Originally posted by Tyler McCracken on 10/11/2009 on www.askthelandlord.com
A Way To Wealth With Rentals: A Tale of Landlording That Anybody Can Replicate.
I remember the day like it was yesterday -February 14, 1994. That was the first day of my career as a landlord in Charlotte, NC.
Roughly a year earlier I had bought that home to live in as if it might be forever; however, I’d also somewhat bought it with an eye towards becoming a rental. Had I to do it over again my first home would have been a duplex though.
With that said, I had screened and moved in a great resident (ended up staying about 5 years). Around the 1st of March came and so did a rent check with the process repeated in April and then May….. I thought to myself that I needed a 100 of these rentals as this was fantastic and surely the road to Independence.
Now this was no special deal. I had bought the home via a Realtor through MLS. It certainly wasn’t a wholesale purchase but one might say it wasn’t full retail either. I had bought the single family home 3 bedroom and 1 bath brick home for @$62k with almost 100% financing on a 30 year fixed rate of 7.5% in 1993. My Principal, Interest, Taxes, and Insurance (PITI) payments ran @$475 per month on the $60k loan. I had less then $3k in rehab into the home (since its purchase) and rented in @1 week for $625 per month. With just a $150 per month positive cash flow at that specific moment, I was ecstatic.
Truth be told I’ve glossed over my commercial credit background and my screening ability of a resident. Filling an empty home with a qualified applicant is one of a few keys to success in landlording and failure to do so…, well you understand -results in what I’ve seen repeated over and over again -A certain level of misery, lost money, and perhaps foreclosure and/or even bankruptcy.
The other part is the cash flow is thin especially if one factors that over time vacancy, repairs, and maintenance costs can average up to 25% of one’s rent. You do the numbers –she’ll be tight. Not saying that one doesn’t play the odds of risk –assuming one truly understands how to weigh those risks. What I am saying is cash flow is king. If it isn’t coming from an empty rental(s), then one had better have positive cash flow in other investments, business, and/or job endeavors not to mention adequate cash reserves.
But I digressed…..
This is a deal -that anybody that can qualify for a fixed rate loan can do. You see today, I’m on my FOURTH resident after 16 years!!! HINT: “Slowing the Turn” of residents is the key to landlording and a sure-fire way to increase the compounding of your wealth generating machine: rentals.
Today that resident is paying $750/mo and my PITI payment is $490/mo. Not to bad. Now let me share some other numbers of the deal. I added $100/mo in extra principal payments for 19 payments between 2002 and 2004. Kicked in two extra $500 principal payments in 2004 too. Have you booted up your amortization tables yet? The net effect of making payments (with those extra principal payments) for the last 16 years is that I owe @$31.5k on that original loan today. If I hadn’t made those extra payments the balance today would be roughly $42.5K. Not bad for a home that had a $60K loan on it originally! Almost 50% of the debt has been paid off –just imagine if I’d automatically added just $50/mo on the payments from the beginning or even $100/mo for extra principal to today?
Have you calculated that in your amortization calculators? No? Why not? If you really want to insure your odds of success, freedom, independence, and wealth, YOU WILL NEED TO TAKE ACTION all the way along the path of life. If $50/mo in extra principal were added all along the balance would be @$22.9k and $100/mo would be @$3.2k. WOW! Can you achieve one of those goals? Perhaps you could start today with an existing loan you may have now. Makes me wish (NOW) that when I set this up 16 years ago on auto bill-pay I had done so. The power of compounding is absolutely amazing. Make sure it always works for you and not against you!
So here I have a rental that I paid $62k and owe @$31.5k. Paying the minimum PITI will result in a free & clear home in less than 9 years. I’ve probably have put a total of $10k into it from the beginning. It’s been rented almost the entire time so it’s not been a drag (i.e. having to take money from elsewhere to pay the mortgage or other daily operating expenses). ).
WHAT IS IT WORTH?
Despite the pullback we’ve seen, the home is worth today what traditional (old school) fundamental rules say it would be worth. Traditionally, homes double in value every 16-18 years.
The home is conservatively worth $125k. Not to bad? $125k minus $10k (out of pocket costs) minus $31.5k (mortgage) and $83.5k is the equity. Calculate the Return on Investment over 16 years on $10k cash investment. Remember: the residents have made all the mortgage payments and maintenance expenses costs over the years.
Regardless of the return do you think you can achieve this? I do.
Imagine having 5, 10, or even 15 homes set up like this. Now, imagine if you had added just $50/mo on them all or even just $100/mo on one or a few? Talk about wealth.
You see the difference between creating wealth and not is really simple. It is called taking ACTION. Believe me this is not a special steal of a deal nor extraordinary great financial loan either. We could argue that I should of refinanced the loan for nothing else but for saving at least 1-1.5% in an interest rate. Stay Focused. Keep it simple. I went out and bought a bread and butter working class home. Didn’t Over-leverage it. Didn’t continue to refi and extract equity and thus perhaps extend the loan payoff date. Have a Fixed Rate Loan. Haven’t pushed the rents.
Through the power of compounding I’ve turned $10k into $83.5k in 16years. It is in excess of a 17.5% annualized return. Now I don’t want you to focus on that number if it appears large (especially when one is comparing to average returns of stocks/bonds). You see far greater returns are achievable –in fact 15% is my minimum goal not including appreciation. That is a whole nother discussion though! Rental property investing in Charlotte, North Carolina has been a good deal.
