We liked our condo with the lake view so much that we wanted to get a fourth property in the same complex. The neighborhood is great and well located close to shopping, public transportation, and a major highway. The HOA fees are relatively low, and the grounds are very well managed.
I had been talking to my mother about investing in real estate, and she agreed to finance our final purchase, but also go in on it with us, 50-50. She and my father had had a bad experience years ago with a rental condo, and I grew up hearing stories about the banker tenant who seemed like a good candidate financially but actually trashed their place. But we’ve been happy with the property management company we’ve used for our other places, so we assured her that they would take care of the screening, rent collecting, and, if necessary, eviction proceedings.
Making the offer, getting the financing
When this fourth condo appeared, it was offered for sale at $77,000 for a small one bedroom. But this is the view outside the sliding glass doors! Each time we went to see it there were other people also waiting to look at it as well. We wrote a note to the owner telling her why we liked it, and she accepted our quick offer.
Again, I have to acknowledge our privilege in being able to get this one with my parents, who loaned us the money for our half. We had a couple thousand saved up for it, and as of this writing, we owe about $6,000 and are aiming to pay it off by the end of the year. Every spare cent that comes into our accounts goes toward paying it off.
Profits and Expenses
So, what does a return on an investment like this look like? It has rented for the past year for about $900, with a slight rent increase this year to $925. After monthly HOA and property management fees, in the past year we received about $300 per month for our half of the property.
The other hidden expenses are, of course, property taxes, insurance, and the occasional thing that breaks. So some months, there might be a broken a/c and we get nothing. Vacancy is another thing you can calculate, because when tenants move out, you would go at least a month without income. Insurance would eat up another half of a month, and property taxes roughly another month and a half on top of that. (Those come due in November, so I have just been setting aside a few hundred dollars a month throughout the year for all four rental properties).
A ballpark estimate for rental properties is to calculate the gross rent you’re going to receive each year, and divide it by half. That’s your net income. Some years it will be more, some years less. A dream goal for me would be about ten rentals netting around $1000 per month, give or take… those estimates may change.
To leverage or not to leverage?
There are also debates about leverage, or how many rentals you have mortgages on. In the pro-leverage camp, people say you should have mortgages on several properties but be “cash flowing” a few hundred dollars a month, i.e. after mortgage and all expenses you’re making a tiny bit of profit from each one. Then you can snowball money into paying them back, one by one.
The negatives with leveraging are what if you have more mortgages than you can handle and you have financial problems or a lack of tenants where you have to pay money out of pocket each month that you don’t have. We are less comfortable with leveraging, even though it seems to go faster that way to build your real estate empire. So right now, we have a mortgage held by my parents on one of the properties, and on this one as well, although we are only $6,000 away from paying it off. Then we’ll fully own outright 2.5 properties, technically owning 3.5 (with one mortgage).
Expenses aside, I think real estate makes a great income stream to contribute to financial independence, especially if you want to diversify your income. It helps if you are handy and can do many of the repairs/renovations yourself. There are so many places online where you can go to learn more – my favorites include the website/podcasts by Bigger Pockets, Afford Anything and Coach Carson, which all have a lot of thoughtful content. I actually learned about index fund investing long after we started on this path, so this is definitely our main avenue for working toward financial independence. Does investing in real estate figure into your plans at all?