All-right BP,
I figured this would make a great topic for a post that I hope helps some people out. In my first few years as an investor, I mindlessly subscribed to the notions that all tenants are headaches, all landlords are slumlords, and that I don’t want to field 11pm phone calls about plugged toilets. So without a second thought, I stuck to deals that were only fix and flips or seller financing. As you can imagine, this leads to some sizeable short term capital gains taxes each year and no limited wealth building
I’m the type of person that, for better or for worse, chooses to challenge paradigms by taking action. I see opportunities, evaluate based on the level of knowledge I have, and decide to move forward. I chose to challenge my own beliefs and see how I could handle becoming a landlord; So I bought 2 rental properties right off the bat in 2019 and ended up with an unplanned 3rd.
I’ve made the move from doing deals for pure income, to a mix of income producing plus cash flow, and towards the end of 2019 I was considering how to start to mix in some wealth building activities. I found a few opportunities that presented me with the following:
- Cash flow off the bat
- Opportunity for 1+ year holding period for LT capital gains taxation
- Multiple exit strategies
Here’s a breakdown of each rental – why I did the deal, my landlording experiences, and how each turned out financially at the end of the year
- Property 1: Main Street
I found Main St on the MLS – it's in a more rural area of North Carolina about 45 minutes outside of Charlotte. I knew I'd be able to seller finance the house if the rental business didn't work for me. I bought the house with the previous tenant in place, with the plan for them to stay as long as they are good stewards of the property and paid on time. We signed a new lease on January 2.
Right off the bat, rent was late. I was paid for a few months of 2020, but eventually the tenant stopped paying and then voluntarily moved out. She even sold off the appliances before leaving!
I took the time to refinance my all cash purchase with a private lender on terms with a 15 year amortization. I then had a qualified buyer with a decent down payment to buy the house seller financed and wrapped the private lender 1st lien.
Purchase Price: $46,000
Expenses: $2832
Private Lender Refinance $38,000 on 15 yr AM
End Buyer Down Payment/Sale Price: $7500/$67,500
Total Income: $11,030
Monthly Cash Flow: $208
Cash On Cash Return: Inf (I have no money in the deal)
- Property 2: Lowry
Lowry was found on the MLS as well. It had been on the market for a while, so I made an offer that made sense to cash flow based on my private money loan rate and the existing rent rates. I knew this house could be flipped when the time was right and I'd have good margins there, so the immediate strategy was a little cash flow, depreciation, move to LT Cap gains, and hopefully some appreciation. In the meantime, the existing tenant was welcome to stay – I'm not in the business of displacing quality tenants who take care of the house and pay on time.
After 1 year with Lowry, I’ve worked to find balance between being a good landlord, treating people well, and also establishing boundaries with tenants and enforcing lease terms. Overall a good experience, even though monetarily this one hasn't been the best. As of October this year, the 6 acres at the end of the street had been cleared in preparation for new construction.
Purchase Price: $53,749. This was a mix of cash and a private money loan
Rent (Month/Annual): $795/9520
Expenses: $8274 including interest only note payments
Net Income: $1245
Cash On Cash Return: 7.8% - Not great, but I knew it coming into the deal
- Property 3: Prospect
Prospect was purchased as a flip. I have been very conservative the last 2 years with my house flips. If I can’t sell it retail, I want to be able to sell it seller financed or cash flow as a refinance/rental. The conservative nature has cost me in such an aggressive market, but it saved me in this case. I had a lot of issues with contractors, material prices, scope creep, and going over budget. Overall, I mismanaged the project. After finishing the rehab and looking at what I’d be making, net after taxes, it just didn’t make sense to try to sell this retail. My property manager suggested we list for rent at $100/month over what my initial idea was. It was leased up very quickly to a professional. I was able to refinance with a 30 year asset based loan. There is a much better feeling about renting a property that is “new” from top to bottom vs a rental with dated roof, dated HVAC, and old appliances.
Purchase Price: $36,456
Rehab Costs: $39,748
$ Left in property after refinance: $5,059
Net Income from rents (3 months): $2288
Cash on Cash Return: 45% to date
In conclusion, I am glad I decided to take action and face my limiting beliefs around owning rental properties. I had some good luck, some bad luck, some challenges, and some creative solutions. I built new relationships with property managers, lenders, and contractors. I learned and grew in a number of areas that make me a better investor – Based on my experiences in 2020, I have 3 houses currently under contract ready to be rehabbed for rental in January 2021.
Challenge that voice in your head that is holding you back. Make a plan - Challenge the limiting beliefs - Grow!
