I purchased my first long-term rental property in December of 2010. I did not buy my second rental property until October of 2011. I did not plan on waiting this long to buy another, but life happens and sometimes in a big way!
The big change that occurred in my life happened on 6.1.11. I guess you could say changes, as my wife and I welcomed boy/girl twins to the world. There was quite a bit of time, money and preparation involved as you can imagine. We were not able to become pregnant naturally so we had to use in vitro which was not covered by insurance and cost a pretty penny. While we were going through the pregnancy, the birth and taking care of two newborns buying another rental was not a priority.
At the end of the summer things calmed down a bit and we began to save up some money again and I started to watch MLS for properties. I had noticed rental property number 2 on MLS before, but it had always been under contract as a short sale. One day I was looking at my hot sheets(hot sheets list new listings and any status changes on MLS) and noticed the property was back on the market. I quickly set up a showing and looked at the property that afternoon. It was a 5 bedroom, 2 bath ranch with a 1 car garage across the street from a school and park.
The home needed some work. The inside needed carpet, paint, windows, doors, appliances and someone had added a fireplace in the basement. To add the fireplace they ran the chimney right through the master bedroom closet! They other issue I noticed was the front patio had settled and the roof wasn’t completely level due to the support post settling with the patio. After looking at the numbers I made an offer that same day. They were asking $96,000 and I offered $90,000 with $2,000 in closing costs. The seller countered me at $94,000 with $2,000 in closing costs and I accepted.
Short sales can take a very long time to get approved and there is never a guarantee they will approve your offer price. I didn’t get too excited about this house since it could take months if the sale was ever approved. I was pleasantly surprised when the listing agent called me and said they had approval about 6 weeks later!
Before I made my offer on this home I had been talking to a number of lenders about getting a loan on another rental property. I was having serious problems getting decent financing lined up. The problem was I had my principle mortgage, rental property number one and two other rentals I had purchased with my parents years ago. My name was on the mortgage on those properties so technically I had four mortgages in my name. It gets really tricky getting a fifth mortgage!
I talked to my mortgage broker and a couple traditional lenders and the consensus was I could get a loan, but it would cost me. I had to put at least 25% down and my interest rate would be at least 1 % higher than a regular investor loan. I was not happy at all with this news! I continued searching and finally found a local bank that loaned their own money, a portfolio lender! They said they could do 20% down, with a regular investor rate, the only catch was I had to move my accounts over to them and they did not offer a 30 year fixed. They offered a 5 and 7 year ARM and a 15 year fixed rate loan. The 5 year ARM works perfect for my model and I was on my way!
I am never sure how it is going to go with a new lender until the home closes. We made it to closing and I was blown away at how easy it was to get the loan done. Basically they used common sense to do the deal. They saw I had plenty of equity, plenty of cash, made a decent income and decided to give me the loan.
I closed on the property, had my contractor complete the repairs including removing the fireplace and chimney and put the house up for rent. I actually ended up renting the home to my brother-in-law who just moved back to the area from Texas after a divorce. I rented it to him for $1,100 a month, even though I know I could have gotten at least $1,200. He moved in at the end of December 2011 and is still living in the home now.
This home took a lot more out-of-pocket cash then my first property but I had more built-in equity and cash flow potential. Here is a look at the numbers.
down payment $18,800
closing costs $2,500
closing cost credit -$2,000
Total Cash $32,450
My cash flow was $7800 with no vacancies or repairs the first year. My cash on cash return was 24% my first year and my rents were low! I was able to refinance this house in October of 2012 and take out $26,000 while only raising my payment $120.