We Bought House #5. Here’s a Behind-the-Scenes Look — Including the Numbers.

Moderation is not my strong suit.

I don’t just eat one chocolate-chip cookie — I either eat zero, or I eat the whole batch. I don’t just travel for a weekend — I either stay at home, or I hit the road for weeks/months/years.

And apparently, I can’t just buy one or two houses. Afford Anything Tribe, I’d like to introduce you to House #5, which is Rental Unit #7 in my ever-growing passive income portfolio.

In this article, I’ll share the no-holds-barred, behind-the-scenes story:

  • How I found this house.
  • Why I choose this area.
  • The NUMBERS! Yes, you nosy people — all $$ will be revealed. :-)

But first … check out the pictures.

Click Display Images in your email program to see this picture - rental unit #7 in Atlanta

The outside of the house … not too shabby!

atlanta rental property

Selfie! Because the first thing you do when you buy a new house is take a selfie, right?

cage your air conditioner - real estate investing lesson

Ah, now that’s home security …

rental property investing in atlanta - house 5 - the kitchen

The stainless steel stove is a nice touch, and the cabinets in are decent shape. Planning to add a dishwasher, though.

rental property investing in atlanta - house 5 - the bathroom

Thank goodness the tile and sink top are a neutral white color. Might swap the faucet for a modern chrome color.

rental property investing in atlanta - house 5 - the master bath

The so-called “master” half-bathroom is small but in good condition.

Can you read this? If so, click Display Images in your email program

Another selfie!! Will takes a pic in the bathroom mirror.

rental property investing in atlanta - house 5 - the living room

Ah, good ol’ windows on two adjacent walls. Add some curtains and you’ll have a pretty nice room.

rental property investing in atlanta - house 5 - the bedroom

How on earth do you snap an interesting picture of an empty bedroom?

totally irrelvant cat photo

Completely irrelevant cat photo. Because the Internet needs more cat photos.

It started with this blog.

People who blog about money tend to know each other. We hang out and swap stories about our websites, usually over strong margaritas.

So about two years ago, I had dinner with a blogger named Lauren Bowling, who (at the time) had just launched a site called L Bee and the Money Tree.

(When we met, she immediately blurted out: “I thought you’d be taller!”)

Lauren was getting started in real estate investing. She and her fiancé purchased a fixer-upper in an “improving” neighborhood. Their plan: Remodel the home, live there for 5+ years, and enjoy equity gains as the rest of their neighborhood slowly beautified.

At least, that was the theory.

Instead, they broke up. Ouch.

But Lauren is a strong lady. She kept the house, oversaw a major renovation by herself, and — about a year ago — invited me to her “housewarming” party to celebrate its official unveiling.

As I drove past the ramshackle buildings that dotted the road to her first investment house, I’ll admit: My knee-jerk reaction was, “OMG Lauren, are you f***ing crazy?!”

Her neighborhood — at first blush — doesn’t seem like a place where you’d want to invest.

You can tell a lot about a neighborhood by the types of businesses located there. In cushy middle-class neighborhoods, you’ll see Starbucks, CostCo and Panera Bread.

In respectable working-class communities, you’ll see little “bodega”-style food marts, beauty salons, thrift stores, and the occasional used tire yard or emissions-testing station.

But Lauren’s neighborhood? Several storefronts were boarded up; vacant. Uh-oh. That’s not a good sign.

But any good investor looks at a neighborhood not for what it currently is, but for what it’s on track to becoming. Formerly-vacant buildings are beginning to fill. The area is turning around.

Lauren saw its potential — and urged me to develop my vision, as well.

I was dubious — (all investors should nurture healthy skepticism) — but I started digging for information. And the more I dug, the more I began to conclude that she was right.

How to Evaluate a Neighborhood

Lauren’s neighborhood is still a tad outside my comfort zone (she’s a very early adopter), but a nearby section of Atlanta, called West End / Adair Park, definitely suited my style.

This neighborhood used to be thriving, I discovered, but it fell during the 1970′s and 80′s and experienced ensuing blight. Here’s a crime map: “Red” indicates high-crime-risk; “Green” shows low-crime-risk. As you can see, I’m looking for houses in the “Yellow” zone.

atlanta crime map - real estate investing

Image courtesy Trulia.com/local

This area is now seeing a slow-but-steady revitalization.

Jobs and Business - It’s close to the airport and features easy public transit access, meaning that many airport workers (TSA officials, baggage handlers, etc.) live here. The surrounding area also holds other service jobs (manufacturing, delivery, etc.) which also keep this neighborhood alive. One strong vote of confidence: Ace Hardware opened a location here. (Hardware stores are an especially strong sign of neighborhood development — by definition, they’re the first type of business than a re-developing area needs.)

Transit - The Atlanta Beltline is a planned 33-mile loop of multi-use cycling/walking/jogging trails alongside 22-miles of light-rail tracks. Once complete, the Beltline will link the city’s neighborhoods together, improving accessibility and reducing Atlanta’s car-dependence. Fortunately, the Beltline runs directly through this neighborhood. In fact, a 2.4-mile section of the Beltline has already opened here. That’s a huge +1 for this neighborhood.

Greenspace – This neighborhood opened a new park in 2008, alongside the Beltline. Why does this matter? It’s good for home-price stability, quality of life, and it’s a symptom of smart urban planning.

