Residential Rental Real Estate Investing: My Start – Everyone has to get started somewhere. This is where I got my start in residential rental real estate investing.
Residential Rental Real Estate Investing – My Backstory:
In March of 2016, I got the bug to start looking into real estate investing. I am and was always looking for new and more creative ways to make money. I was working at my hospital job full time and operating the Custom Shift Knob business in my spare time. It was okay, but I wanted to make passive income every month.
My father had invested in real estate around the year 2000 to about 2008. He had two town homes in my parent’s development that he bought and rented. Due to the rapid rise in home values in that time, he did very well when he sold them (he also did well renting them out too!). I grew up around this real estate business and learned some benefits when I was younger.
Deciding to start:
For some reason, I decided it was time to start – so I did. The first piece of the puzzle was education. I enjoy reading but with a hectic work schedule and part-time business – there wasn’t much time that I could sit and read a book. Looking for a different direction, I decided to try out podcasts. In the real estate genre, one of the first one’s I found a podcast called BiggerPockets that was exclusively about real estate investment and began to compulsively listen to every episode.
In a few months, I managed to go through the 150 or so episodes that were available. I learned volumes of information on analyzing deals, common issues with rental properties, how to find and vet tenants, etc. I felt that I was now ready to begin looking.
One day, I was speaking with my parents on the phone. I was discussing my real estate aims with my father, who suggested that we could partner up so I could learn from him. Little did I know that this was the beginning of my new business partnership/family business.
The accidental mentor:
I began to look for potential deals. After spending months coming up with dead ends (and going through 3 realtors), I finally found a combination that works. The Realtor that was helping me at the time (and who became my current Realtor) took the unorthodox approach of suggesting that her father (who was very experienced in commercial, multi-family and real estate investing) help me narrow down my search and help me find a property.
I came to him with a list of properties and he immediately threw out 80% of them. He gave me a property to focus on, which is the property I (we) eventually purchased as the first rental property.
Residential Rental Real Estate Investing: The Property
Pardon the terrible shot, but zooming out wouldn’t have made it much better.
At the time, I was living further south in NJ. I wanted a property that was close to my current house. There were other terms I desired like the house had to be: built after the 1970s, no oil heat/oil tank, etc. I found one of these properties and it was 3 miles from my personal residence at the time. It was a single family town home. Not exactly what I had been shooting for (I really wanted a multi-family property) but it was a start.
The property itself was 3 bed, 2.5 bath town home. Rental comps for the property in that are were anywhere between $1350 to $1475. After running an analysis on the property (with my wonderful biggerpockets rental calculator), I got a stronger picture of what the financials would look like.
The owner was asking for $159,000. The property had been on the market for quite some time and wasn’t moving. The pictures they had looked great but that all changed once you looked at the house. This house was a disaster. It was messy, things were broken, there were holes in the wall. It was… perfect!
My agent suggested we send them an enticing offer to take any other potential investors/buyers off the table. We offered them $150,000 – and then quickly settled at $152,000 contingent on inspection. Not ground breaking, but helpful.
We learned more about the seller’s situation, which I believe is critical to understanding a deal. The seller was distressed. He had two homes, was recently divorced and deep in credit card debt. He worked 1.5 hours from this house and needed to get out from under it to improve his finances and life.
The inspection and closing
Following the recommendations of my Realtor, we used his preferred property inspector. The inspector found numerous issues: a non-functioning A/C, a heater that was barely working – along with all the other cosmetic problems (carpet, paint, etc).
We decided to embark on a strategy my agent called “taking a second bite of the apple”. Meaning – once the inspection was in and there was more information – it would be logical to renegotiate. Being a little brazen, we asked the seller to repair all the issues. To our surpise – he agreed! My Realtor and I were stunned.
Repairs were completed and we inspected everything prior to closing. It was all done and checked out. Closing was interesting – the title company had a slight miscalculation on the first attempt at closing. Basically, there was a $6,500 lein on the property that no one knew anything about. Closing had to be rescheduled until that was resolved.
Closing attempt number two was successful, mostly. The seller did have to run to the bank because he was $20 short for one of the closing items but other than – the house was ours!
The house was rough. There were holes in the wall all over, numerous things that were damaged, tons of deferred maintenance. It needed some serious TLC.
The majority of the work was cosmetic: paint and flooring.
This was the “fun” part, if you like hard work as fun. I’ll share with you the following pictures on the evolution of this property:
Most of the rehab was fairly straightforward. Paint, clean up and then flooring. There were plenty of other unforeseen items like repairing the gas line leaks that were missed on the home inspection ($1500 later…).
Residential Rental Real Estate Investing: The finished product
Total repair costs weren’t too bad – about $10k overall. Most the repairs were paint and carpet/flooring. There were other things like removing the 30ft vine that grew on the back of the house.
The next step had arrived – finding tenants. I used Cozy which is a free platform that lets you collect rent through ACH transfers along with completing background and credit checks. They also have a feature that lets you advertise your rentals on several real estate websites.
We had multiple very interesting potential tenants come through. People requesting money off the rent. Other people that wanted to change things with the property. On and on. It was definitely a little frustrating at times. We settled on a great couple with two kids and a dog. The final rent was $1,550 – which is about $75 higher than the rental comps.
Anytime you’re dealing with residential rental real estate investing, there are going to be some bumps in the road. After signing leases and having the tenants move in, there was only one minor hiccup. The hot water heater hadn’t been used extensively when we were rehabbing the place but when 4 people suddenly move in, the device gets put through it’s paces. Unfortunately it failed within a few days. Thankfully after a $700 repair, we were back in business.
Residential Rental Real Estate Investing: The deal at a distance
These are raw cash flow numbers, meaning I’m not accounting for vacancy, repairs, etc. It’s hard to predict the unforeseen expenses so in the interest of transparency I just disclose the raw cash flow numbers.
Either way, at this point – we were in business! We had a fully rehabbed and functional rental with paying tenants. The only next step was to find the next one! And besides, who could complain about an extra $500 per month? For my first foray into residential rental real estate investing, I could have done much worse!
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