This guest post from Barry is part of a new feature here at Get Rich Slowly. Every Sunday will include a reader story (in the new “reader stories” category). Some will be general “how I did X” stories, and others will be examples of how a GRS reader achieved financial success. Barry's post is also part of an accidental “real estate week” kicked off by Baker's story.
For years I'd heard the rental horror stories, about tenants who refused to pay and landlords who couldn't get rid of them, or tenants who trash their units so badly that the landlord gives up on renting altogether.
I'm sure these things can and do happen. But are they the norm? My wife and I had always wanted to own rental property, but stories like these made us nervous. Maybe rentals weren't really meant for average folks like us.
Plus, there was the question of cost. My wife and I only make $60,000 between the two of us. Could we really afford to own a rental property? We'd always thought of rental properties as something for the rich. But maybe we had it backwards: Maybe the rich were the only ones smart enough to know that rental properties were good investments. Maybe we need to think like the rich do.
Doing our homework
With our limited income, we felt like we didn't have the money to put in stocks. Plus, we thought that maybe the income from a rental unit would help us build a nest egg that wasn't subject to the whims of the stock market. And we really liked the idea of having somebody else (the renters) setting aside money for us every month.
First, we did some homework. While the bank pre-approved us for a loan, we talked with our insurance company, local real-estate agents, and local landlords. This research gave us enough knowledge to go out and look.
We found several houses we liked, but most of them were too expensive. We couldn't rent them out for enough to cover expenses. It seemed the local investors (rich people) were working closely with the real-estate agents. Agents get thousands of dollars in commissions through the investors, so my one purchase wasn't anything that interested them. The investors are their bread and butter, so they got first crack at the good deals. I got the overpriced leftovers. My wife and I almost gave up. We couldn't get a real-estate agent to work with us; we just couldn't compete with the investors.
Evening the score
Then one day, there was an auction in our area. I went to see how much the house would go for. It went cheap! I'd been looking for long enough to know that if the house had been listed with an agent, it would have sold for a lot more. I wondered if this were a way to even the score.
We asked around and discovered the local investors get so many houses through the real-estate agents that they don't bother going to auctions. They consider it a waste of their time.
Auctions are scary places to buy houses. There are no contingencies, no home inspections, and everything is final when the auction is done. You have to be sure of yourself when you place that bid. These things alone make it hard for the normal person to buy a home at auction.
The next few months we went to every auction around. We learned how to bid at an auction, and how much houses were going for. We knew we needed $5,000 for a down payment on the day of the purchase, and financing for the rest within 30 days. Because the houses at auction were selling for about 10% less than on the open market, this was our chance to get a good deal.
After waiting for a while, we found a house we liked that was going to be sold at auction. It was in a nice neighborhood. It needed some work, but we knew we could do most of that ourselves. We ran the numbers through our bank and found out interest rates had dropped to record lows because of the mortgage crisis. There seemed to be a perfect storm of low interest rates and people losing faith in real-estate. We felt that this was our chance.
Taking a chance
When we got to the auction, we were scared to death. We'd been to other auctions before, but this one was different. We knew this was the house for us. We wanted it more than any other house we'd looked at.
We arrived well armed. We'd done our math. We knew just how much comparable houses were getting for rent, what the taxes were, how much insurance would cost, and how much we could bid and still come out ahead.
As you can probably guess, in the end we were the winning bidders. We'd bought our first rental property. Now the real work began. We spent two solid weeks doing nothing but working on the house. When we were done, it looked great. We found a renter through word of mouth, signed a one-year lease, and now welcome the challenge of being landlords.
The property has been rented out for about six months now, and we're very glad we bought the house. Our tenants have been early with the rent every month, and so far things are going smoothly. We did have some furnace problems and a problem with one of the doors, but those were minor. We knew there'd be problems, and we've dealt with them as we would have with our own house. It's nothing the average person couldn't handle.
Owning investment property isn't for everyone. As with other investments, there are risks involved. But we felt that rental property would give us another form of income to help us on our financial journey. We know it's not going to give us a quick payback like picking the right stock might. But we're not looking to get rich quickly. We're looking to build a nice solid nest egg, and rental property is just a part of that.
Is rental property for the average joe? We think so. What do you think? Do you own rentals? What advice do you have for others who might want to try this to make a little extra money?