Infrastructure – The local authorities recently invested $2 million in new sidewalks, streetlights, trees, and other neighborhood improvements. Awesomesauce.

Artists - Atlanta’s “what’s happening” magazine, Creative Loafing, called this area the “Best Neighborhood for Artists” — another strong sign that the area is improving. (Tip: Follow the artists.)

What Are Other Investors Doing?

Signs point to neighborhood improvement, so Step Two is to start chatting with other local investors.

I met one person who purchased a home in this neighborhood for $25,000 in spring 2013. He invested about $100,000 into renovating it, listed it for $192,000 in spring 2014 — and received multiple offers. (I fact-checked his story by digging up the public-information records. See, who says journalism training doesn’t pay? :-) )

This tells me two things:

  • The underlying land is cheap …
  • … yet people want to live here.

That’s a perfect combination.

Why? Land is overhead. I don’t make money from the land; I make money from the building. The less I need to spend on the underlying lot, the more I can put into updating the cabinets / countertops / appliances. Cheap Land + Consumer Demand = Happy Investor.

Meanwhile, on the corporate builder/developer scene, this neighborhood just opened its first condo — “SkyLofts” — in a former abandoned Sears parking lot, and the units are selling quickly. Another +1 for the neighborhood, as it reflects growing demand.

Three Crucial Concepts About Real Estate Investing

Okay, so I’ve identified a neighborhood that’s (potentially) improving, and I’ve met other investors who are profiting nicely in this area. But why should I buy a house there? How does “Theory A” lead to “Conclusion B”?

Let me take a step back for a second, and quickly explain three critical concepts:

1) Risk is Tied to Reward

If you buy stocks, you carry more risk than someone who buys bonds. You also enjoy the potential for bigger rewards.

That’s simple enough, right? But it doesn’t end there. WITHIN the niche category of “U.S. stocks,” some investments are riskier/reward-ier than others.

A large company like Coca-Cola or Nike probably won’t collapse — but it also probably won’t experience double-digit growth. It’s low-risk, low-reward. Likewise, a tiny startup company might flop. Or it might become the next Tesla Motors. More risk, more (potential) reward.

Risk is tied to reward, both across categories as well as within categories.

Are you still with me? Okay, let’s apply this to rental properties:

An established neighborhood features:

  • Low turnover
  • Low vacancies
  • Stable values
  • Low-risk, low-reward.

An emerging neighborhood features:

  • High-turnover
  • High-vacancies
  • Volatile values
  • High-risk, high-reward.

And that leads us to the next point –

2) Judge Your “Risk-Adjusted Return”

Occasionally, I’ll get an email from a reader saying: “You’re only getting X percent returns? Ha! I get Y percent returns!”

But that information alone is meaningless. Investors need to judge reward in the context of risk.

The stock/bond market is an obvious example: Getting 10 percent returns from your Enron stock is different than getting 10 percent from a U.S. government bond — it’s not “the same” 10 percent. If you’re comparing two investments with different risk profiles, X does NOT equal X.

That’s why you need to understand investments within their risk framework.

In traditional stock-investing, this is referred to as “risk-adjusted return,” and analysts have devised all kinds of fancy algorithms to try to understand it.

You don’t need a finance degree, though — you just need to understand this broad concept, and apply it to your own personal choices.

And that brings us to our last point –

3) Diversify Your Holdings

If you have a 401k or IRA, you should split your money between some combination of U.S. stocks, international stocks, bonds, and cash.

I mean, duh. That’s basic.

The same applies to real estate investing. If you’re going to own a handful of rental properties, you should diversify enough so that you’ve spread your bets, but not so much that you lose track of what you’re doing.

For example: I specialize in residential rental properties in metro Atlanta. That’s niche.

  • I don’t flip houses.
  • I don’t own retail space, offices, warehouses or mobile home parks.
  • I don’t invest outside of metro Atlanta.

Am I missing out on plenty of great opportunities? Of course. But I can’t become an expert at everything, so I’ve narrowed my niche to a very specific property type and location.

I can’t do everything. So I do ONE thing, and I do it well.

However, WITHIN that niche, I diversify. My properties are located in across the city, in neighborhoods that range from “trendy” to “suburban,” from “established” to “emerging.”

Here’s a map of my property locations:

atlanta real estate investing map - click Display Images in your email to see this

Why This House?

Back to my original question: Why did I buy this house?

To diversify my holdings.

Most of my rental properties fall towards the conservative side of the risk-reward spectrum. I own properties in stable, well-established neighborhoods.

As a result, most of my properties (only) meet the One Percent Rule. They rarely exceed it. And they almost never double or triple it (with the exception of House #2).

But in the same way that an investor might put a small fraction of their portfolio in “frontier markets” like Ghana or Albania, I decided to put a small fraction of my portfolio into a “frontier neighborhood.”

And that leads us to House #5 / Rental Unit #7 –

  • Stats: 4-Bedroom, 1.5-Bath
  • Size: 1,625 square feet
  • Style: Suburban Ranch House
  • Condition: Good
  • Built: 1972

Last Sold: $140,000 in October 2009

Foreclosure or Short Sale?: Of course! Everything I buy is a foreclosure, short sale or distressed sale. (That’s where you snag the best deals, y’all!) This house was a short sale, just like House #1 (my first investment). Houses #2 and #4 were foreclosures, and House #3 was a distressed sale / motivated seller.

