We Bought a Rental House With Cash – One Year in Review

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On November 30th, 2015, we closed on our very first rental property – a 3 bedroom, one bath home in a nearby neighborhood. The pipes we corroded, the kitchen was a disaster, and the hardwood floors all needed refinishing (which I have of course never done in my life).

It was a big project, but we were starry eyed with the investment possibilities. After all, we had the cash for a complete purchase and figured that 100% of the rent checks would go directly in our pockets.

Were we a little naive?

Of course.

But we all get a little naive with excitement, don’t we?

Related: Our Offer Was Accepted. Let the Rental Games Begin! 

We Bought a Rental House With Cash

You may be thinking, “How in the world did you buy this rental house with cash??”

Long story short:

  • I hate debt. It makes me nervous, angry, it distracts me. So, I paid off my house in 2014.
  • My now-wife sold her house in early 2015 and pocketed the $45,000 of equity.
  • We got married, combined our savings, and discovered this $81,000 investment property.
  • And, as the story goes, we jumped on it and paid with cash.

It took us about 4 months to complete the renovation (you can read all the updates here), and it cost us a little under $9,000. Our all-in cost on this house was $90,000.

Finding a Renter

The one thing that makes or breaks a new landlord’s experience is the tenant. Get a bad one and you’ll earn no income, waste a bunch of your time, and possibly even lose equity in your investment from unruly tenant damage.

The majority of new real estate investors are so eager to start earning money that they just hand the keys over to the first living creature that fills out an application.

Not us.

I held multiple open houses, took 10+ applications, and stuck to our qualification criteria (of small pets only and a net income of 3 times the rental cost). It was tempting to consider applicants that were close to qualifying, but I’m so glad that we stuck to our guns on what we said from the very beginning.

After a couple weeks, we had our first candidates that met all the criteria – three guys that were a couple years out of college, looking for their first classy, non-dorm style place.

They signed the paperwork and moved in on April 15, 2016.

Related: How to attract the best tenants for a rental property

The Landlord Stories of Year One

Exactly six days after the ink dried on the rental contract, I got my first text from the tenants….The entire front underside of the roof fell off. Seriously.

This landlording business….not off to a good start. Is this what landlording was always going to be like?

Fortunately for me, I was able to fix it myself and it only cost me 2 hours of my time and $10 worth of materials.

I didn’t hear from the tenants again until January. This time, it was the furnace. It would randomly turn off at times and they’d have to switch it off and then turn it back on for it to function properly. After a few hours, this would happen all over again. There was clearly an issue, and I being the landlord, needed to do something about it.

Here’s the quick play-by-play on the furnace repair:

  • I called the local repair company – let’s name them BB Repair (to protect their incompetence)
  • They came out and found nothing, so they blew out a hose, hoping that would solve the issue. It didn’t.
  • Visit #2: They still had no idea so they replaced the capacitor, thinking that could be the problem. It wasn’t.
  • Visit #3: BB Repair thought maybe it was the thermostat. That did nothing.
  • Visit #4: They gave me a new service tech and he replaced the entire circuit board, saying that was typically the issue with these units. Still broken.
  • Visit #5: BB Repair put in a new motor and a new switch. Problem solved. Hallelujah.

Although the entire experience was a complete hassle, the service manager was a pretty awesome dude. He realized my frustration and agreed to only charge me for one service fee, the motor, the capacitor, and the switch. The thermostat and the circuit board were freebies along with the four other visits. So basically, I got a new furnace with half-price parts. Nice!

Since we rented out the unit in April, I figure I spent about 7 hours of my life in that rental property. Over the course of an entire year, I don’t think that’s too shabby! Not to mention the fact that all the rent checks cleared without issue and only one was a couple of days late.

The Profit Margin

So how did we fair after one year as landlords? Were we as profitable as we thought we would be?

Let’s take a look at the numbers:

  • 12 months rented at $1,200 a month: $14,400
  • Property tax: $3,100
  • Roof repair: $10
  • Furnace repair: $400
  • Operating Income: $10,890

With a $90,000 investment, we earned $10,890 of income. That’s a 12.1% return on investment. That’s pretty awesome! But you know what? It gets even better.

