Jumping into real estate was one of the best decisions I made, but at the time I had no idea how well it would work out for me. It turns out that taking risks and being naive can sometimes work out. When I was just 23 years old I decided to purchase my first property, a duplex that totaled 3,000 square feet. It was a short sale and the asking price was $150,000.
I initially ended up offering around $140,000 just to see what they would counter at. To be honest, the purchase price didn’t really matter to me, I had saved aggressively and was sitting on a pile of cash (This was before I learned about index investing and began maxing out my 401k – I was saving just to save). At the time, I knew nothing about evaluating real estate deals. After seeing many properties, this was the first one that I actually liked so my emotions definitely played a role here.
After putting in my offer, my real estate agent notified me that there was an all cash competing offer on the table for full asking price. Disappointed, I asked what my options were. Since it seemed like a good deal (again, my naive self thinking) I asked whether I could offer just $1,000 over asking. ($151,000) My agent stated that although it was unlikely I’d get the property that it was worth a shot and he’d put the offer together.
Shockingly, my plan worked and I was surprised to hear they had accepted my offer! I was a real estate investor! Let’s get to the numbers:
Duplex (1,500 Sq Ft, 3 bed/2 bath, 2 car garage per side)
- Purchase price: $151,000
- Rent at purchase: $875 per side
- Current rent: $885 per side
- Principal, Interest, Taxes and Insurance payment: $954.31
- Real estate taxes: $4,001.88 (Ouch!)
- 30 year fixed at 3.75%
My second rental property purchase came several years after. I had grown sick of my current position and was thinking that another rental property might allow me to work part time, leaving free time for other projects. Little did I know that my career would take a drastic turn shortly after agreeing to purchase this house. This property was a different animal and I was nervous to go down the rental spectrum so to speak and I learned quickly about the importance of picking quality tenants. I also wasn’t willing to take out another large mortgage like I had done in the past. The numbers worked well and I fought through initial issues with tenants.
Small Single Family (~1,000 Sq Ft, 2 bed/1 bath)
- Purchase price: 52,500
- Rent at purchase: $700
- Current rent: $750
- Mortgage payment: $310.67
- Insurance: ~$400
- Taxes: ~$1,700
- 15 year fixed at 4.00%
There you have it, my small, but easily manageable real estate empire that has served me well. Probably the biggest benefit is that the rent covers mortgage payments on the respective properties, but also pays mine. Cash flow is one of the most amazing things about rental properties.
This post is up to date as of February 2016.