What did I pay for this?

  • Purchase Price: $46,000
  • Repairs Needed: $4,000 (nothing major — needs carpet and general small details)
  • “Total” Acquisition Cost: $50,000

What does that gross?

  • Rental Income: $800 – $1,000 per month
  • Does it Meet the One Percent Rule? Obviously. In fact, at the higher end of the projected rental income spectrum, it doubles the One Percent Rule (investors call this the “Two Percent Rule.”)

What does that net?

  • Mortgage: — (Paid-in-Cash)
  • Taxes: $67.41 per month ($809/year) based on 2013 tax records
  • Insurance: $58.33 per month ($700/year) estimated
  • Vacancy: $75 per month ($900/year) at 92 percent occupancy, $900/mo rent
  • Management: $90 per month ($1,080/year) at 10 percent fee, $900/mo rent
  • Repairs/Maintenance: $50 per month ($600/year) based on “one percent of purchase price” rule-of-thumb
  • Total Expenses: $340.74 per month

Cash Flow: $459.26 — $659.26 per month, or $5,511.12 — $7,911.12 per year

Cap Rate:

  • $5,511.12 / $50,000 = 11.02 percent
  • $7,911.12 / $50,000 = 15.82 percent

WTF does that mean?

In a nutshell:

  • The “cap rate” (the “return on investment”) is between 11 to 16 percent. WAHOO!!!!!!!
  • The “cash flow” (the $$ in my bank account) is $5,500 – $8,000 per year.

Another victory for the Financial Independence // Passive Income Brigade. This house offers uber-strong cash flow, a ridiculously awesome return, PLUS the potential for long-term equity gains (which is pure icing on the cake.)

Happy dance!!!!!

And with that …

FAQ’s:

Q: Is that literally the exact amount you’ll earn?

A: No, I’m not going to have precisely $600.00 in repairs annually, nor will I have exactly 92.00 percent occupancy. This is an educated estimate based on prior years’ tax records, current insurance rates, the maintenance history of my other properties, and an analysis of other rentals in the same neighborhood. In reality, real estate earnings will fluctuate every year — that’s why you should be prepared for a range. (Also, note that vacancy/management estimates are based on $900/mo rent.)

Q: How in the $%#&(&!@ did you pay cash for a house??

A: Will and I live on one person’s income, and save the other’s.

In 2012, we earned roughly the same amount, so we saved about 50 percent of our income. In 2013, my earnings outpaced his, which meant that we saved 77 percent of our income. My business continues to boom in 2014, and again, all of my income goes into savings (and taxes).

This goes back to the mantra I keep repeating on this blog: Mind the Gap between your income and spending. The more you earn, the easier it is to save.

Q: That’s all well-and-good that you can live on one person’s income (and therefore buy a house in cash), but that’s not realistic for most of us. Most of us NEED two incomes to survive.

A: First of all, that’s false. The median U.S. household has 2.5 people and 1.3 incomes, according to the Census Bureau. In other words: The median American lives on one income per two people.

If millions of people can do it, why can’t you? Don’t take that as an affront; embrace it as a challenge. :-)

Second of all, are you really “minding the gap?” Be honest with yourself. Are you really optimizing? Here’s what Will and I do:

  • We live with roommates.
  • We drive used cars.
  • We don’t buy fancy clothes / jewelry / furniture.
  • We don’t have cable TV.
  • We choose to live in cities that have a reasonable cost-of-living.
  • We either work-from-home (me) or live-close-to-work (him).
  • We “self-insure” (buy cheap insurance with a high deductible; keep a huge emergency fund).
  • We save tens of thousands on taxes by maxing out our 401k, IRA and HSA accounts.
  • We’ve both always, always, always had a side hustle. We’ve never had “just” one job.

So … lather, rinse, repeat, and you’ll eventually amass $50,000 in cash. Invest it, then re-invest the profits, and you’ll create a self-sustaining cycle.

Q: But I don’t want to buy a used car / cut my cable / live with roommates.

A: That’s a choice. You can afford anything, but not everything. You can choose to spend thousands buying a new car or keeping your guest room vacant — but that choice demands trade-offs.

Be deliberate about those trade-offs. Never confuse “I can’t” with “I choose not to.”

.

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56 Responses to “We Bought House #5. Here’s a Behind-the-Scenes Look — Including the Numbers.”

  1. Charlotte
    27. Jul, 2014 at 7:13 pm #

    Damn girl! You’re an absolute inspiration. It’s been so neat following your blog over the years from when you were starting out with your real estate side business to now…5 properties in!

    I would kill for housing prices like the ones you enjoy in Atlanta…Toronto’s housing market is beyond crazy.

    Also, I love the story about LB. So neat that you two are friends in real life!

    • Afford Anything
      28. Jul, 2014 at 2:10 am #

      @Charlotte — Thank you!! It’s been really fun sharing this journey with my readers … you’ve all seen me transition from a novice investor, buying her first house, to today … thank you so much for being part of that adventure! :-)

      And Lauren is awesome! I keep joking with her that we’re now “neighbors,” so to speak. :-)

  2. Jason Hull
    27. Jul, 2014 at 10:05 pm #

    Excellent work, Paula! Nice find! We close on properties 8 and 9 this week including our first duplex. Real estate investing is so much more fun when you buy with cash, isn’t it?

