Our First Rental Property

We just purchased our first purposeful rental property in early December and have already learned a lot along the way. Mrs C.’s mom lives in our previous home that we still own, but I don’t really consider that a rental house. This is the first house we’ve bought with the goal of it being a rental property.

The Property:

We purchased a 2 bedroom bungalow style home in a small neighborhood of about 30 houses next to our small town airport.  The house was built in the 1940s and had previously been a rental property owned by an out of state investor. Yes by the airport is not the nicest area to be in, and a couple times a day the windows shake and you can hear the planes landing/taking off.  The houses north of this house were bought by the airport and demolished for a runway expansion roughly 10 years ago, so there are no neighbors across the street, just a fenced in open field for the airport.

The house is 770 square feet, has a living room and kitchen on one side and 2 bedrooms with a bathroom in between them on the other side.  The house has a full basement and is on a 50 X 130 lot. There is a concrete patio on the backside of the house. This is about as basic of a house as you can get.

 

 

The Numbers:

We paid $19,000 “cash” for the house, although we financed this through a HELOC on our primary residence.  We have over $100,000 of equity in our primary and took on a $60,000 HELOC, with no closing costs. This will give us the ability to self finance low cost rental houses, or down payments on higher priced homes.

Negotiation: The house was originally listed at $27,900 and over 6 months the owner had dropped the price to $21,900.  We originally offered $16,000, he countered at $20,000, we came up to $18,000 and made the deal at $19,000. I really don’t like the “split the difference” negotiation style, but that’s what ended up happening here.  I feel we got a really good deal on the place overall. I felt a lot better haggling over the price on this one than I have in the past.  When you are comfortable with walking away there is much less stress involved.

When we purchased the property our closing fees amounted to $497. Buying a house with no loan is so much less stress and the paperwork is much easier as well.  We were in and out of the closing office in 15 minutes. We have put just under $3,500 into the renovations, with only a small amount left to do.  All in we are at $23,000 in total cost and it will rent at $600 per month.  In the future I should be able to increase this to around $650 for a Section 8 renter.  I will need to go through a special inspection and certification process to get the house Section 8 approved.

Taxes are roughly $480 per year and our insurance is $412 per year. I’m budgeting 10% of rent for repairs/maintenance. With no mortgage our main concern for insurance was liability insurance, which we set pretty high at $300,000.  They offered to insure the property itself for $100,000 and we set it at $50,000.  The difference in price was actually only around $50 a year, so in the future we may insure at a higher rate just because it is cheap.

The numbers then look like this:

  • $23,000 purchase
  • $7,200 Gross rent
  • -$892 taxes and insurance
  • -$720 repairs and maintenance
  • =$5,588 before debt payment
  • This is a CAP rate of 24.3%
  • When we increase the rent to $650, the CAP rate will be 26.9%.

Our HELOC currently charges 5% interest, and the main reason we used a HELOC was to avoid the closing costs, which are an extremely high percentage for a small value loan.  We will be using the proceeds from this property to pay down the loan.

Our next rental property will most likely cost closer to $40,000 and will be financed with a traditional loan, we will also use rental income from that property to pay down this HELOC.

Repairs:

The interior of the house was in fair cosmetic condition and we did nothing beyond cleaning on the main floor to start out with.

Systems:

The largest expense was a new well pump and bladder tank.  We knew this would be necessary when we purchased the house and actually planned on replacing the well.  The water ran extremely slow, like <1 gpm from the faucets and the well pump would cycle constantly while making a very upset noise.   It turned out that water volume issue was due to corrosion metals in the fixtures.  I replaced the water faucets and the shower head and we had decent pressure.  The tank and the pump still had reached the end of their life and we had them swapped out.  This had a total cost of $2,200.

The next largest expense was the electric hot water heater.  The water heater in place was a 2004 model and was mostly rusted through on the bottom.  We didn’t even bother testing it and replaced it right off the bat.  We got a pretty good deal on one for $338 from Home Depot. Gas water heaters are WAY cheaper to operate, but electric are easier to install and the house was already setup for electric.

The furnace is probably older than me but works fantastic. There was a run going into the basement, which I removed and capped off at the distribution box, since we don’t need to heat the basement. I replaced the furnace filter, and was shocked at how horrible the old filter was, I’m surprised any air went through it at all, it was caked in probably an eighth of an inch of dirt.

The house had a really bad smell to it and I knew it was either a dead animal or sewer gas.  Since it had been empty for several months, I figured that sewer gas was most likely.  I ran water through all the faucets to fill the traps, but the next day it still had a smell. I then tightened up a loose connection in the drain piping under the sink and ran the water for a good 10 minutes. The next day the smell was gone. Sewer gas is nothing to play with, not only is it unpleasant, it can cause sickness as well.

