Rental properties for the average Joe

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.

Buyer Beware?

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?

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fantasma
fantasma

if only it was truly that “easy” but its not. it’s awesome that thus far your journey has been fairly smooth, but be careful good luck!
i do believe renting is for the average joe, they need to have a handy man that can be counted on. one day i would love to own rentals, my grandmother used to own property. make sure you have money set aside for problems like a leak in the roof, plumbing. do yearly pest control.

Trevor
Trevor

Great guest post Barry! I bought my first rental property when I was 20 and my second when I was 22. There have been moments when I regretted it (having to evict someone) but overall they have been great investments that are building wealth for the future. To people looking to buy their first rental property, I would advise that you have a $3-5,000 emergency fund for the property. No matter how well you plan and how much you check things over it always seems like there is several thousand dollar expense that comes up every year or two. For… Read more »

Jay
Jay

I agree with you. I bought one SFH at 22 and another at 23. For several years I completely regretted owning them, but now that I am 13 years into it I see that it has been completely worth while and I have set myself up well for the future. There is ups/downs but you have to see the long term value, hard times will come, you learn from them and continue on. I will never sell them.

Twiggers
Twiggers

We were forced into being landlords. That is, our home was on the market for 9 months and wouldn’t sell and we refused to let it go into foreclosure, but also couldn’t afford the monthly payments on two places (we were relocating across the country due to a job). We have a renter in the home, but she never pays on time. We’re stuck with her though because the market still isn’t good enough to sell for what we need it to sell for. Being a landlord is not fun and we wouldn’t do it again.

dP
dP

I too, am an unwitting landlord for a rental property I cannot sell currently. I have rented it for approximately 6 years and have had both good and bad experiences.

Most renters have been positive experiences however, I am careful to screen them thoroughly before I even consider giving them a lease. No pets, no smokers, no tenants <25 years old. Call me whatever ugly name you like, but my condo remains in great condition and I’ve never had any problem with collecting rent.

Lisa
Lisa

I’m interested in buying a rental property, but don’t think the renter market is good enough where I live; I’d rather look in a city or college town. Does anyone know of reliable property management companies? Or, does anyone use one? I’d really appreciate some advice on this.

john
john

To each his own I say. I have a friend who owns a small rental property and he was telling me a little bit about all of the hard work and the minimal return he was making. He was happy with the return and I was glad I didn’t have to tell him how much more I make from the comfort of my own desk and internet connection. But he can fix plumbing and I can’t and I can build websites and he can’t, so we all need to do what works.

Bon
Bon

My parents had rental property and had to evict a tenant (in a nice neighborhood). On their way out, the tenants left the gas burners in the house on full blast. Thank goodness when my mom and sister went to check on the house days later no one was hurt. That scared me enough from ever entertaining the idea of rental propety!

Lise
Lise

Here in the Boston area, multi-unit housing is very common. These look like regular detached houses but either each floor is a separate unit, or two floors are one unit and the other floor is a smaller unit. When I was looking to buy I specifically wanted a multi-unit house, because that was the only way I could afford to own anywhere near the city. So far it’s worked out really well. I don’t use an agent to find tenants (Craigslist is cheaper for them and for me) but I do use a credit check agency to make sure they’re… Read more »

med student wife
med student wife

I think this is a great story. You did you research on prices. You figured out financing ahead of time. You researched how auctions work. And it seems like you are renting in the same town you live in. And you know how to do minor repairs on the house.

