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3.5 Rentals in 4 years: Part Two

Our second condo on its online auction site. Blue skies and palm trees make anything look great.

Picture driving into a condo complex with a sign that looks like it’s been made out of paper and is peeling off of its wood surface. In the complex are a few hundred two-story condos resembling a roadside motel, surrounding not a beautiful swimming pool or courtyard but a retention pond. You pass by a small, square swimming pool with no furniture surrounding it. An abuela in a house dress sits on a second story porch watching the cars go by, and outside many of the apartments you notice a number of trucks, indicating working class families. If it’s after five, people will be sitting on their porches drinking beer. You drive up to view the condo you’re thinking of buying and notice that the guy who lives below is washing his car, a small silver Volkswagen, as music plays loudly and his kindergarten-age son rides in circles on a bicycle. On future visits, you observe that he always seems to be washing his car. It’s a very clean car.

Rental property #2 was also a foreclosed condominium that we bought two and a half years after the first property. It was listed at $75,000 for a two bedroom, and it was in a great location near universities, supermarkets, and a Target. There were other neighborhoods of single-family houses and apartment complexes nearby, but ours was definitely the bottom of the barrel. (Example: whereas from our other HOAs, we get newsletters about beautification projects and needing to issue new keys for the boat dock, for this one we get notifications about the increase in car thefts, or door-to-door scammers). There were a number of foreclosures in this complex because it had been a former apartment complex quickly converted to condos during the real estate boom of the early 2000s, and the people who had owned this one were investors who lost their shirts when the market crashed.

I found this place on the MLS and asked the agent we often work with to take us there. She’s an investor-friendly agent, meaning she knows we aren’t out to find our dream home and also understands what we’re trying to do with real estate. When we first went inside, there was no electricity, all the appliances were gone, and the bathrooms were extremely dirty. The kitchen was a little dated, but again, these slightly blurry real estate photos make it look better than it really did.

The walls were filthy and would need to be painted, as would the dingy popcorn ceiling. Here and there a door was falling off the hinges, but on the surface nothing seemed irreparable.  It had been built in the 1990s, which was encouragingly recent. On the plus side, the air conditioning unit wasn’t ancient, and the hot water heater was fairly new.

Then we walked into one of the two bedrooms and looked up. Giant black circles of mold emanated out from the popcorn ceilings, where a sad lightbulb hanging from a twisted wire. Strips of ceiling were peeling off and hanging down as well. Was it toxic? Black mold? A deal breaker? Note that the online representations conveniently left the ceiling out of the room:

There was one other issue. Not only was this a foreclosure, but you had to bid on and buy it through an online auction company called Hubzu. Whaaat? Buying a house on the Internet? How was that safe?

I ran home and started googling, “Is Hubzu legit?” A site I’d never heard of, called Bigger Pockets, appeared. The discussion about Hubzu took place on a forum, and I kept finding thread after fascinating thread about investing in real estate. There was a wealth of knowledge there, including podcasts, so I filed away the intention to listen to the podcasts later so I could learn more. It turned out that yes, Hubzu is legit! It is one of a few property auction sites, and in these transactions, there is an actual title company that makes sure there are no liens on the property before you buy it, which sometimes doesn’t happen with other types of property auctions. There were complaints about Hubzu, and there was no telling how long our transaction might take, but just like the killer mold, we decided to temporarily suspend our fears of how bad it could be and put in an offer.

We asked our agent to put in a bid for us and she started the process. The auction ended in a couple days, and we waited with nervous anticipation. We were thrilled when we won, and we did get it for $75,000. For Hubzu, at that time you had to pay a $2,000 bidding fee, which made the closing costs slightly more than we expected, and we also expected the process to take a very long time, but it didn’t. A title company in Atlanta was working with the bank and we were able to close on the condo two months later.

You also had to pay cash for Hubzu properties. We had maybe 2/3 of the money saved for this one, and we had opened up a home equity line of credit (HELOC) on our main house around that time that would give us the rest of what we needed. We were inspired to pay the HELOC off as quickly as we could because it was from our main bank, which is a giant bank that doesn’t give the best rates, so there was some interest every month on it. Now this property has been completely paid off, as has our first one.

