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How we bought 3.5 rental properties in 4 years, part 3

The photo of this one says it all.

While we were busy trying to acquire our second property, which was a foreclosure, we started to get discouraged. Our online bid had been accepted by the bank that owned it, but there were inexplicable delays, and we started to think we wouldn’t be able to get it. (If you’d like to read the first post, about how I stumbled into real estate investing in the first place, start here.)

We have a family history of trying to buy foreclosures. In getting our dream house, we had spent over year and a half trying to buy a foreclosure in the same neighborhood because the houses were basically too expensive for us and we knew that we could only get something in that neighborhood if we found a deal (Again, we knew nothing about FIRE goals, so at that point our goal was just to live in this particular neighborhood). So, we put in a bid on a house that had had a fire, a hole in the roof, and a mouse infestation (didn’t get it), and for many months we had worked on getting another foreclosure where someone was squatting and had basically sold every item within those walls, including parts of the flooring. (Our dream house was not a foreclosure but fell into our lap after months of trying to convince the bank to sell us that second foreclosure. The one we eventually bought was a good deal because the people had already moved, it was fall and school had already started, and it had been on the market too long.)

Because of our experience trying to get houses from the bank, we thought our second condo was never going to happen. We started to look at back-up properties just in case. Then we saw this one – a tiny little one bedroom condo overlooking the lake. Not only was there a lake view, but a boat parking lot and dock as well. The view was gorgeous – I could sit there for hours just staring at that lake. Inside it needed a really thorough cleaning, new fixtures, a closet door and shelves, and a new paint job, but it was basically in very good shape. The owner had passed away and his heirs were trying to sell it. This was 2017, and the price was about $63,000. We made an offer, and it was refused.

We were sad about that, but we went back to waiting for our foreclosed condo with the mold-infested ceiling and no appliances. Then a stroke of good luck – the agent came back to us a week later and said the winning bidder had never paid the escrow. What?! We pounced on that.

Here’s where privilege comes in. For our second one, we had planned to pay with a combination of savings and a home equity line of credit (HELOC) we’d taken out on our primary residence. But we didn’t really have any money for this third one. So we needed a mortgage. It’s entirely possible to get mortgages on rental properties, although the rates are generally higher, but it’s a little harder to get them for condos. I checked with a mortgage broker I knew and the bank. The bank seemed like it could possibly take months to give us the loan, and I can’t remember why, but it didn’t look like it was going to happen.

Enter parents. I asked my mother if she would be willing to hold the mortgage, and she agreed. So we took out a ten-year, 4% mortgage with her and closed on this beautiful place. The tenant is basically paying this mortgage so we get nothing from it every month, but we are going to refinance to a 5-year, 3% mortgage after the new year, again with mom, and pay it down quicker. It currently rents for $950 per month, and the condo fees are pretty low – around $200.

And now a word about leverage – in the real estate investment world, people love to debate how “leveraged” you should be with your rental properties, meaning how many mortgages is it okay to have. In the pro-leverage camp, having a bunch of properties mortgaged allows you to grow your real estate empire (heh heh) quickly. Imagine that you have $100,000, and you use that money to buy five properties with 20% down and $80,000 mortgages. Tenants rent them out right away, so your goal is to “cash flow” just a little bit – i.e. still get a few hundred dollars in profit even given the mortgage. You can snowball your debt and concentrate on paying them back one at a time, then do more. You’re getting there much faster, if all works out.

Or imagine you have $100,000 and you use it to buy just one property. You sit there for a while as prices go up, and even if you are getting $1000 per month rent, your “equity” isn’t doing anything for you – or so this is the argument.

However for us, we haven’t been comfortable with the idea of a lot of debt, so for now, we only have 1.5 mortgages on our rentals and are almost done paying the .5 one back. (more on that .5 property in my next update). It might not please the pro-leverage camp, but I just don’t like the idea of having a lot of debt.

We spent a couple months on the weekends making it nice again, finding in the process some interesting things the owner left behind, including a key chain collection in an old coffee can. I thought a lot about that guy – internet searches revealed to me that he had moved to Florida in the 1980s after almost a lifetime in Michigan raising a family, and had lived in that condo ever since. One of the neighbors spoke to us about how much he missed him.

I like to get all Marie Kondo with these places and thank them, just like she tells you to thank your possessions for the joy they brought to you before saying goodbye to them. I think about the people that lived there, even if I don’t know them, and thank the place for providing shelter to people. I would love to live in this one – except that it’s tiny and the place doesn’t allow children under sixteen. In the back of my mind, I imagine we could downsize there someday if necessary, after the kids are grown. So it’s nice to think about a place that we will own fully and where the waterfront view is so beautiful and peaceful. There has been a tenant in place for almost two years now, and I imagine the tenant likes it there, too, since she hasn’t asked to move yet.

After we closed on this one, everything also came together with the 2-bedroom moldy ceiling condo, so we now suddenly had two more rental properties. It would be a year before we got our next one…

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