Congrats on the due diligence you put into buying a rental. It paid off.

sandycheeks
sandycheeks

My parents have been landlords for many years. They bought in area’s that they were familiar with and did most of the work themselves. Now that they are aging, they are selling the properties because the upkeep between tenants (repainting, recarpeting, drywall work, possible rent court etc) is too demanding and too expensive to hire out. DH and I would love to buy a rental but we want it close to home and homes are still overpriced in the area. We keep an eye on the auctions and foreclosures but out of town banks who own the properties seem willing… Read more »

Kevin
Kevin

I don’t understand the comment: “With our limited income, we felt like we didn’t have the money to put in stocks.” You didn’t feel like you could afford to contribute to an index fund, but you had no qualms putting much of your personal portfolio into an illiquid, highly volatile, high maintenance investment like rental property? Seems like this is only something you would think about doing AFTER you’ve maxed out your options in areas like stocks, bonds, etc., and even then I might consider investing in REITs other than rental property. See this post for more details on this… Read more »

Kyle
Kyle

My wife and I have also considered owning rental property, it really sounds like you did your research to make sure you made a good investment. My BIL rented out his house for two years when he was in grad school and never had a pro lem. He used a property management company though since he was out of state. I am
curious if you use a lawyer to do your leases
or how that whole process even works.

Sara A.
Sara A.

Wait… did I miss the second part of Baker’s story?

Tommy
Tommy

I agree with Kevin 100%. What happens if you’re renters give you trouble? What happens if they move out and you can’t find a new tenant right away? Can you afford 2 houses by yourself? You’ve probably thought of all these things, and that’s fine if it works for you. I wouldn’t want to deal with it myself. But I’d like to offer an alternative view of rental properties – not from the tenants point of view, but from the non-renting neighbors. I’m tired of “averages Joes” getting into rental properties. Actually I’m tired of rental properties period. I actually… Read more »

Scott
Scott

I’ve been toying with the idea of rental properties for a while. As a recent college grad with tons of school loan debt (>100,000), buying a duplex and living in one half seemed like the easiest way to minimize my monthly required spending, while also building my net worth at the same time.

It’s reassuring to hear success stories from regular people. I hope everything keeps going well from you, and would definitely look forward to any follow-ups on your story!

Taylor
Taylor

There are lots of resources for landlords, and as a landlord I use all of them. One example is a website called mrlandlord.com. They have a section where you can post your question or problem for free and other landlords will offer suggestions on how to handle. Being a landlord is not for everyone. There are problems. But one thing that most – in fact just about everyone – fails to consider is this: How much time and effort does it take for a person to get up, get ready, and go to work every morning? Do you believe that… Read more »

Meredith
Meredith

I’ve always wanted to invest in real estate – so far it’s just been my own – this is a great story! I had a colleague who bought her first home – cash, then continued to live like a college student and saved her money to buy her second home – cash. She rented it, and used the money to buy her next home. She has ~10 now… took her about 25 years. She just sent her first child to the college of her choice – she told me that – if she needed it – she could just sell… Read more »

Financial Samurai
Financial Samurai

Hey Barry, thanks for your post. I own a couple rentals, one which I manage, another which the resort managers. It’s not a walk in the park I agree, and there’s an added layer of tax understanding to it. However, after the first year or two, it really goes on autopilot, and you can start seeing the benefits owning rentals have to your retirement portfolio by year 3 at the latest. Value of the property is nice, but the real value is in the CASH FLOW. Economy sucks, people rent and rent holds steady or even goes up sometimes. Economy… Read more »

Michelle
Michelle

Oh JD – your comment was unnecessary because this post was extremely well written. 🙂 I read this with a lot of interest. My hubby and I bought our first home-got a great deal, but live in a middle-lower income neighborhood. We have horror stories from the rental property next door (drugs, handguns, fistfights, etc.). That house was recently foreclosed upon and is now going for $99,000 on the real estate market. If my husband and I were in the financial condition to do so, I almost want to buy it so we can have control over who our next… Read more »

Chett
Chett

@Kevin I don’t think he wrote this post to ask for advice on how he should invest his discretionary income, he wrote it to tell how he used his. The point of when and how you should invest is specific for each person to decide for themselves. I do agree if you plan to be a landlord you should have some handyman skills (and I don’t mean changing light bulbs) and a savings fund large enough to deal with repairs. We’ve been considering purchasing a rental as well, but just haven’t found the right property yet. Regarding property managers: I… Read more »

