Time to talk about houses! I answer your questions about rental property investing in this week’s episode.
Our first question comes from James, age 25. He lives in Florida, where he bought a $130,000, 3-bedroom, 2-bath condominium in the Class B range as his primary residence. He’d like to buy a second home and rent out his current home.
He has $4,000 in cash and is eligible to take out $5,000 as a home equity line of credit. He makes $41,000 per year, after taxes. He’d like to buy one property a year.
What funding options can he look into? If he had good credit, can he bypass the downpayment wall? What general advice would I offer to someone in his situation?
Here’s a short summary of what I tell James:
- Keep a personal emergency fund.
- Keep cash reserves for your rental. If your condo rents for $1,300 per month, you’ll want at least 3 months’ gross rent in reserves, or $3,900.
- Look into FHA loans, which require only 3.5 percent down.
- Wait until the HELOC can get you at least $10,000 to $15,000. Ideally you’ll also want a little extra on the side for closing costs and other unexpected costs.
- Think of ‘one house a year’ as general guideline rather than die-hard order. The more properties you purchase, the faster you can buy properties, because you can reinvest the cash flow from your existing properties. Your growth will be slowest in beginning and gets faster as you move along.
The next question comes from Berlinda. She works in a job she loves, with a great company, chill manager and fantastic team. She’s signed a two-year contract, and she’s six months into that term.
She lives in metropolitan Chicago, but her boyfriend lives in New York. She’s concerned that if she moves there, she might not find a job that she loves quite as much.
She bought a duplex, and now owns a total of three rental units. She needs to upgrade these units. She projects that she’ll need 14 rental units before she can live on the income. How can she scale her rental properties to the point at which she can live on their income?
The third question comes from Katie from Mississippi. She started reading the Afford Anything blog in 2015, after she bought her first rental property. She now owns two rentals. She bought the first for $77,000 (purchase + initial repairs) and it rents for $975, and the other for $80,000 (purchase + initial repairs) and it rents for $900. After the PITI mortgage, they collect $603 per month, or $7,236 per year. Their operating expenses have consumed this amount, and in some years their operating costs exceed their income. What’s going wrong?
The final question comes from Ben. He and a business partner owns a multiunit rental property, which they purchased two years ago. His business partner lives in one of the three units; the total income is $2200 from two of the three units (plus the partner lives in one unit for free). Their mortgage is $1,475, plus $120 for insurance.
Ben would like to get out of the deal, but he’s not sure how. He’d like to refinance the property to get his name off the mortgage, either by selling his share to his business partner or by finding another partner to replace him within the deal. What should we do?
I answer these four questions in today’s episode. Enjoy!
P.S. Need software to manage your rental properties? Collect applications, screen tenants, and collect rent online with Cozy.co/Paula.
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