  3. Mike
    27. Jul, 2014 at 10:29 pm #

    Love what you’re doing and all the work you put in to make these posts! The only question I had was how do you typically identify potential properties? Are you using Trulia/Zillow or are there other methods that you typically rely on? I’m in the SF Bay Area so this probably isn’t for me right now :) but I’d love to just learn more in general about your process!

    • Afford Anything
      28. Jul, 2014 at 2:04 am #

      @Mike — After House #3, I decided to become a licensed real estate agent. This allows me to check the MLS (Multiple Listing Service) directly, without needing to go through an intermediary. In other words, I’m my own agent. :-)

      I found House #2 through an agent, and I found Houses #1 and #3 by literally seeing the “For Sale” sign in the yard (which is why it helps to start by choosing a neighborhood, then learning everything about that area — you’ll quickly know what houses are for sale.)

  4. Michelle
    27. Jul, 2014 at 11:07 pm #

    This is awesome. Good job! And, especially good job with buying the house in cash. $46,000 seems like a great price.

  5. Don
    27. Jul, 2014 at 11:13 pm #

    Congratulations on your due diligence and discipline paying off.

    Do you feel that by leaving so much equity in your home, your capital is becoming kind of stagnant? Have you thought about cashing out some equity to further expand your growing empire? I would think that leaving cash in a property puts it at risk in the event that something happens that is not covered by insurance.

    Thank You.

    • Afford Anything
      28. Jul, 2014 at 2:01 am #

      Great question, Don — Is it better to maximize your leverage (by borrowing), or to reduce your risk (by holding a bigger equity position)?

      I cover that in this article — http://affordanything.com/2014/04/10/showdown-keep-your-mortgage-vs-crush-your-mortgage-who-wins-the-championship/ — hopefully that’ll help shed some light on the question. :-)

      • Don
        29. Jul, 2014 at 7:06 pm #

        I read your other two articles and while I disagree with your conclusion, I enjoyed the excellent analysis of the pros and cons.

        However, I will argue one point with you. You say that by holding a bigger equity position you are reducing your risk. This is actually the opposite of what you are doing. By holding a large equity position, you are reducing the lender’s risk while increasing your own. You have now sunk your cash into an asset that could be destroyed tomorrow as opposed to keeping it in a federally insured financial institution. If for whatever reason your house lost 60% of its value tomorrow, would you rather have had $100k or $20k tied up in it? This argument can be expanded to protect against a lawsuit brought on by a tenant. If structured properly, most lawsuits could only go after the property itself.

        I can understand a person wanting to be free of a mortgage mainly for the emotional boost of confidence but to say that you are reducing your own risk is just wrong. Please let me know if I am missing something. Thanks.

        • Afford Anything
          30. Jul, 2014 at 2:00 pm #

          Hi Don,
          Thanks for reading — Those are excellent questions. :-) Here’s my take:

          1) “You’ve sunk cash into an asset that can be destroyed” — That’s what homeowner’s insurance is for. In the event of a fire/tornado/etc., my maximum loss would be the insurance deductible. I recommend insuring for the value of replacing the home, not just the purchase price.

          2) “If the house lost 60% of it’s value” — I’d rather be mortgage-free in this circumstance. If the house loses value, and you decide to sell, you’re “upside-down” on the loan. You’re stuck holding the house (against your desires), or you need to bring cash to the closing table, or you’re forced to “short-sell” the house, which tarnishes your credit. But if the house loses value and it’s paid-in-full, I retain the ability to sell the house anytime I want, without needing to bring cash to closing or process a short sale.

          Furthermore, as a rental property owner, I don’t care about the underlying value of the house. I only care about the monthly cash flow.

          3) “To protect against a lawsuit” — Holding a mortgage won’t shield you from a lawsuit. A tenant can still sue, regardless of whether or not you’re a debtor. The chief protection that you have against a lawsuit is:
          — Hold properties in an LLC or a Trust (if possible)
          — Buy an umbrella liability insurance policy
          — Use licensed, bonded and insured contractors
          — Use a licensed property manager (if you outsource this)

          If a tenant wins a lawsuit, the judgment is levied against you (as an individual or as an LLC) — not against the bank. You’re personally liable for paying any judgment that comes out of the suit. That’s why it’s critical to carry liability insurance.

          • Josh
            02. Aug, 2014 at 11:46 pm #

            Hello Paula,
            My wife and I love reading your blog! We have been reading a lot of books about real estate investing lately and definitely feel your strategy fits us best. Right now we feel we are ready to jump in, but have one thing holding us back. Any chance you could write an article about how to best set-up a LLC to protect your properties, and the steps you went through to actually get yours? I’m kind of thinking we need to setup a LLC before we buy a rental property, but maybe we can do it after and transfer the property to it? Please help enlighten us. Thanks!!
            -J & L

          • Ricky
            06. Aug, 2014 at 7:25 pm #

            So, in some ways, by ceasing to leverage it is as though you have traded your upside potential for peace of mind. You’re limiting what your returns / cash flow could be by the fact that you can’t get comfortable with your debt, no?

            I think that is perfectly reasonable and I would probably do much the same as you have.

  6. Rich
    28. Jul, 2014 at 1:20 am #

    Well done! Thanks for sharing your progress with all of us!