RetirementInvestingToday
RetirementInvestingToday

Here in the UK property according to my valuations is very over priced. I’m therefore on the other side to that of Barry. I’m a renter. Now I’m looking to save as much of my gross earnings as I physically can as part of my retirement investing strategy and so I am looking for every way to reduce my monthly outgoings. So when my rental agreement came up for renewal I took advantage of what Barry mentions in his first paragraph. The fact that I pay on time and don’t trash the building. I was therefore able to negotiate a… Read more »

Gabe
Gabe

Thanks for the interesting post. I’ve been thinking about rental properties, but Central New Jersey is just really expensive to buy in. In order to make some money (or break even), I would have to buy a duplex or a triplex. A handyman special goes for between $250-300k.

K
K

Barry, thanks for sharing your story. I also hope to have a rental property someday (more along the duplex-that-you-live-in-too lines).

DP, my initial reaction is that you’re discriminating on the basis of age. Now I know that as a landlord you can discriminate against smokers and pets, but I’m not sure your age requirement is legal (I guess it depends on your state – anyone know more?).

I guess since I’m 23 I’ve trashed every place I ever lived and never paid rent.

Jan
Jan

Really nice article Barry! I hope you have a great side business for years to come. i am with @21. I plan on renting after we are done with the mid section of our retirement. We have always been great tenants- paying before time, fixing small things ourselves. We built a house three years before my husband’s military retirement and rented it out. Our property manager knew it was nice- so advertised by word of mouth. In Arizona it is difficult to legally “cut people out”. In fact @24- you cannot discriminate because of age (I think that is a… Read more »

Nicole
Nicole

We’re renting our house for the year… it was kind of a nightmare. We learned that background checks on tenants are very important… people who offered us the full rent had no means of support, smoked, had arrest records for non-payment, etc. (Some prospective tenants just evaporated upon hearing the words “background check.”) If we weren’t locked into a home owners association it would have been much easier because we could have rented to 3 unrelated medical students or 4 unrelated PhD students. It would also have been easier if we didn’t own such a nice house– there seems to… Read more »

Edward - Entry Level Dilemma
Edward - Entry Level Dilemma

A friend of mine was left a small house by her grandmother. It was converted into a duplex and she lives in one unit and rents out the other. We live in a college town and she gets a lot of college students as tenants. However, she has had some of the worst tenants – ones who pay late, ones who trash the place, ones who are loud, etc, and, the worst, ones who move out after two months providing only two weeks notice. It tends to have a vacant room a lot. I’ve been trying to convince her to… Read more »

valletta
valletta

My grandmother came to this country from Spain before the Depression, unable to speak English, not educated.
After she married (on the boat coming over!) the first thing she did was take my grandfather’s meager pay, save it and buy up (very) small houses in the neighborhood. And they had 8 kids!
When she died at 92 she left 12 houses in her estate.
She used to say to me as a little kid, “buy land, they don’t make it anymore” 🙂

Teresa
Teresa

Great post! I am a Realtor (have been for 22 years) and I just wanted to say that not every Realtor makes a killing off of investors… Many of my clients over the years have purchased one income property from me, and I appreciated their sale each time, and treated each one as an important transaction, no matter what the price of the property ended up being. Congrats to you on taking the plunge and starting to build wealth for yourself…welcome to the club! If you are in the market for a nice 2-flat in Geneva, IL call me… I… Read more »

tmurin
tmurin

Owning a rental property can be a very good thing, but there are a lot of caveats and not something to be taken lightly. I had 2 rental properties, one of which was a duplex which I resided in. On site management was fairly easy since – not much more difficult than owning a single family. If you have a good tenants – it is almost too easy. Bad tenants can be a nightmare. When you sell a rental property – Uncle Sam is your partner! You are taxed on the gain unlike a personal residence. The best option is… Read more »