Exterior:

The house had been empty for sometime and the next door neighbors used the driveway as a “wrap around” driveway for their house.  One of the first things I did was extend an existing fence on this property line.  I used 4′ chain link and 6′ field fencing metal posts, which is the same structure that was already in place.  This costed $115 to put in place.

I then built a custom privacy fence on the other side of the house that connects the neighbors privacy fence to our house, this blocked off street traffic from crossing through our yard.  This fence also cost right around $115.  This was a bit more than expected, but I ran into a small problem.  it seems that a long time ago there was a concrete slab installed where I wanted to install my posts. The slab was under about 4″ of dirt. There was no way around it and I ended up spending an extra $25 installing a cup for the post to sit into that bolts to the concrete.  This isn’t the prettiest fence and the individual panels aren’t as level as ideal, but it is functional and I got it done in a couple hours.

The driveway had a major dip in it, which I fixed with 4 yards of crushed concrete for $133 delivered. I spent about 30 minutes shoveling and raking it out to get it level.

Painting / Power washing: 

This is still on my to do list and will wait until spring.  The vinyl siding needs a good power washing and the windows all need to be scraped and repainted.  This is a low cost, albeit time consuming project. With the temperature so low I don’t want to do exterior painting right now.

Security:

The front door did not have a deadbolt, so we installed one.  In addition to installing a deadbolt and replacing the handle so the keys would match, I installed 3.5″ screws into both the strike plate and the door hinges.  This allows the door to get tied into the framing of the house and not just the trim piece of the door jamb.

I installed 10 year closed cell lithium ion smoke detectors in the bedrooms and in the basement. I also installed a plugin with battery backup Carbon Monoxide detector.

Lighting and Blinds: I installed simple $9 Walmart blinds on all of the windows and installed LED bulbs in all of the lighting fixtures. This totaled about $120, with the vast majority being the cost of the blinds.

Appliances:

I already had a used fridge available for this unit and I bought an electric range off of craigslist for $75. It functions but is high up there in age, I’m planning on keeping an eye out for a nicer one to replace it with.  For this tenant I also bought a washer and dryer for $200 off of craigslist.

Washer and Dryer: Ok, so I bought a Whirlpool Duet pair for $200, which was an amazing deal, normally these are around $500+ used.  The thing about high efficiency washers is they are ridiculously heavy.  A normal washer weighs around 130 pounds, the Whirlpool Duet weighs around 230 pounds. That hundred pounds makes a world of difference.   It wasn’t too bad getting it out of the guys basement I bought it from because he was able to help me with it, but once I got home it was a different story.  I had to have my father in law come over to help me get the thing in the house.

Well, in addition to the weight being the issue the size of the doorway was also an issue and I had to take off the door and hook up the washer on the appliance dolly on the back instead of the side.  We got it to the basement, but it wasn’t pretty.  I then realized that I broke the plastic hose connections on the back of the washer. I ordered a $15 part off eBay and was able to replace it with no problem.  We then tested the washer and it failed to drain and flashed an error code, doh!

I went through the process of opening up the bottom, draining it out manually and cleaning the filter twice, but still received an error code. It was showing F11 and most of the internet tells you this is the brain of the washer and the part is ridiculously expensive.  Well I was about to replace the thing when I found a website stating that 99% of the time the problem is actually a loose connection, which makes sense due to the washer getting jolted around moving it up and down stairs.  I challenged each connection, found a loose one, and after another test run it worked!

Bottom line: In the future I don’t plan to provide washers and dryers to tenants, they are a pain in the butt. Very few rentals in this area and price range include washers and dryers.  I will also most likely start units with a new fridge rather than used to make emergency repair calls less likely.

Extras: 

Our tenant told us that it would be nice if the kitchen had a bit more cabinet space.  I found a cabinet at our local habitat for humanity restore that closely matched the existing kitchen cabinets and was able to buy it for $15.  This cabinet fit perfectly over the stove and added 9 linear feet of shelving. I then spent another $10 on the knobs and trim to make the cabinet fully match.

Neighbors:

The neighbors to the left side are friends with our nephews dad and knows the kids so that is good.  We also met the neighbor to the right side of us and she is really nice and has lived there for over 30 years.  I don’t think we will have any issues with our neighbors.  The houses are a bit closer together than what I personally like, but are of “normal” spacing for city lots.

Going Forward:

On this property I will do some power washing and scrape and paint the windows in the spring.

For the most part we will be investing in 4 bedroom houses that are also just outside of the city, but on the other side by our other rental property.  This was a really good deal and in the future I may still buy another 2 or 3 bedroom house in this area if the price is right.

I constantly look at the MLS, Zillow, Craigslist, and the Facebook marketplace to keep tabs on rental prices and sale prices in the area.

Do you have any rental properties?  What type of houses do you invest in and how do you finance new properties?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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