For as long as I can remember I have wanted to own multiple rental properties. Having created thousands of balance sheets and retirement runs over the past decade and a half there seems to be no more straightforward way to build one’s wealth, or provide for a successful retirement, then with rental real estate.
Why I Want to Own Rental Properties
As part of my current position over the past 15 or so years, I have reviewed thousands (if not more) balance sheets, and the higher net worth individuals almost always own either a business or real estate other than their main residence, and for the most part usually both.
There are a couple of major benefits, that get me really excited when it comes to rental real estate as an investment:
- There is almost always built-in, but conservative, leverage with a mortgage allowing you to start building this asset class with a lower upfront cost. That leverage is often fixed which leads us to the second benefit
- While a large part of your expenses are fixed, your income is often indexed to inflation, as rents in good neighborhoods tend to increase over the long term.
- While those two things (expenses and income) are working themselves out the ownership of property is a lot more passive than running a business.
It should go without saying, but I feel the need to say it anyway, the above pros of real estate are only available if the deal is properly structured. Similarly, I think I used enough qualifying words in those three bullet points to highlight the fact that none of them are absolute, expenses can be, and are in fact often variable (taxes go up, roof repairs, major issues), rental income can go down, and can even plummet to zero in those months were you have no one renting, and lastly, if any of the previous items cause you an issue the ownership thereof will no longer be passive!
How I Came to Own my Rental Property
I have blog posts from my old site that put me at looking at rental properties for about 10 years without ever actually pulling the trigger. I think the main problem is that I live in a ridiculously high cost part of the country, so to get into real estate here comes with a lot of capital/risk. So how did I end up owning a rental property if not by the usual means of finding one on the market and then buying it?
The Wife and I bought our first home, a town house that had a ton of restrictions including sale price and rental ability, in 2007…right before the biggest real estate collapse in a generation. However, since this property was purchased so far under fair market value pursuant to a program to keep young professionals on Long Island, I actually made money when we sold in late 2012. We rolled that equity plus additional money saved into a $485,000 home in our current town.
Then in early 2018 after some number crunching with The Wife (I calculated she listened and agreed), we figured that if we took the equity from the house and a few bucks of liquid cash that we had, we’d be able to upgrade our house significantly without affecting our monthly nut all that much. As the saying goes, “Man Plans and God Laughs.”
We listed our house at $625,000 after a few realtors said that would be no problem. At the same time we were searching for our new home. As is the case with most people, found a few houses, put bids in, failed to close a deal, and then our new home presented itself to us through my son’s best friend’s mother – she knew the owners wanted to move but didn’t put the house on the market. We jumped, but at the same time the realtor kept asking me to lower my price. It was at this point that I said to her, “at some price point I don’t need to pay you 4%!”
I think The Wife then saw my blood pressure and overall stress level climbing to a level where I could say fuck all of this, and I believe it was her that came up with the idea to rent it out!
The Numbers Behind My Rental Property
I currently have a fantastic tenant. Since moving in she has paid her rent early, every single month, while painting the entire inside of the house and upgraded some of the flooring. She is recently divorced with 3 boys, and wants to stay in our school district. Let’s talk some real numbers:
- Her rent started at $3,500 but increased to $3,550 in August of 2020;
- Mortgage (principal and interest), homeowner’s insurance and taxes come out to about $3,200; and
- HELOC Interest only payment comes out to about $250.
This leaves us with a few bucks every month which is either used to pay me back for miscellaneous costs or plowed back into slowly paying back the HELOC.
One day I am going to be excited to turn on the income stream, however, given the small gap between debt repayment and income it just doesn’t do a lot for me. Notwithstanding, the current lack of cash flow watching my tenant pay down my mortgage month in and month out has been amazing! As stated, I bought this house in 2013 so I am 7 years into a 30 year fixed mortgage. Every time she pays the debt my net worth goes up, even if the house value stays flat.
My Future Real Estate Ventures
I can’t see anything on the near term horizon – with this part of my life satisfied I haven’t been actively looking, nor have I had a lot of conversations with friends recently since a good portion of my net worth is already tied up in the current place. Notwithstanding, I am very open to future deals. The problem is that where I leave there are no small deals, especially since COVID hit and people are running from New York City to the suburbs.
When any future deals come my way I will highlight the details here as I work through them.