The Point is….., Everyone can do this! Take action. Buy a good rental home. Get a good loan. Manage it. Forget about it and don’t eat the equity. Years later you’ll have a balance sheet that will make you happy.
Take the Blinders off… Make an Educated Decision…, and Pull the Trigger. Just Do It!
Tyler
Good Post. No bands playing, no fan fair, no hype, and no get rich quick schemes – just down to earth basic GOOD info. I waited late in life to find out what you are telling us here. However, it’s never too late to start. Somehow I stumbled into the idea of making extra principal payments when I moved to the location I am at now. I made up a spreadsheet to see how much I would save, ran it using various amounts for extra payments, using 50,75,100,125,150 $ guesstimates. For me I found out 100 extra a month would make a WORLD of difference. Save YEARS of time and TONS of money. But where to get the 100$ extra? Its there, you just have to WANT it bad enough. Most all of us can find some money if we really want to. Give up that extra soda pop, cut back on smoking, vacation close to home, TAKE your kids to the park, river, woods and have some quality time instead of just giving them money to go to???? I could go on and on but you have planted the seed so now all that needs to be done is water it and it will grow.
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Clara Permalink Reply by Clara 1 hour ago
It IS a very good post. Actually lays out a plan I followed myself.
Bought the first two family at 19 (my mother had to sign the land contract papers), lived in the lower for 12 years. During that time, refinanced it twice to build the home I’m still in, and the other for a down payment on an apartment building. Sold it later for 3 times what I had paid for it.
Over the years, I accumulated several properties . . . most of them on assumptions . . . a few for cash . . . a couple land contracts. Other than the commercial loan on the apartment building, I never did a new mortgage or refi. At one point, I took out a large equity line on my home, and used that sparingly for purchases.
I didn’t get as technical as Tyler or Mike (remember, I’m blonde).
I did make a list of the balances owed on the properties, with the interest rate and payment noted.
I then started, when I had extra funds to add significantly to those with the highest interest rates and payments, also looking at the lower balances, systematically paying off everything one by one.
I’m at a point now where everything is paid off, which allows me the freedom to pick and choose tenants, and leave a property vacant until a good fit is found.
When they were still available, I did put a LARGE equity line in place on one of the rentals, and have used that to purchase other properties for cash (remember, CASH is KING), and then paid it off as quickly as possible when the CD’s mature. AT times, my cash flow is such that I can pay it off out of that.
At any rate, I pay VERY little interest over the year, as credit cards, while used extensively, are paid off
when I get the bill.
I’m not nearly as eqoquent in my writing as Tyler, but I think you will get my drift.
I have always been extremely conservative in my investments; I’ve worked too hard to risk anything. Also, rental property has been primarily how I supported myself and the 3 children, and I wanted to be sure $$$ would be there when needed. I had no one to fall back on, as I had no job all these years, and no family to bail me out. The overuse (in my opinion) of OPM was not for me, and I felt what is borrowed has to be paid back, and I didn’t know if I would have the funds when the bill came in.
Also, when I started investing MANY years ago, it was much easier; tenants were more honorable, and
city code enforcement and the court systems slanted toward the tenants were not around. I also
had the good sense to invest in stable communities where I and the children would feel safe when we were working on them. NEVER in anything in Detroit (thank GOD).
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We work with a very small local bank. They don’t make mortgages except for us. Our mortgages are 15 year with a fixed rate (the last was 6.something). They don’t care how many mortgages I have but they do have a cap of $250K per borrower. For the properties we buy, that is plenty. I know that if I’m not even looking for a property but drive by something that I want, all I have to do is pick up the phone. I know that if I look at something on a week-end and need to make an offer immediately, I have the power to be a “cash” buyer and work out the details with the bank on Monday. They won’t re-finance, do a HELOC, no pre-payment penalties. It’s just basic simple math.
When we look at property, if the potential rental income won’t make 2 mortgage payments a month (with a few dollars left over) we don’t buy it. If a property won’t pay for itself in 7.5 years it doesn’t get bought. The majority of our properties have been cheap properties, major fixer uppers in areas that are severely under-rented and have a lot of landlord neglect. We aren’t afraid to lowball an offer to make the numbers work for us. And if the numbers don’t work, we walk. We don’t hope, wish and pray for cash flow—-it’s there or it doesn’t happen.
Each month I make 2 mortgage ( 1 regular payment and 1 payment applied to the principal) payments on each property. The “left overs” (I have almost $1K a month left over) are banked for insurance, maintenance cushion and property taxes. If for some reason the wheels fall off the wagon 1 month and we have a large repair, I know I have a cushion of making 1 payment per property and using the balance for the repair. I also do a modified Dave Ramsey debt snowball with any extra cash in a month. I take the property with the lowest balance and will shove any extra cash to it each month. Because of this I have paid off 3 properties since January to the tune of about $30K. I’m also on track to pay off 1 more property before the end of the year. We run no credit card balances, no home mortgage, no car payments.
Our focus is 20 paid off properties with about $9K in rental income a month. We’re not into leveraging, pulling out equity or anything else. We are into not paying INTEREST!!!! Right now we have the time and sweat to build equity although properties we are looking at now are closer to move in ready than earlier properties. The last house we bought we only had to buy appliances for and take care of a few deferred maintenance issues to rent it. That was NICE!!!! This is our plan and works well for us and our area. I know we buy really cheap houses around here but our rents are a lot lower than what others see too.
I have been told more than once you can’t get rich renting $350 houses so why bother? I’m here to tell you that while you may not be rich you can be damn comfortable!!!