It started in October 2010. I had just moved to Atlanta and didn’t know a thing about the city.
I picked a neighborhood at random – eeny-meeny-miney-moe – and rented the first listing on Craigslist. I struck gold.
I moved 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.
I immediately thought: This neighborhood rocks. There’s strong rental demand from young professionals with great credit. So I started looking at real estate prices.
OUCH! They were astronomical. We’re talking $650,000 for a 2,000 sq.-ft. home. Yeech.
But I don’t give up. I get creative.
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.
I checked the price of the 3-unit building in which I rented. The landlord purchased the building in 2004 for $323,000. His monthly gross rental income is approximately $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 me – is $300 per month (last month he paid $320). Trash is $100 a month ($33 per month per unit). Insurance comes to $250 a month. In other words: his baseline expenses are $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 holds this because he hopes (he speculates, he gambles) the building will rise in value.
BAD IDEA!!!!!!!
No matter how nice the neighborhood is, I’m dead-set against buying a negative cash flow property, for two reasons:
1) It’s a gamble. Housing prices can rise OR fall.
2) The “cap rate” (a measure of return-on-investment) is nonexistent on a negative-cash-flow property. And I’m into making math-based decisions.
3) There’s 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. (If your properties put cash in your pocket each month, then the more you buy, the more you can keep buying. The rich get richer.)
(Note: Don’t get angry that the rich get richer. Put yourself that same position.)
So I 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 astronomically higher than the rents they fetch.
I searched high and low. Nothing in that neighborhood could create positive cash flow and a solid cap rate. I almost gave up.
And then I discovered the house nobody 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 I cobbled together the funds to make the deal sail through.
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This has nothing to do with your rental property, but… I’m from St. Louis and I’m happy you’re there. If you need any advice on things to do or eat (ST. LOUIS STYLE PIZZA!!!) you know where to find me.
Very cool. I’ve just purchased my first REI as well. Looking forward to the next posts in this series to see how it plays out.
Great stuff Paula. I think a lot of people assume real estate investing is easy. You’ve already done a good job at pointing out some of the quirks – looking forward to the next two parts.
Great tease! Can’t wait to read Wednesday’s article, even though I know the story. 🙂
Love this and love reading about your adventures!!
Buying income property is a research project. I particularly enjoyed the search and negotiation portions. The owning portion is okay, but not as much fun.
congratulations on your first win, and may there be many more to come. value real estate investing is one of my favorite ways to generate passive income and long term equity over time as well. leverage helps tremendously, a a solid balance sheet and FICO helps gain that leverage. the other component is discretionary cash ready for investment.
@Sunil — Discretionary cash is huge. If I had more of it, I’d be snapping up properties left and right! Right now my goal is to buy one new property every 1-2 years. Can I do it? We’ll see … 🙂
Great post Paula!
We view real estate similarly. Without positive cash flow, it’s a gamble. With positive cash flow, it’s a gem! Capital appreciation is icing on the cake.
Looking forward to the post you’ve promised to write about the blogging convention. I can’t help but think of pointy eared Vulcans and Captain Picard when I think about a blogging convention, so I’m pretty curious.
@Andrew — Apparently we were next door to a Star Trek convention, the last one that Leonard Nimoy would ever attend. Several people mused about whether they should skip the blog convention and just go next door …
Ah, and my “blog convention” post — which sort of took a different track — is here: http://afford-anything.com/2011/10/03/the-entrepreneur-mindset/
Kidding aside, I think I would love a blogging convention! I heard that you met the Ninja!
@Andrew — I DID meet the acclaimed Ninja! We missed you …. maybe I should lobby for the next blogging conference to be in Singapore!
I am excited to hear the rest! I am interested in rental real estate just not where I want to be before I put that on the priority list…
@Evan — The next installment of the story is up! http://afford-anything.com/2011/10/19/my-rotting-home-weird-adventures-in-real-estate/
You and your wife are welcome to see the house on your next trip south to watch a Falcons game! 🙂
Yes yes, hope it’s a fixer That’s a great way to create value. good luck, i like how you think!
@Barb — Thanks!! 🙂 It’s a fun new adventure!!
Ahh, but I want to live in that neighborhood so badly! 🙂
Just found out this morning that a unit I thought would be available in April won’t be available ’til the end of July, and I’m having a hard time finsing anything else advertised on craigslist.
When I was doing my (now abandoned) home search, I was all over the Grant Park area instead – I like the park more – more shade, fewer people, but people still think that it’s “dangerous” there.
That was an impressive post and Real Estate is been an awesome business if you invest your time and your interest. And I do just loved to be a dealer rather than a builder or retailer.
I love your writings. They are insightful yet humorous. Thank you!! post more!
Thank you Natalie!
Hey Paula,
I like reading a lot of your stories – you definitely inspire a can-do attitude.
What is your recommendation on getting into a highly priced market? I live in North NJ NYC area, and while single family homes run anywhere from 325k up to 900k for a 2 or 3 br, I’m still hard pressed to find multi units under 500k that don’t need 150k+ work. It seems that most established landlords and builders are sharks when it comes to finding these places. Occasionally one pops up and it’s gone in a day.
Do you have any experience with purchasing/owning outside of your area?
To make a small correction, cap rates or capitalization rates refer to the rate of return on the property. It does not take into account cashflow after interest and amortization. So the multifamily unit you are talking about does in fact have a positive cap rate, it is just not more positive then the cost of money borrowed against it. Cap rate=gross rents-minus matinence and costs-estimated vacancy. The mortgage payment is excluded from this.
Great article! I love your positive attitude and how you keep on keeping on. Thanks for sharing!
Hello, newbie here be kind.
How did you come up with “Assuming our landlord put 20 percent down and has a 5 percent interest rate, his monthly mortgage would be $1,725 per month.” I put the factors into a mortgage calculator and came up with a different number.