Lessons from a cash-only rental property purchase

We bought our second rental property in April at a price that was at the upper end of our budget.  While we knew the property would need some work, we were confident the deal was worth it and that the estimated repairs wouldn't exceed our maximum budget of $190,000 - the cash we had on hand for this investment.

Flickr image courtesy of: polkadotted1

Flickr image courtesy of: polkadotted1

One of the services provided by our property management company is overseeing repairs and make ready work for clients' properties.  We enlisted their help to make the needed repairs so that the property would be rentable as we couldn't do it ourselves.  

On top of a $181,000 purchase... we have additional expenses of:

  • $2,200 to replace carpet; $1,700 over estimate (initial assessment was that cleaning and stretching would suffice)
  • $1,055 to replace a sliding glass door; $800 over estimate (initial assessment was that it was repairable)
  • $400 dishwasher; $400 over estimate (inspector wasn't able to test this during inspection but we were told it was in working condition by owner)
  • $200 to paint cabinet faces
  • $1,200-1,400 for GFI upgrades and light replacement (we have aluminum wiring and expected this expense)
  • $245 for blinds

  • $1,121 make ready (general repairs like caulking, touch-ups, etc.)

  • $3,200 interior painting

  • $300 for cleaning

The grand total for repair and make-ready? $9,921

That puts us just over our maximum budget of $190,000 by $921.  So far.  It looks like that figure will be the final one for this property, but as we know from experience with our first property, we have to be prepared for the unexpected repairs. (Does anyone ever see a $6,000 sewer line replacement coming their way?)

Fortunately, we were able to cash flow the extra $921 in repairs as the work orders came in over a span of about a month.  However, we've completely cashed out our non-retirement savings except for a few thousand in the bank for monthly expenses and our emergency fund covering about 4 months of expenses.  I love financial security and that emergency fund is what has allowed me to sleep at night!  I have never lived paycheck-to-paycheck and I certainly don't intend to start now.  

We've learned a few lessons from this rental property purchase, as I expected we would:

  1. It's always better to lay eyes on a property before you buy it.  We knew we wouldn't be able to do this, but it's still a best practice rather than buying sight unseen.  Kind of a "duh" lesson, but one to keep in mind for anyone contemplating buying in a market they don't live in or at auction.
  2. Prioritize repairs.  We've put off making some other electrical upgrades and repairing some of the fence as they aren't as high of a priority.  The goal is to make the property rentable as soon as possible, without cutting safety corners and without going overboard on improvements that won't draw in added rental income.
  3. Expect repairs to cost more than you expect.  And have funds available to cover them or be prepared to cash flow.  We ended up with a really tight repairs budget by purchasing at the top end of our price range.
  4. Have trustworthy contractors on hand.  Our property manager has a team of trusted contractors and we have never had anything but a good experience with our property management company.  All of the repairs they want to do align with our property inspection report.  Before we even closed on the house, we gave them two weeks notice about the purchase and the likely repairs so that they could get their team ready.  If you do the repairs yourself, you need to get the property to market quickly to start making your investment pay off so call up your contractors prior to closing with an estimated start date for work.
  5. It takes time to turn around a rental that needs repairs. If we cash flowed more repairs, we obviously couldn't use the rental income from this property (unless it was rentable without the repairs).  Don't plan on having access to rental income for at least a few months with a new purchase unless tenants are staying.

How to estimate the value of your property without a realtor

When was the last time you assessed the current value of your home or rental properties?  

We bought our first rental property in 2008, and since then never adjusted the value of the property in our asset listings.  Meanwhile, the national housing market has shown solid year-over-year increases in both existing and new single family home prices.  While the value of our rental does not matter as much as the monthly rent we are bringing in, it does help to know what our holdings are in light of our financial goals.  Accurately knowing what we have helps us make better plans - for example...

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Update: Rental property purchase #2

Update: Rental property purchase #2

Over the last 6 weeks, we have seriously considered 3 different rental properties.  And by serious, I mean we came this_close to making an offer or actually submitted an offer.  To get to those 3 properties, I probably looked at (online, not in person) about 200 others. Each property met most of our guidelines for purchasing rental property.

Even though we are still without a second rental income, I don't regret the time spent on each of these.  Here is what I've learned from each vetting experience...

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We didn't win the bid for the second rental property

We submitted our best and final offer on a rental property last week (check out this post for more details on the potential deal) and heard back this week from the bank who owned the house.

As it turns out... we didn't win the house with our final bid.  And we are okay with that.  Earlier this week, I described some of the ways in which we try to make big financial decisions that we can live with.  Although I wish I had this house as part of our investment portfolio, I wouldn't have wanted it for any more than the final offer we submitted.  

I have wondered if the person (or corporation) who did win is comfortable with their decision given the numbers we were looking at for repairs and market value post-repair.  I certainly hope so, but I can't help but wonder if they believe they got a really good deal or not.

How to make (and live with) big financial decisions

How to make (and live with) big financial decisions

As I shared with you a little over a week ago, we put in an offer on a foreclosure property.  That ended up being a multiple-offer situation and the bank sent all original offers back and requested a "best and final offer" (BAFO) submission from us.  I crunched the numbers and we came up with a higher offer (we originally submitted one at just over 1% of the bank's list price) that we could both get behind.  The offer was 6.5% higher than the list price, but it would... 

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