We purchased our first rental property nearly ten months ago. We wanted share our experiences, thoughts, and lessons learned with other new or soon-to-be landlords. Our hope is that you take away something from this and also that we learn something from you as well! Take these simply as data points.
Deal Analysis (Show Me The Money)
Cash flow is negative, right around -$200/month if setting aside money for vacancy and repair; with no repair and vacancy, the cash flow is around $50/month. However, we took a calculated risk and felt confident that the rents and house value would increase over the ensuing 12 months. And if nothing else, at least our principal would be paid down every month.
Things We Are Happy About
- Location, location, location: the property is in a great location. For us, that meant being in a safe neighborhood next to highly-rated schools. It also made finding a well-qualified tenant relatively easy. And it also put our mind at ease knowing that we would feel 100% safe going to the property in the middle of the night if a problem arose.
- Not over-leveraging ourselves: we didn't want to feel stressed out if the property were to sit vacant, so we made sure that we could comfortably support two mortgages (our primary and rental residences).
- Picking the right tenants: our tenants have been fantastic. They have paid the rent on time every month, kept the property clean, and been quick to notify us of issues.
- Payment processing: we found a free, reliable payment processor. The payments always show up in our accounts within a day or two from the beginning of the month, when rent is due. Of course, this also ties in to having high-quality tenants that pay on time.
- Rents have increased: We've been watching rents in the area pretty closely and feel confident that we can raise our rent by anywhere between 5%-8% and still be under market when the current tenant's lease is up.
- Property values have increased: talking to our realtor and looking at various comps, our house has gained a conservative 6% from our purchase price over the past 10 months.
Things We Would Do Differently
- Location, location, location: yep, you read that correctly. Our property is in a great location. Some would say a "class A" neighborhood. So what's the problem? The problem is the distance between our primary house and the rental. We wish we lived closer. There have been a couple issues at the house where we ended up calling a repairman to come do work. If we were closer to the property, we could have possibly troubleshot and fixed the issue for much less money.
- Buy at a better price: we paid for a move-in ready home that had several upgrades. We knew that properties in the area were selling quickly, so we even made an offer slightly above the list price. In retrospect, we should have bought a property that needed a little work and then added the value in ourselves. We should also have tried to negotiate on the sale price given that there will always be more houses to hit the market.
Next Steps
Looking back, we probably jumped the gun on this first rental. We are now considering selling the property and using the funds toward a down payment on a new primary residence and at the same time rent out our current primary residence. Over all, we think our first rental property has been a great "getting our feet wet and learning" experience and we feel fortunate that we can sell for break-even or even a slight profit. We consider this "the cost of learning" and well worth it.
