I have wanted to own a rental property for a long, long time. If there is a “cool” thing about having a blog is that I can actually look up moments like, when I first brought up owning real estate (6 years ago) or when it actually came up as a business plan, I actually looked at a house or two (or when that second possible deal failed).
Why it is important for me to own a Rental Real Estate Property?
I have discussed the idea of multiple streams of income, and why they are important to me since almost the beginning of this blog. I was able to reinvigorate my feelings on the topic when talk to my older brother this past weekend when I was telling him about this deal.
He asked me, point blank, why I wanted to get involved with real estate. We both saw our father go through hell with some of his tenants over the past couple of decades. My father owns a mixed use property (2 units and commercial space) that my grandparents bought when they came to America from Greece, as well as his first property that is also 2 units (he used the equity from that home to purchase their main residence that they have owned for the past 30 years or so). Both properties are in the boroughs of New York City which are notoriously anti-landlord.
Notwithstanding my father’s experiences, creating a real estate portfolio is extremely important to me. My brother is a lieutenant in the FDNY and his wife is a NYC teacher. One day they will wake up and have an income stream for the rest of their life. It is my goal to create those streams of income that is not predicated on the selling of principal for future Evan. I can’t see any path I would take at the age of 37 that would take me to a stream of income like that other than real estate and my dividend portfolio. He seemed to completely understand as soon as I explained it that way – so that may help someone else out there.
The Possible Real Estate Deal
About a week or so ago my friend, boss, and what I would consider a mentor (although I don’t think he’d appreciate the title) came to me with a deal. A banker’s broker he has worked with a few times before on short sales brought a deal to his attention. The deal was too small for him to deal with all the inherent headaches (described below), but he thought if there could be a deal for both of us where he would be the moneyed partner and I would handle all the day to day headaches. To say I was appreciative would be an understatement. We spent the next two weeks or so ironing out details.
It was at the end of that second week that he sat me down and said that he had an alternative arrangement. He would fund the entire deal but it would be all mine. He would be my very generous bank but a bank nonetheless with all the rights thereto. After talking to a few people I said I was in!
Estimated Costs and Income of the Home
The home is a short sale and with the help of the aforementioned friend is at the rock bottom price of $350,000.00 – all cash deal. From what I researched I would estimate there is probably an estimated $50,000 to $100,000 of equity in the home (i.e. there aren’t many homes in this town that sell for less than $400,000).
The current occupants are the soon to be ex-homeowners. This is great and terrible at the same time. First the bad news, they were obviously not able to pay their mortgage, so who is to say they are able to pay me! The good news, they have indicated to parties involved they want to stay and that they have kids in the school district. Interestingly, when I did a creepy drive by they had newly planted plants and the sprinklers going. I thought this was a really good thing – it shows they care about this house.
As of this post, I have not had the opportunity to sit down with them. Hopefully that is happening in the next day or two. My plan is to sit down with them, have a background check done (knowing the credit report is going to come up terrible) and discuss how much they plan on paying me. These numbers are estimates as this post is in the middle of a lot of balls up in the air.
Income from Property – $3,000/mo (Going to try and negotiate $3,250)
Interest Only Monthly Payment – $1,666/mo ($20k/yr on $400k borrowed)
Taxes – $600/mo (approx)
Homeowners Insurance – $150/mo (approx)
Leaves me with working capital of about $500 – $600/mo of positive cash flow. I am not going on with blinders this deal is unlikely to be a lottery ticket to an early retirement, however, I am looking at it as a very low risk way to get my feet wet into real estate as an asset class for my family. If I absolutely hate it, then lesson learned, I sell the property, payback my friend and walk hopefully with a few dollars for my troubles. If I love it, then I slowly eat into my unbelievably low hard money borrowing rate and continue to be thankful that I have met amazing people in my life that allowed me this opportunity.
What Could Still go Wrong with the Deal?
I could have held this post off until closing, but I have been doing that too much lately and then never getting around to writing something when it doesn’t work out. For example, last week The Wife and I put an offer on a new main residence! By the time the dust settled we were outbid, and as such, I lost all motivation to write a post. I know for anyone reading this blog still it doesn’t matter, but now, that deal will be completely lost from my memory. While that one will be gone from my memory, fighting with The Wife about what we offered, how much we got out bid, etc., this rental property will be memorialized even if it doesn’t work out…and this is far from a lock!
First thing that could derail this deal are the tenants. As alluded to earlier in the post, there are just no guarantees that we are going to ‘vibe.’ The bank has made it clear that for a deal to go through they are my problem meaning they aren’t dealing with the foreclosure which leaves me to an eviction process Evicting an individual in my county is much easier than in NYC but it is still a process nonetheless. I don’t think I want my first 6 months as a landlord to be spent in court trying to evict a family (with children) from the home they thought was going to be their forever home. To minimize this risk, I am going to have a sit down with them to try and figure out how this is all going to work out! That meeting hasn’t happened yet, but if there is no way they can afford $2,000 nevertheless the $3,000 that is my final offer, I am not sure where that leaves me.
The second thing that could kill the deal is the inspection report. Similar to evicting a tenant, I don’t want my first 6 months (or even year) as a landlord to be dealing with major problems. If there is a roof issue, boiler, etc., I just would rather hold off till the next one! To minimize this risk I need to set up an inspection from an agent that has absolutely no relationship with the broker or bank, and as such, does not care if the deal closes.
Looking into the Future
I obviously does not know where this one is going to end up! I am hoping in 60 to 90 days I’ll be able to say that I am a landlord with great tenants! Could the deal fall through? 100%. Could I be stuck with terrible tenants? 100%. Could this be a terrible mistake? 100%, however, there seems to be such little downfall risk that I have to at least try it out! Even if shit completely hits the fan I really believe that this could be a quick flip after I work on evicting the tenants.