We’ve Jumped Into Real Estate Investing!!

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Well, we’ve gone and done it. We’ve lunged into the world of rental real estate. It’s something I’ve wanted to pursue for years but just never got around to pulling the trigger.  The idea came back into my mind as we’re pursuing financial independence as aggressively as we can, and income from rental properties can accelerate our plan for supplying us with the much-needed passive income to be financially independent (i.e. I wanted higher and more stable returns than the stock market!).  Our goal is to have the option of doing what we want with our lives without the requirement of having a 9-5 job.  

So…. Starting around May 2016 I engulfed myself with books, blogs, podcasts, local real estate groups, real estate investors who have done this before, and any other resource I could find.  I began looking at properties for sale around the Seattle metro area and looking up what rental rates I could get.  It didn’t take long for me to realize that the Seattle area is terrible if your goal is to have a rental property produce positive cash flow at the end of every month.  As well, we’d have to put up a huge down payment.  Sure, a property might appreciate but I need something that’s going to give me income every month, to help replace my current income.

I then looked out of state to see what else was out there. To my surprise there are plenty of cities in the U.S. where you can buy a residential property and have it cash flow from day one.  These are in completely different markets than Seattle, San Francisco, New York, etc.  For example, you could buy a house that has 3 bedrooms and 2 baths for $100k!

You may be thinking homes that are $100k are in the slums (especially if you’re from a high-priced market), but nope. They’re in good neighborhoods that attracts quality tenants (with stable, mainly blue-collar jobs).  Plus, you can get rent for ~1% of the purchase price, which in this case would be ~$1000.  What this means is that after putting 20% down on a property and account for property management fees, mortgage payment, property taxes, and insurance we’re looking at a >20% return!  If you account for the fact the rent check is also paying down the mortgage, then it goes beyond 30% return.  This sure as heck beats the stock market annual return of 7%*!

Knowing what was possible I researched the heck out of how people buy investment properties when they live hundreds or thousands of miles away from it.  First off, one needed quality property management as land lording from a distance is not something I’m interested in (let alone land lording when the property is in my own city).  Second, you need to build relationships with people that have purchased rental properties like this and learn from them.  Typically, investors (like myself) are buying properties from companies that are called “turnkey providers” (a term used to describe someone who purchases properties, likely foreclosures or distressed properties, rehabs them to rental quality, and then sells them to investors).  Vetting the turnkey provider is important to the purchase to ensure you can trust them (getting third-party, unbiased opinions is critical).  After spending so many months researching the whole “turnkey” process, I dove right in with my own purchases!

So… I got myself out of being stuck in analysis/paralysis mode and purchased my first two turnkey rental properties in March 2017!   The first one is in Memphis, TN and was $96,900.  The second one is in Birmingham, AL and was $69k.  20% was put down on both properties.  This decision was huge for me, mainly because the properties were so far away and I’d be purchasing them sight unseen.  To most folks, the idea of purchasing a property sight unseen makes them run for the hills.  And believe me, once I first heard of the idea it did not give me warm and fuzzy feelings.  But I was determined to get all the facts and decide if this was for me or not.  The biggest factor was talking to so many investors that have done exactly what I’ve done, purchased from the same folks I purchased from, and have done quite well with their investments.  Plus, by the time I purchased I’d read and heard and talked with so many sources I didn’t have to learn all this the hard way.  I was setup on a path where I knew what to look out for and what not to do.  As with most things, once you are educated about the topic you feel much more comfortable and the fear drowns out.

Rental Property #1 (Memphis): $96,900, 3 bed/2 bath Single Family Home

Mortgage Payment$4304.5%
Property Insurance$50/month$605/year
Property Taxes$135/month$1,620/year
Property Management$98/month$1,176/year
Total Expenses$713/month$8,566/year
Rent$1,095/month$13,140/year
Total Net Income$381/month$4,572/year
Annual Return on Investment
(Net Income / Down Payment)
($4,572 / $19,380)
23.5%*


Rental Property #2
(Birmingham): $68,900, 3 bed/1 bath Single Family Home

Mortgage Payment$3144.75%
Property Insurance$34/month$411/year
Property Taxes$55/month$660/year
Property Management$65/month$780/year
Total Expenses$468/month$5,616/year
Rent$800/month$9,600/year
Total Net Income$332/month$3,984/year
Annual Return on Investment
(Net Income / Down Payment)
($3,984 / $13,780)
28.9%*

 

So…. How does all this circle back to becoming financially independent?  We’re intending to use these two properties as guinea pigs to prove that buying out of state rental property can work for us; and that we can see with our own eyes that it can contribute to the passive income we need to bring us closer to financial independence. Then, it’s a matter of purchasing more properties until we’ve reached our goals.

Thoughts? Would you ever buy a rental property? Let alone out of state?

* However! Returns are actually higher than this if you account for the rent actually paying down my mortgage for me. The renter is paying down the principle balance of my mortgage so the only real cost here is the interest portion of the mortgage payment.  This means an additional ~9% return beyond what’s stated above!* This return can be lower if maintenance/repairs are needed and if any vacancies occur. If I account for 5% of rent going toward maintenance and 5% of rent going toward vacancies, then my total return would drop ~5-6%.  Even so, still really awesome returns!

* Plus! This is a bit more advanced, but if you account for all the tax deductions from all of the expenses above (mortgage interest, insurance, property taxes , property management, etc.) it accounts for an additional ~2-3% return beyond what’s stated above!

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8 Responsesso far.

  1. Rory Pitts says:

    I’m really excited to see where this goes for you! This is definitely one of the best ways to build your retirement cash flow. I agree that owning properties in the Puget Sound area right now might not be the best use of your resources. The market is just too hot and all of the “deals” have been bought, flipped and sold. Looking to see where this takes you!!

  2. Joey Noel says:

    Congratulations on your start. However I would suggest you fly out to these markets before you purchase anymore. It’s a must in my opinion. You will not only learn a ton on these trips but you will begin establishing better relationships with the people that are helping you. Dont trust people. Fly out their and see things for yourself and make your own conclusions. Buying sight unseen is for the established investor with a trustworthy team in place and definitely not for a newbie.

    • Thanks for commenting Joey! I definitely agree and I very much went back and forth on this in the beginning. Although not ideal, I took my sweet time talking to the turnkey companies and property managers. As well, I spoke at length with many of their current clients and what I would consider to be folks with objective opinions on them. While a risk, it has been going well so far but I would like to go out eventually and meet with the team I’ve established in person.

  3. Alpesh Parmar says:

    Awesome. Good Luck!

  4. Should I invest in real estate With property values rising once again in many parts of the country, that s a question many investors might be asking.

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