Julie
Julie

We, too, got caught on the front end of the bubble. My husband lost his job and had to take another in another state and our house was in the middle of a remodel. We couldn’t sell it without taking a huge hit, but couldn’t rent it for full fair market value because of its condition. We ended up renting it out for about half of the monthly mortgage, and the tenant was sort of OK. She was late twice, bounced the rent check twice, violated several terms of the lease, but at least we had someone IN the house… Read more »

Avistew
Avistew

I’d been wanting to buy an apartment to rent it out (in France). When I looked into them, they were way too expensive, and the bank wouldn’t give us a credit because the rent couldn’t count towards our available income, so they thought we “couldn’t afford it” (even though we could twice over, even before being paid rent). That, and the average property took about 12 years to pay for itself (that is, we’d get our money back after 12 years of rent) which seemed too long to me. And I guess I was right since we ended up moving… Read more »

Aaron
Aaron

Great story! I accidentally entered into being a landlord. My company transferred me one year after I had bought a house, so I decided to rent it rather than sell it. It has worked out well. I actually spent quite a bit of time finding someone to manage the property for me. That adds costs, but I was too far away to do it any other way. I’ve since gone on to buy and rent another property as well. The thing I learned in all my rental experiences is that there are multiple reasons to buy a property and rent… Read more »

Gloria
Gloria

While you may have had a good experience with auctions, that is not always the case – even with thorough due diligence. Some owners who know that their house is going to be put on the auction block will literally destroy their property, selling their appliances, ripping out the carpet and cabinets. In California at least, would-be auction buyers are not allowed to inspect the property whatsoever. So what you see (from the outside) is what you get. There could be extensive damage on the interior of the house so it really is a gamble and while you can get… Read more »

Single Guy Money
Single Guy Money

I am one of those “average joes” that owns a rental property. I have been a landlord for almost 4 years now and I have been very lucky my first time out. I have a great tenant that I’ve had since I first rented the property. She has only been late with the rent one time in the last 4 years and she doesn’t call me for minor repairs. In fact, she calls me so rarely, when she does call, I start to freak out a little because I know something big is wrong. It can be a good experience… Read more »

ami | 40daystochange
ami | 40daystochange

I think I’m with Kevin @11 on this. As someone who has owned both stocks/mutual funds and real estate, I think stocks are a bit easier to manage than real estate – and they are easier to get out of if things head south. That being said, I think real estate could be a good way to diversify your finances (once you’ve got the foundation of your financial life set up). I would hesitate to go back to renting for the reasons others have mentioned. But if we did, I’d definitely (1) do the due diligence that Barry did on… Read more »

Sam
Sam

We own multiple rental properties. We keep to single family homes that are cheap enough that if empty we can cover the morgage. Background checks are important. Mr. Sam does the vast majority of the work himself. It takes time and energy which means that some times weekends are just house projects. The best part of real estate investments is that our tenants are building our equity for us. We keep our properties well kept and most of the time our property is the nicest one on the block. We learned real estate from my grandparents who at one point… Read more »

Four Pillars
Four Pillars

Interesting story – thanks for sharing.

I have to say that the idea of a couple who only make $60k wanting a rental property bought at auction is very risky.

King of like buying junior mining stocks. Nothing wrong with it, but it’s not a great strategy for the “average Joe”.

Emmy
Emmy

This is a really interesting post. As a renter I always find it kind of interesting to see the perspective of the landlord, especially people who just have one or two rental properties. I had no idea people were so afraid of tenants! When I think of the ideal landlord/tenant relationship I always remember this great 4-plex I lived in in Oakland, CA. The landlord/owner lived in the unit next to us on the top floor, and the bottom two units were mature, long-term tenants. When we went to look at the apartment my roommate and I were really impressed… Read more »

Mike Crosby
Mike Crosby

For me, owning rental property is a good fit. I can fix anything, and I mean anything that goes wrong. And my wife is an attorney who can deal with the other end of the business. Before I met my wife, I got very lucky in RE. I never made much of a yearly income, but with a few RE investments, I did quite well. Living in SoCal properties though are still way too expensive. If they were to drop another 50%, I may start taking another look. PS. A short comment to GRS. I really like that I can… Read more »

