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?
But we all get a little naive with excitement, don’t we?
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.
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.
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!
So how about you? Have you thought about becoming a landlord? Based on our experiences, I highly recommend it.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.