I’ve wanted to own rental property my whole life. Ever since I was a kid. I remember driving around with my dad when I was about 6 or 7. Sitting in the front seat with no seat belt on of course! It was the early 80’s after all. We drove past a condo complex that was being built and he explained to me how you could buy one of those and rent it out. He talked about how the tenants will pay the mortgage. That sounded awesome, even to my 6 year old ears. (I told you I was a weird kid.)
It took 25 years and a housing bubble burst to make my land-lording dreams come true.
The housing market in Phoenix saw some of the biggest extremes in the country. Housing prices doubled and even tripled in the course of just a couple of years. At this time the idea of buying a rental property wasn’t realistic for us. But then the crash prices dropped to a third of their bubble highs. I kept a close eye on the market during this time. I tried to keep track of trends in the area. It finally seemed like prices were starting to level off.
It’s not possible to tell where the bottom is. I don’t know if we bought at the bottom or if prices will continue to fall. Only time will tell. I do know that the time was right for us.
My first step was to get pre approved. Because it was an investment property we had to put down 25%. This rule gave us what we could spend. A larger down payment would have gotten us approved for a higher purchase price, but I knew our budget and I wasn’t willing to put down any more money. So, preapproval in hand we started shopping.
What I looked for in a rental property
Positive cash flow: I wouldn’t even consider purchasing rental property if it wasn’t going to provide some income. I wanted this investment to be self sustaining. Rent would have to cover all monthly costs along with all maintenance needs and hopefully still provide an income. Before the crash this wasn’t possible to do. But with all the foreclosures and short sales in our area there were deals to be had.
A single family home: My rule of thumb was that I wanted to buy something I would want to live in. I really wanted a 4 bedroom but with our budget a 3 bedroom was more realistic. To afford a 4 bedroom we would have had to move into less desirable areas.
A good school district: A 3 or 4 bedroom single family home is going to attract families. So I wanted them to be in a good school. This helps with long term value, rentability, and rent prices. It also falls into my rule of being a house I would want to live in.
Reasonably maintained: I didn’t need the house to be perfect but I wanted it in pretty good shape. I didn’t have the budget to do any renovations.
The house we ended up with was a 3 bedroom single family home in the school district we wanted. It provides positive cash flow, about a third of the rent or 12.6% annual return of our investment on rent alone. We will also see market appreciation over time, hopefully. Of course, some of the rent will have to be reinvested into the property. So time will tell what our actual return is.
It was also in good condition. Mostly it needed to be cleaned and painted. I spent probably 30 hours cleaning it and then another two days painting. The other major costs were repairing some cracks in the ceiling drywall, replacing a vanity top in the master bathroom, pest control (since the house had been sitting empty for a while), and repairing the air conditioner.
Tomorrow I will talk about why I decided to get a property manager and how I went about choosing one.