  7. Paul
    28. Jul, 2014 at 8:23 am #

    Congratulations. I found your blog from listening to an interview you did with the Mad Fientist and I really enjoy it. I have a question about your comment in the fourth picture of the kitchen. You mention you are going to be adding a dishwasher. Do you feel that this is a needed item? I admit I am a bit biased and don’t use the one I have because I grew up washing dishes by hand and prefer doing that to prewashing then putting them in the dishwasher to use more water. Anyway one of the older houses in my (very) small “rental empire” is hinting that they would like me to add one. I think they would even do it themselves if I gave permission. The thing is that I have always heard that dishwashers in rental units are a big headache and potential water damage point. What is your opinion on that?

    • Afford Anything
      28. Jul, 2014 at 9:27 am #

      @Paul – I grew up washing dishes by hand, as well, but I’ve come to realize that rentals need to be designed around what the aggregate consumer prefers, not about what you yourself prefer. (Here’s an article I wrote about that.)

      In my view, the cost of not having a dishwasher is higher potential vacancy and turnover. If I lose a single month of rental income due to lacking a dishwasher (e.g. if it takes longer to find a tenant, or if a tenant moves-out after 1 year instead of staying for 2-3 years) then I’d be better-served by having one.

  8. Michael
    28. Jul, 2014 at 9:35 am #

    Hi Paula,
    That property looks CLEAN!! Great find! Ill also add the investment property selfie on my next deal lol.
    Thanks

    Michael

  9. Nick
    28. Jul, 2014 at 9:36 am #

    Congrats Paula, way to go!

  10. Isabel
    28. Jul, 2014 at 9:54 am #

    Congratulations! Such a great, informative article! I would love, love to start investing in real estate but I live in San Francisco and even the surrounding suburbs and not as expensive areas are ridiculously priced at $500k and up. I really can’t find any properties that meet the 1% rule-any advice?

    • Afford Anything
      28. Jul, 2014 at 1:14 pm #

      Hi Isabel —

      Three tips:

      #1: Dedicate a significant amount of time scouting out the best deals (foreclosures, short sales, homes that are being sold at auction). You just need ONE super-undervalued property to make your personal numbers substantially better than the general average.

      #2: Look outside of San Francisco. Imagine a bunch of concentric circles on a map, with your hometown as the epicenter. If there’s nothing that meets the One Percent Rule in your hometown, expand your search to the next ring. Then the next one. And then the next one.

      For example:

      I lived in Boulder, Colorado for 8 years. I never found anything in Boulder that meets the One Percent Rule. But when I expand outward to a small city called Broomfield, Colo., I can find a few rentals that meet the One Percent Rule. And if I expand even further, out to Arvada, my options are a lot more plentiful.

      #3: Find out where the service-sector and lower-paid-professional workers live.

      San Fran has an airport. Where do the TSA officials live? Where do gate agents and baggage handlers live? Where do it’s entry-level police, fire, teachers live? What about restaurant managers? Bartenders? Retail employees? Interns? Students? Look in these neighborhoods.

  11. tammy
    28. Jul, 2014 at 11:21 am #

    Congrats. Looks like a good purchase. Just curious as why you don’t use a personal residence like a investment due to the capital gain rules. You could sell and move ever 2 years gain free.

  12. Julie @ The Family CEO
    28. Jul, 2014 at 11:52 am #

    So inspiring as usual, Paula. We decided long ago that owning rental houses isn’t for us, but every time I read one of your posts like this one I reconsider.

  13. Anne @ Money Propeller
    28. Jul, 2014 at 1:05 pm #

    Congratulations on the latest house!
    Every time you find one for prices like that, it blows my mind. I liked the assessment of the neighbourhoods, too. I knew that Lauren’s neighbourhood wasn’t the best, but now I am even more intrigued, after your reaction.

  14. Jules
    28. Jul, 2014 at 1:12 pm #

    Very nice house, but gorgeous cat! Is that the one that was on the Stacking Benjamins round table discussion?

    This is a wonderfully detailed post – thanks for sharing all the juicy details! Since this was a short sale, how long did you have to wait from the offer to closing? Was there any back and forth on the price?

    • Afford Anything
      28. Jul, 2014 at 1:20 pm #

      Haha, I was wondering how long it would take for someone to comment on the cat!! Yep, that’s the same cat that was clinking her collar against the food bowl during the Stacking Benjamins podcast. :-)

      Her name is Azra (a play on the word “azure,” for her blue eyes) and she just turned one.

      This particular short sale happened quickly — I made the offer in March, and we closed in July. In the past, however, other short sales have dragged for 6+ months or more, so if you’re going to get into the short-sale world, be ready to be patient.

      (Also, be aware that THIS could happen — http://affordanything.com/2013/04/16/the-last-house-i-didnt-buy/ )

      We had a little back-and-forth: I went under contract for the house at $42,000, but the bank retorted with $48,000, so I volleyed back with $46,000, and they accepted.

  15. Matt
    28. Jul, 2014 at 6:15 pm #

    You’re such an inspiration! I’ve been thinking of getting into real estate for the past two years and have looked a bit in a few select communities in my area. I’ve also come across a company in my area that is primarily a property management company. They buy homes, fix them up, then resell them to investors with rental guarantees and cash flow estimates. Do you have any thoughts on these types of deals? As someone who isn’t real handy, they sound enticing.