J Brown
J Brown

I rented our townhouse for 5 yrs. My advice is the following: – no matter how nearby\handy you are, get a property manager. They become the required 3rd party to act according to the lease/law. – be creative to keep good tenants. No matter how hard you try, you lose at least 1 months rent btw tenants. This is a fact. We offered a better price for a longer contract. In addition, we offered reduction for other items like carpet cleaning and such if they stayed on longer. It is always cheaper to keep a tenant. – have your own… Read more »

Brian
Brian

Would-be purchasers need to do their homework before buying at auction. My brother nearly bid on a condo with a lien on it that would have turned his investment into a real nightmare. He didn’t know about the lien beforehand, he claims that his “intuition” prevented him from making a bid on the condo on auction day.

But it’s good to know that, once someone has navigated the potential minefields, being a landlord can be a rewarding and profitable experience!

Doctor Stock
Doctor Stock

I’ve lived in places where housing is so affordable and stable, even during the past couple of years, that owning was the only way to go. I’ve also lived in places where the volatility and housing prices are so high, renting would be a great choice. There’s no blanket answer for everyone… but both are great options depending on one’s abilities, needs, situations, etc.

Bananen
Bananen

What happened to the second part of Baker’s story?

J.D.
J.D.

The second part of Baker’s story hasn’t gone up yet. He hasn’t given it to me! 🙂

elisabeth
elisabeth

When we bought our house we were moving from a rented duplex. Our new house had an apartment in it, and our old neighbor offered to move with us — it was a great deal for both of us; he paid half of the mortgage which was below-average rent, and we got tax benefits and paid down our mortgage faster. When he left to move to another state, we had two different friends who moved in for short periods of time (a year or so each), and also paid a modest but beneficial rent. When they moved out, we converted… Read more »

Julie Hocking
Julie Hocking

My husband and I have three rental units. We always take dated photos of the empty clean unit when we do the walk-though with new tenants. We give them a copy of the photos. We also take dated photos of the unit at the final walk-through when someone moves out. This has kept disagreements about the condition to a minimum.

Lara
Lara

My husband and I bought a duplex in a college town and lived in one side for two years. It was a great deal for us. Our tenant’s rent paid 3/4 of our mortgage and the work was not much more than would be required for a single home. Four years ago we moved out and rented both sides. It’s certainly harder to keep up on things now. Over the past four years we’ve financially broken even on rent. With the lousy economy there have been no true capital gains (it’s worth a little more because we got a good… Read more »

Ouida Vincent
Ouida Vincent

I currently control 18 units and have owned as many as 21 units over the past 15 years. I have had tenants attempt to squat in one of my properties, I have had tenants trash a unit, someone drove a car into one of my buildings and did I mention, I have been sued? I don’t say any of these things to discourage anyone from going into real estate, I only mention these things to say that craziness can be a part of any business! The truth at least for me is that real estate is and should be part… Read more »

basicmoneytips
basicmoneytips

I like what the writer had to say about his rental experience. After the last few years in the stock market, who can argue that diversification is a smart move. There are a lot of advantages in rental property – the depreciation and other tax write offs are important up front. Plus, once it is paid off, who would not like a extra rent check to supplement things. There are bad experiences, and of course the unwanted repairs – like the AC unit going out in July. You have to be willing to accept that, but otherwise there are definately… Read more »

Paul in cAshburn
Paul in cAshburn

Interesting that nobody challenged the statements “Auctions are scary places to buy houses. There are no contingencies, no home inspections, and everything is final when the auction is done.” We bought the house we live in at auction through Tranzon, and we were allowed to do a home inspection post-sale, found the finished basement hadn’t been permitted through the county – and negotiated a $10,000 price reduction from what we had bid at auction (because this clearly was a defect not readily apparent to walk-through inspections by prospective buyers). So, buying at auction was fine for us (although we spent… Read more »

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