So, as we started having more and more success with the various real estate investments we had tried, we were ready to venture back into having long-term rental properties. The issue was the housing bubble burst around 2007, which made it hard to do some of the things we learned about financing through Carlton Sheets back in the day. (Is our age showing?)
The good news is that my husband is a fearless negotiator. We wanted to have some multi-family units, and we found one in a good starter price range. It was 10 units on the market for $210,000. Rents were at $330 a unit because the man had owned the property since he built it in the 70’s. This rent $100 per unit undermarket. In most case scenarios, you can build equity in a multi-unit building very quickly by raising rents. Sometimes it will require you make improvements, sometimes not.
Ed went to the man and said, “I will buy your property, but at these rents I need to offer you $190,000. In addition, I want you to carry 20% of the loan, and I want you to wait a year before we start making payments on this loan. Not only did the guy accept, we walked away from the closing table with a few thousand dollars because we closed early in the month and the rents were prorated.
This arrangement allowed for us to meet the down-payment requirements of our bank with the sellers money. The year delay gave us time to build our rents up to where the debt would not choke us. That’s the thing, when you are financing at 100%, it’s harder to make the numbers work. By the time you have debt service, overhead expenses such as insurance and property taxes, and repair expenses, it really does not leave a lot left over for profits. Most experts would tell you to budget for 50% of your income to go back out in expenses and that does not include debt service.
Why do it? Because in this case, you have 10 units paying off a mortgage for you. In your retirement, you can just take that debt service as income. You also have the accounting depreciation that offsets tax obligations. If you are in a hot market, that property will likely do nothing but also go up in value. So, reselling would also be an option. Just keep in mind that you will be susceptible to capital gains tax when you cash out.
Between the raising of the rents, or the property gaining value over time and someone else paying that asset off for you, why wouldn’t you want to do that?
So, that’s why I call this the foundation of our plan. We have to have retirement and at our younger ages, 401k is not going to cover what we need. I have no idea if Social Security will even be there by the time I get to the qualifying age. So, fundamentally we took care of the end game first.
After that purchase, we then did a similar arrangement for a 23-unit building that had a mix of townhouses, and one bedroom and two bedroom apartments. After that a 13 unit. In the midst of that, we also purchased a duplex and a few other single family dwellings. Today, about 3 years later, we own properties totaling about 60 doors. It’s our goal to get that to 100. Not because we are greedy, but because the other part of our plan is when we leave to have people working for us full-time on the management. In order to make enough cash to support that, we guestimate needing to broaden our portfolio by about 40 more doors of the same level of properties we already have, or possibly less depending on how the numbers fall.