    • Janet
      28. Aug, 2014 at 3:09 pm #

      Hi Matt — Sorry this reply is a month late, but I just found Afford Anything (Thanks Paula — great blog!). I remember reading a thread on Mister Money Mustache where people were posting about services like that, and the general feeling was that it’s very easy to get taken advantage of with those types of offers. Some of the pitfalls include sub-par rehabbing of properties, overestimated cash flow due to underestimated expenses, inflated rental rates which can’t be duplicated with subsequent tenants, and the probability that you’re purchasing the property for at least full retail instead of getting any sort of “deal”. Caveat Emptor! As far as not being particularly handy, neither am I; but I do go to the trouble of getting recommendations for handymen, etc. when work needs to be done. Keep in mind that you’ll still make mistakes, but that’s part of the learning curve. Just try to make as few as possible :-) and remember that, in the long run, the mistakes you (or your handypeople) do make along that learning curve are part of the cost of doing business. Good Luck!

  16. dEBI
    29. Jul, 2014 at 10:49 am #

    Never confuse “I can’t” with “I choose not to.” So simple, yet so hard for so many to understand!

  17. Chanté
    29. Jul, 2014 at 2:01 pm #

    Mad props to you…as always! I knew it wouldn’t be too long before there was another addition to your empire.

    Keep up the great work. You are an inspiration to a lot of us; even if my goal is NOT to be a landlord, I do see benefits in some sort of real estate investing and hope to make my mark by 2016.

    p.s. Yes, Azra is beautiful :)

  18. RentalRandy
    31. Jul, 2014 at 8:59 am #

    Congratulations. I found your blog recently and have greatly enjoyed it. I have two rental properties myself, and am in a group that owns two retail/office buildings (12 units total) and four rental houses.

    The investment homes I own myself are very much like the one you just purchased. I focus on very inexpensive houses areas of town many people don’t even consider driving through, much less investing in. Their mistake, because it works for me. My two houses have a cap rate of 20% and 14.3%.

    If I had the money, I would buy four more homes in the next month. The properties are there. As it is, finances will limit me to one by the end of the year. If things go right, maybe 2015 will be the first year I buy two properties.

    Last thing before I ramble out of control. People are hopelessly lost when they say I’m “lucky” to be on this path. As you said, getting her required planning, sacrifice, effort, risk, and fortitude. Luck, was probably the sixth, seventh, or eigth thing on the list.

    • Afford Anything
      31. Jul, 2014 at 10:38 am #

      Hi Randy —
      Congratulations on your rental properties, as well! I love your last paragraph — “People are hopelessly lost when they say I’m “lucky” to be on this path.” That is so, so, so true. The people who think it’s a function of luck — they don’t get it, and many of them are just trying to make excuses for their own lack of progress.

      I’m lucky to live in a first-world nation like the U.S., I’m lucky to be in good health, and I’m lucky to live in the 21st century. I’ll totally attribute “luck” to those three factors. But when people tell me that I’m lucky … they’re not referring to those three factors. They themselves are also healthy people living in America.

      One thing I love about Afford Anything is that on this website, you’ll find a community of people who “get it.” People who know that hard work results in success. Who know the difference between “I can’t” vs. “I choose not to” — and conversely, “I can” and “I choose to.”

      Thanks for joining. :-)

      – Paula

  19. RentalRandy
    31. Jul, 2014 at 9:00 am #

    Typos, UGH!

  20. Blaire
    31. Jul, 2014 at 11:02 am #

    Here’s the question I have…what about families with kids? I didn’t see anything mentioned about kids in your post. We are a family of four (two adults and two kids— more in the future) on one income. We don’t have people live with us simply because there’s no space. We have a two bedroom townhouse. We have cut all other things you mentioned (no cable etc.) so how are we to achieve what you talk about? Live on half the income for four people and save the other half? It may just come down to different strokes for different folks, but in my opinion kids are more important than lots of money. We save where we can (consignment clothes, no cable, one car, I stay home with the kids so no daycare cost, etc.) but I’d like for you to speak to families like ours. What ideas do you have for us? My hubby already works 10 hr shifts so a second job for him is not realistic or he will never see his family. I stay home with the kids so we don’t pay for daycare (and bc I love being with them). I have a little side job but it doesn’t bring it tons and I can’t work much because I have my children to watch. Any suggestions?

    • Afford Anything
      31. Jul, 2014 at 12:26 pm #

      Hi Blaire —
      Thanks for reading, and great question.

      First, focus on ways that you can cut back expenses further. You mentioned that there’s no space to rent out a room — but is that really true? Can the kids move into your room? My cousin, her husband and their elementary-school-aged son all shared the same bedroom in Queens, New York when they immigrated to the U.S., and they rented out the second bedroom. (This is very common among immigrant families who are trying to get a foothold in America.) My cousin used the proceeds from this (plus other income) to get a cosmetology license and open up a small beauty studio near New York University, and after a few years, her practice grew and she started hiring employees.

      What about food — how can you cut back your grocery budget? Can you cut meat from your diet? (Beans/lentils are nutritious and much cheaper than eating beef or pork). When did you last comparison-shop for insurance quotes? Have you refinanced your mortgage into a lower rate? Do you pay to get haircuts, or do you cut your own hair? Are your lightbulbs incandescent, or CFLs? Do you run the A/C during the summertime, or use fans and drink water?

