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Property Empire in Our Future?

Mr. BFS and I would love to diversify our investments for retirement, and the rental property we have is making us crave more.  We’re looking at our buying options and finances right now to see if we really need to wait until next year like we originally planned.  Here is how it is looking.

Rental Property

Our Targets

I was browsing foreclosures in our area last week and noticed two in our old neighborhood.  That area is perfect for rental property!

  • Homes built in 2004 and 2005.
  • $110,000 to $130,000 foreclosures with 3-4 bedrooms and 2.5-3 baths.
  • The homes need less than $10,000 in repairs and basic renovations before renting.
  • Great school district.
  • A solid market for tenants at $1300-$1500 per month since the area is nice (safe suburbia close to groceries and entertainment).
  • Well built homes (we have had very low maintenance costs on our first house in these last 6 years).
  • Affordable property taxes ($2500-$3000 a year).
  • No home owner’s association.  Score!
  • 5 miles away from our new house (10-20 minute drive depending on the time of day).  That’s close enough to keep an eye on our properties but far enough away that we won’t be physically visited by our tenants very often.

The only thing holding us back is the cash on hand needed to buy another house.

Foreclosure

The Financial Picture

At 4% interest, a 30 year mortgage after putting 20% down for one of the foreclosures available right now would run about $450-$500 a month plus about $300 a month for property taxes and home insurance.  That’s $800 a month for a property that can easily rent for $1300 right after it’s fixed up.  That looks to be a great investment!

Plus, even in the no-tenant months, we can cover $800 extra without risking our overall financial health.  It would bring our monthly nut including taxes to $8000 again like late 2012 instead of the $7200 it is at right now.  We have been hitting that income target for 2 years.  We also only have one debt – the $205,000 mortgage we have left on our current house.  So this would bring our debt up to about $300,000, but our properties would be valued at a combined $500,000.

BUT, buying another house right now would also mean we would need the cash on hand for 20% down, closing costs, and renovations.  A realistic estimate on the high side of all of that would be $40,000.  We do have a little more than $40,000, but that would pretty much wipe out most of our cash savings.  We never would do that since padding is just plain necessary when you are self-employed.

Our Options

  • Wait until next year and see how much cash we can save up by then.  The risk here is that there won’t be any foreclosures available in our old neighborhood by next year.  We may have to expand outside of our comfort zone or pay $130,000-$150,000 for a non-foreclosure.
  • Take out a home equity loan on our paid off rental home to cover that $40,000 needed around closing.  But then we’d have two more loans on top of our current mortgage.
  • Look into loans that don’t require 20% down.  We do have 2 years of self-employed tax returns now, so finding a loan will be easier than it was last year hopefully.  But self-employment may simply mean that banks will want 20% down.  We’ll visit a couple and see what they suggest.
  • Ignore rental properties completely and open up a SEP IRA as soon as possible instead.  I just can’t see retirement accounts making the interest that would make them more profitable than $1300-income rental properties that only cost $800 a month.  Property values in this area are still pretty low and make for great long-term investments (there aren’t many places where you can get a 2000 square foot home for $110,000).

We’re leaning towards talking to some banks and seeing what our loan options would be.  If 20% down is necessary, we’ll probably wait until next year.

What would you be leaning towards in our position?  What obvious options have I missed?  :-)

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13 comments to Property Empire in Our Future?

  • When I’ve looked at buying rentals, the bank told me 25% down for investment properties.

  • This is so interesting to read because in Toronto there’s a different opportunity. There are condos going up like crazy. Every single place you look there’s a new development going up. I’m talking every green space is going away.

    One thing to consider is maybe the tenante situation. You can look for current ads for rentals in that area to see what the prices are and if you would be able to cover the mortgage.

  • Sounds like you have some great options ahead of you. The physical proximity sounds especially attractive.

  • I don’t think you’ll find and investment property mortgage that will allow less than 20% down, probably more like 25%. I would wait until I had cash on hand to make the down payment, but the HELOC isn’t a bad idea if you think you can pay it off quickly. We are kind of in the same boat and want to have one more rental soon, but the timing is not there yet. It’s hard to be patient!

  • If I were in your position, I would concentrate on paying off the house you already have, rather than buying another one. If one or both of you becomes unable to work for some reason (unthinkable when you are young and healthy, but shit happens) you don’t want to be out on a limb for two mortgages, because that’s when all of a sudden your tenant loses their job and the furnace blows up and the car needs an engineectomy. Real financial security does not come from having a lot of debt but even more income; real financial security comes from not owing anybody anything.

  • Brianna

    I would do a little more research…You also have to take into account repair costs, property taxes will be higher because it is not your homestead, landlord insurance is higher because it is not owner occupied, taxes paid on profit at the end of the year, management costs (even if you are managing the property yourself…you don’t want to work for free, do you?), 1 month vacancy (I know you said you could pay for it, but with an investment you really want the tenant to ‘pay’ for it).

  • I can’t give you advice on this! Unfortunately, I’m not a renter. But I would want to seize the properties now while they’re cheap. Especially since interest rates and houses are still low. You’re costs will go up in a year or two which will decrease your cash flow.

  • “Unfortunately, I’m not a renter” What I meant was I’m not a rental property owner. Ooops

  • @Jason, good to know! So either a home equity loan on the other house or wait until next year…

    @Martin, yeah, it’s a great tenant market right now.

    @Mike, yep. :-)

    @Kim, what’s “patient” mean? ;-)

    @Zendelle, I’m actually not worried about financial security as much as our financial future. We are making more now than we ever have and just want to make sure we are leveraging it the best we possibly can. I don’t think blog advertising will be around for the next 20-30 years, so I want to make sure we are covered even if our business stops. No matter what, we own a house outright (our 3 bedroom rental) and our current house can sell for more than $50,000 over what we owe, so we do have a lot of options. But I bet we have this house paid off in the next 10 years anyway since I also don’t like debt.

    @Brianna, I did take into account those things. It’ll be $10,000 right off the bat for repairs plus $1500-$2000 per year to be placed aside for ones along the way. The higher property taxes will be around $2500-$3000 instead of $2100. The taxes are paid from the profits. Management costs are whatever is left. And it can be vacant 3-4 months a year and we’d still be okay. But the market is very renter-heavy right now, so I bet it would be vacant less than a month a year (maybe a month or two every 3 years between renters). But we’d have a padded rent home account to cover that (the same one used for repairs needed along the way).

    @Savvy, yeah, I’m right there with you. But if we need 25% down, we need to wait until next year to avoid a home equity loan on the other rental house. We’ll see…

  • BF and I are considering buying an investment property. We can’t afford to buy one here in the NYC area, but we could easily buy one up by my folks in Maine for $100,000 or so. Right now we’re saving for a down payment. Sounds like you’ve obviously done your homework. I say if you can afford the down payment, go for it!

  • Another way to invest in real estate, only with lots less hassle than renting, is to invest in a real estate investment trust (REIT).

  • @KK, since it looks like 25% down is necessary, I think we’ll be waiting until next year.

    @Funny, hmmmm…I need to look into that…

  • Great post! My coworker and I were were discussing this topic this morning. Thanks for the useful information!