in your name or the name of the LLC?

    • says

      @PK — House #2 was bought in cash; the other houses have mortgages. The LLC’s don’t qualify for business loans (generally a business needs to be in operation for two years before it’s loan-eligible, at least according to the bankers I’ve talked to). We’ll take the loan and buy the house in our name, and then Quit-Claim Deed it into the LLC.

  8. says

    I’d love to hear more about the financing end of it…maybe you have a post on it? What does your cash flow look like for each of the houses? In total for your real estate mini-empire?

  9. says

    Congratulations on House #3!! I love investing in real estate and have been doing it for a few years now. I must say that you are on the right path! Keep up the good work, you might surprise yourself and far exceed your goal of buying real estate!

  10. says

    Hopefully you can get over $1,000. I rented a house with two other people in Chosewood Park, and our rent was $1,000 for a 3 br, 2 ba, but of course, it’s easier to share a 2 ba with 3 people than a 1.5 bath, but the neighborhood is significantly less attractive to anyone who wants to live in a decent area 😉

    • says

      @Kellen — Location is the single most crucial factor in determining the rental (or resale) value of a property. I can rent a 600-sq-ft, one-bedroom unit in Midtown for $1,000 per month or more, but a 1,500-sq-ft 3-bed in OTP South Decatur will rent for only $850 a month. It’s ALL about location.

  11. says

    That’s pretty legit. I don’t own one property yet. I will get there. I think one day I’d like to maybe renovate a few houses and make some side money by renting them out. But ive heard some horror stories with doing so.
    Terrible tenants destroying the house among other things.

    When does the value of the income become less than the lack of value from bad people?

    • says

      @Ryan — First of all, I’d caution you away from the mindset that all tenants, or most tenants, are destructive. I’ve been fortunate in that I’ve had wonderful tenants. That’s partly due to the location of my properties, and partly due to my responsiveness as a landlord. I live by the philosophy that I’ll treat the tenant very well as long as they treat me well. I make repairs promptly, I send them holiday gifts, I call them “sir” and “ma’am.”

      Regarding your question (When does the income value become no longer worth the hassle): that’s a judgment call. I won’t buy properties in certain neighborhoods, even though the cash flow is great, because the quality of tenant you’re likely to attract in those neighborhoods is questionable. I generally stick to buying properties in neighborhoods where I’m likely to get decent tenants.

      Remember: almost all of us — every reader on this blog — has been a tenant at some point in our lives, and hopefully, we’ve all been good ones. :-) There are plenty of great tenants out there, and I believe that if you treat your tenants well, they’ll reciprocate.

  12. says

    Hi, I really like how you’ve explained all of your rental property purchases. I do have a question about the up-front repairs–do you “budget” for those when you buy the house? Does the money come from what you already have saved?

    Thanks,

    Ashley

    • says

      @Ash – Yes, I do. My definition of the “purchase price” of a house is the initial cost of buying it PLUS whatever upfront repairs are needed to make it rent-ready. For example, I bought House #2 for $21,000 (purchase price), and put $10,000 into it (upfront repairs), so the “real” purchase price was $31,000. I find that it helps to mentally conceptualize $31,000, and not $21,000, as the “true” price of the house.

  13. says

    I had the same goal of a house every two years for ten years about five years ago. But it’s been really hard with all the travel I do for work and I have not found nearly the great deals you have. I really need one of those 25k deals to get back into the market.

    • says

      @Zach – Traveling for work is tough; you have to do the same amount of job-related work AND also deal with the hassle and inefficiency of being in transit. Pulling together a solid team that helps you find properties helps a lot. My “team” includes several mentors, contractors, and friends who are investors, real estate agents and property managers whom I bounce ideas off and who help me find leads.

  14. says

    Paula,

    Taking on too much work ourselves is a trap that the wife and I fall into from time to time as well.

    Just found your blog and really enjoying it. Your writing style is great.

Leave a Reply

Your email address will not be published. Required fields are marked *