      There are always more ways to cut back. You need very little money for bare-bones survival. Every dollar that you spend after “survival” is a choice. And it’s fine to make that choice — as long as you recognize that every choice comes with trade-offs.

      Secondly, let’s focus on boosting your income. You mentioned that you have a side job but it doesn’t bring in tons of money, so let’s brainstorm ways to turbocharge that. Can you watch other children during the day (while you’re also watching your own?) Can you walk dogs in the neighborhood (and bring your children along?) Mow grass? Shovel snow? Can you learn basic programming or design skills, and work online while the kids are asleep?

      Finally, focus on making small, incremental changes. Let’s say that you currently save 10 percent of your income. You won’t jump from 10 percent to 50 percent overnight … but you CAN jump from 10 percent to 12 percent. And then transition from 12 percent to 15 percent. And then from 15 percent to 18 percent. The more you incorporate these changes into your daily lifestyle, the easier that transition will become.

    • RentalRandy
      01. Aug, 2014 at 8:09 am #

      Blaire,
      I have three children and did not buy my first income property until after my youngest was born. My wife does not share my drive to prepare for our future, which means she does not contribute financially to this cause. I pay the majority of the family bills and I do not have a high paying job. Still, I managed to save enough to get my first property. It took two years of saving every dime (literally) I could.

      I have an unconventional life and job and work odd hours so I could be a stay-at-home Dad and primary caregiver for our children. It means I have to live off 4-6 hours of sleep a night and be a walking zombie some days, but that’s okay. I did it primarily so our kids would have a parent looking after them and not a day care employee, but I can’t lie and say the money saved wasn’t a small part of that choice.

      You have to start. Just start.

      One year, I decided to open a Rental House savings account at my bank. I started with about $25. Every chance I got, I deposited money in that account. Tax return? (having a mortgage and three kids helps there) Straight into the Rental House account. Xmas Gift money? Sorry kids and wife, but no big ticket gifts this year or the next. That money’s going straight into the Rental Home account. Friends want to meet at the local bar/restaurant and have fun? Sorry guys, I can’t go out until I buy an investment property. That’s $30 into the Rental House account.

      I didn’t choose to buy a home that was outside my budget — say, the type of home/neighborhood you or I might choose to raise our children. That would be setting myself up for failure. Besides, it offers a sort of built-in excuse for not accomplishing my goal. I chose a price point that worked for me, went to the real estate websites, and searched for properties I could afford.

      Then, after I’d saved a few thousand dollars, I went to my bank and asked how much money they would loan me. Remember, I don’t make a ton of money. I was disappointed when the bank offered $10,000 less than I wanted. No problem. I lowered my Rental House budget and kept searching. I found a property that needed a little bit of repair. Between the money I’d saved and the bank loan, I bought the property, fixed it up, and had it rented in two months.

      I don’t view the rental income as “income”. It all goes to paying down the debt. The sooner I pay it down, the sooner I can buy more properties. Both my homes are owned free and clear, though I have a few thousand to pay back on a line of credit I used to help fix the second property. Also, I have a bank lined up to provide a HELOC on one of my rental houses. I will use that money (and some of my own savings) to buy my next property.

      It can be done. You just have to start. Now. You don’t need a detailed plan initially. Just start saving. Now.

  21. Timothie
    02. Aug, 2014 at 1:36 pm #

    House #5? That’s pretty friggin insane. You seem to be doing well. I guess we all have our preferred investment vehicles. While you prefer real estate, I prefer equities and commodities.

  22. Chance
    06. Aug, 2014 at 2:01 am #

    So here is my scenario…

    I have a rental property that I will have paid off by next March. I will be broke, but it will be paid off. I will then get the $850 a month free and clear off that property minus taxes and insurance along with the money I make off of my regular paying job.

    Should I save up 20% and throw it down on another property immediately, or should I save up until I have enough cash to pay for another property outright. I figure I can grow faster by taking out another mortgage immediately but I will be in debt. Or I can take longer and just pay cash for my next investment…If I pay cash it will take longer to grow my empire but I feel it will be more secure as opposed to having a bunch of debt.

    What do you recommend?

  23. Chelsea_Gerrard
    09. Aug, 2014 at 7:06 am #

    You are such an extreme case; either its your way or a complete noway :D First, the house is fantastic and there is no doubt about it. Second, your research, knowledge and calculations are flawless. Third, I am totally in love with your confidence :) And finally, congratulations for the fabulous achievement.. I loved reading this post!

  24. Steve
    09. Aug, 2014 at 9:09 pm #

    Can’t believe I’ve only just found Afford Anything: amazing! Always love to see how people manage RE portfolios. I’m more of a stock guy so I think the closest interest to RE as an investment I’d get is through REITs. But the fundamental/core concepts of your philosophy are the same as mine. Will be around regularly! Thanks for the great read!

  25. Kayla @ Red Debted Stepchild
    10. Aug, 2014 at 11:06 am #

    Great article! I love that you explain not only what you bought, but why and how to evalute rate or return and risk associated with the purchase.