Our $90,000 house is now worth $125,000. We’ve earned $35,000 of equity thanks to the steal of a deal we got on the purchase (and from the many renovations we made ourselves). So in actuality, our $90,000 investment has yielded us a return of $45,890 – or 51.0%. BOOM!!

We’re Looking For The Next One

It should be no surprise to you that we’re starting to look for the next steal of a deal. We’ll buy something cheap, put a few months’ worth of labor into it, rent it out for $1,000 or more, and then use those earnings to roll into the next rental property. Once the rental snowball gets rolling, there’s no stopping it!

Related: The Rental Property Wealth Calculator – Your Path to Millionaire Status

So how about you? Have you thought about becoming a landlord? Based on our experiences, I highly recommend it.

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8 comments to We Bought a Rental House With Cash – One Year in Review

  • Wow, that’s some crazy returns Derek congrats. From the sounds of it, this will property will be a cash cow for years to come!!

    I’m surprised at the $9k cost for your repairs. It sounded like that would have been much more costly (pipes and kitchen).

    An operating income of $10k a year is fantastic. You didn’t even include the tax benefits of it either!!

    • A cash cow for sure! And, our renters just decided to sign the contract for another year! Love it!

      The repair costs were about $1,500 for the plumbing (thankfully all the pipes were easily accessible since the basement is unfinished). The kitchen turned out to be pretty cheap. We ended up building cupboards ourselves, the floors ourselves, and put a fresh coat of paint on everything!

      The Op Income IS fantastic! I figure depreciation takes $3,500 off from our tax bill each year. I am really starting to LOVE rental properties!

  • I inherited a property across the country from me and have had an up and down time with it. The second month I owned it my tenant stopped paying rent and I had to evict him and ended up losing 5 months of rent. I’ve had the same tenants for over 5 years now and have had to replace nearly every major appliance since then, but they had all been original to the house so it’s hard to be upset about it. I really appreciate the rent check I get every month and haven’t had any issue with the house in two years.

    I am saving up for a rental property closer to home. I’d really like a duplex or larger-something will larger potential cash flow. But I’ll just wait to see what is on the market when I am in a position to buy.

    • Hi Jax. Thanks for the insight from your experiences!

      Have you ever thought about selling the property across the country and possibly investing in a couple of rentals nearby instead? I can’t imagine trying to manage something that’s so far away.

  • Thanks for posting this!

    Stumbled to the site today and really love it. Posts like this always makes me jealous of people starting in real estate rentals. I would love to have a house or two (or ten) like this one day!

    My wife definitely has heard the true horror stories and is leery of making such a large investment with our cash. I appreciate you posting an honest report of the good and bad.

    I think as long as you stick to your guns when it comes to tenant finding like you did it can help immensely!

    Congrats!

    • Hi Cameron. Yeah, there are definitely tons of horror stories out there, and I’m sure some of them can happen to anybody, but I think most of the horror stories were a result of new landlords rushing into something that they 1) didn’t know anything about and 2) spent zero time researching.

      My experience as a landlord has been excellent. Sure, I’ve had to fix the roof a bit and had to hassle with a furnace repair, but overall the experience has been amazing. Hopefully you can get into the real estate game someday. It truly is the sandbox for the wealthy. I say it’s time to play! 🙂

  • Julie

    You guys are doing great, Derek! Thanks for the update. My husband and I want to buy rental homes in cash in the near future but Texas property taxes are through the roof. For example, we paid off our mortgage but will still have to pay $7000 in property taxes this year. I know it’s best to own rental property close to home but I worry about property taxes eating into our investment year after year over the long term. Would you ever suggest owning property in a nearby state with much lower property tax rates? We have considered Louisiana due to proximity and having one of the lowest property tax rates in the country. Would love to know your thoughts on this.

    • How far would that be from you? I wouldn’t suggest that anyone be a landlord for a property that’s more than an hour away.

      When you consider a rental, think about the 1% rule. If you bought the property for $200,000, could you rent it for $2,000 a month? Or 1% of the $200k? If you could do 1.5%, then I wouldn’t worry about dodging the property tax. You’ll still earn more than 10% on your investment!

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