While we were waiting to close, we got another good piece of news – the HOA planned not only to clean up the ceiling mold but also to put a new roof on the condo – in fact, they were in the process of putting a roof on the entire place. It was not going to be our responsibility! We still bought the condo before the repairs had been completed, but they were done quickly AND just in time for Hurricane Irma, which would undoubtedly have made things a lot worse with a bad roof. Meanwhile my husband went to work fixing this one up and was able to get it in decent shape within three months. We didn’t go overboard in making this one beautiful like we did with the first one, but we painted the walls and ceiling, the kitchen counters, added new appliances (kitchen appliances we bought from Lowe’s using a 10% coupon you can buy on EBay, and for a washer-dryer we found a stackable unit in a scratch-and-dent place), fixed all the minor broken things, etc.

How much better does this kitchen look!

In the process of buying our second condo, I learned another good rule of thumb when considering a rental property, the 1% rule. Basically 1% or more of your purchase price should equal to the rent. So, if you were looking at a $100,000 house, you would want to get $1000 in rent, or for a $75,000 house, $750 in rent, but higher than one percent is even better. I calculate the HOA fees into that for condos, so given that our $75,000 purchase rents for $1050 and has a monthly HOA fee of $279, that puts us in the 1% rule for this one as well. (Unfortunately, the market is now pretty high again in our area, so I haven’t found anything that meets the 1% rule in a while, except for properties that would be outside our comfort zone in terms of needed repairs, or neighborhoods we aren’t too sure about investing in. In other states, though, this wouldn’t necessarily ne true.)

There are other things to think about when buying an investment property as well: property taxes are about $1100 a year for this one, we insure it for about $350 per year, and we have to set aside a small emergency fund to fix other broken things. We also put this one in an LLC, which basically means that we created our own little company to house it, which is supposed to protect you from liability in the event of being sued, although there’s a lot of debate about whether this is necessary or not. The LLC has to be renewed once a year too.

Finally, we pay a property manager each month to take care of this condo, unlike our first one. A friend of mine has been working with a reliable company for several years, so we decided to have them manage it. Property management companies take either a flat fee or 8-12% of the monthly income, they screen and find tenants in exchange for a large percentage of the first month’s rent, and they deal with maintenance requests, which they run by us before performing. Since we’re still working full time, we decided it was worth it.

Also, over the two years we have owned this one, we’ve discovered the HOA is a little difficult to work with – they will do things like replace the mailboxes and then tell everyone they have to drive to their offices an hour away to pick up a key, but then they won’t actually be there when they promised. It’s nice having the property management company deal with them rather than us. This brings me to another “lesson learned” – always check out the HOA, and make sure there aren’t any big assessments coming due, i.e. your monthly fee is about to go up dramatically because they’re doing some major repair work. Our dues haven’t gone up, but I’m not sure what’s going on with this HOA because to me they seem to be taking a lot of money each month but not doing much with it. The landscaping is meh. The pool area is of questionable cleanliness. Having a new roof, though, is a great bonus, and there was even a moment when we were thinking of selling our house where I thought we could potentially live there with our family and save a ton of money. (However, we still had a tenant).  

We like condos in general because the HOA takes care of the outside, you take care of the inside, and when you’re dealing with a small, compact space, it feels somehow like less could go wrong than in a house where you’re responsible for everything. Air conditioners and water heaters are smaller and you know how much replacing them would cost. This may be irrational, because I recognize a bad tenant could still do a lot of destruction, as could a water leak or something else really damaging, regardless of whether you’re in a condo or not, but still, I feel like the limitation to interiors takes out some of the work, although of course you pay for that through the monthly fees.

The discovery of Bigger Pockets to learn about everything from the 1% rule to property managers to how to collect rent was life changing, and although I spent a very long time just exploring the online world of real estate before discovering the FIRE community, it helped us to hone our plans. I remember a long car ride home from a family trip listening to podcasts, and hearing one that blew my mind about the potential of real estate, with a teacher in San Diego who had become a millionaire on his real estate investments. I started reading the books mentioned on the shows (hello, Rich Dad, Poor Dad – problematic but gave me so much to think about!) and planning our next acquisition, which ended up happening sooner than we had intended. More on that one next time!

Published inFinancial IndependenceReal Estate Investing

2 Comments

  1. Ana Ana

    Sounds like you’re doing great with your rentals. You reminded me of my own rental stories with the iffy neighborhood, using HELOC to buy and getting discounted appliances from Lowe’s. A good property management company can handle the interaction with tenants, regular inspections and any legal issues. I think the fee is reasonable for the peace of mind.

    • misFIRE misFIRE

      I would love to read your rental property stories! I absolutely think the property management company is a life saver. If we weren’t working, perhaps we could manage more of them ourselves, but for now, there’s no way I could handle it.

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