  26. Emma @ Life. By Emma
    11. Aug, 2014 at 9:24 am #

    I have just found your blog and love it. I totally get the fun and addictive-ness of buying rental property. We got up to six there a few years ago before tectonic forces had their way during the earthquakes in New Zealand in 2011 and destroyed two of them beyond repair – thankfully we had full insurance and walked away with cash in hand however I’ll always the lament the loss of future income and capital gains.
    I’m so jealous of the prices you can get in the USA, that would definitely make income property more enticing. We can’t really buy anything near a centre of employment for under 200K NZD (170K USD) so can only purchase one property every two years, but still I love scouting websites and talking to agents all the time. I consider it my hobby!

  27. Andrew@LivingRichCheaply
    14. Aug, 2014 at 11:10 am #

    Really enjoy reading your blog, and have been reading through the older posts! I’m especially interested in rental properties recently so I’ve been going through those archives. My wife and I live in NYC…yes we’ve chosen to live in an expensive area (our families/friends are here), but we try our best to mind our gap! P.S:
    I really love: “Be deliberate about those trade-offs. Never confuse “I can’t” with “I choose not to.”
    So very very true…I see many people confuse the two.

  28. Kalen @ MoneyMiniBlog
    15. Aug, 2014 at 9:43 am #

    Wow, I’ve read your blog before, but I didn’t realize your were this into rental properties. My wife and I have one and we want many more. Your plan is basically the plan we already follow. We buy homes, live in them, then turn them into rental property. It’s great for the tax benefits, but it’s also great for when we finance the home. We get a residential rate, instead of an investment rate. We prefer to pay cash for everything though, including real estate. Your an inspiration that my wife and I can own even more properties. I am adding you blog to my RSS reader. I’m sure I will include you on some link roundups in the future! :)

    • Afford Anything
      19. Aug, 2014 at 7:49 am #

      @Kalen — Congrats on your first rental property! I know a very successful couple that follows your same strategy: they buy a house (getting the owner-occupant interest rate), live there for 1 or 2 years while saving for their next down payment, and then rent out the house to buy another one.

      The “key,” of course, is that when they shop for a house, they run all the formulas (Cap Rate, One Percent Rule, Cash-on-Cash Return) so that they buy the best rental property … even if it’s not the type of house that they personally would prefer. In other words, they might trade-off having a deck or a 3rd bedroom, for example, for the sake of choosing the best investment.

      And if you really think about it, that’s a worthwhile trade-off. “You can either have high ceilings … or an extra $400 per month in passive income for the next 15 years until the mortgage is paid-in-full, followed by $1,000 per month in passive income for the rest of your life.” It’s practically a no-brainer.

      So I applaud your decision … I think you and your wife have found an awesome way to invest. :-)

  29. Nadia B
    20. Aug, 2014 at 10:46 pm #

    Hi there, been reading your blog a while and loving it! Yet another amazing RE transaction!
    I have been thinking to add rentals to our passive income as well. We have a few properties in the country where we are originally from, but have not dipped out feet into US rentals yet. In our area (Raleigh, NC), there are very few single family homes that fit One Percent Rule, but definitely some townhomes/condos that fit the rule. What is your take on TH rental investments?

    • Afford Anything
      21. Aug, 2014 at 12:27 pm #

      @Nadia — The biggest problem with townhomes/condos is that they’re governed by HOAs, which often have restrictive policies. Your unit may or may be not on the “approved” rental list, and they can yank your approval designation at anytime. In other words, your decision-making power is not your own … another entity has the final say over whether or not you’re allowed to use the space as a rental.

      If you DO choose the townhouse/condo route, be 110 percent certain that the unit you purchase is officially approved to be used as a rental. Look at the HOA’s financials to make sure they’re not in arrears, and verify that they have solid reserves.

      A better alternative, though, is to buy a duplex/triplex/4-plex. Many single-family homes won’t meet the 1 Percent Rule, but subdivide that house into a duplex or triplex, and voila — now you’ve got something that meets the 1 Percent Rule with flying colors.

  30. Leeanne O
    22. Aug, 2014 at 6:24 pm #

    We have been doing exactly what you are doing for 15 years now and though the passive income is good, I am getting out of the rental business b/c I am tired of dealing with frustrating tenants and house repairs. We don’t hire a Property Mgt b/c I don’t want to pay them 10% and lose the income. Also, I would recommend buying home warranties for all your properties. They have paid for themselves many times over, esp if you have an older home.

    • Afford Anything
      24. Aug, 2014 at 10:52 pm #

      @Leeanne — I highly recommend hiring a property manager. It’s better to collect 90% of the gross income than to collect 0%, and if you get out of the rental game, you’ll collect 0%.

      In my view, hiring a property manager is no different than — say — hiring an employee for your small business. Let’s say you own a bakery, or a hardware store, or a consulting firm. You could hire someone(s), at the cost of 10 percent of your gross revenue, and that new hire could take a BUNCH of the workload off your hands. This frees you to either grow the business or spend more time with your family. Wouldn’t you do that? Of course. Almost everyone would — that’s why businesses have employees. So why should investing in rentals be treated any differently?

      In fact, property managers are even better than traditional employees because they don’t require training (they’ve already gone through a rigorous certification process), AND they help spread out some of the liability issues (Fair Housing Act, etc.) Hiring property managers and contractors — and overall being diligent about outsourcing — is one of the best choices I’ve made in the past few years.

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