05 Sep Our First Rental House!

While I’m not completely sure how or why we had interest in rental property, it was something in our mind that we couldn’t rid ourselves of.  Perhaps it was the success of one of my uncles that owned several rental homes in my home town, or being renters that we thought we could flip the script and be on the other side as landlords. In any case, we were interested in being real estate investors and I began looking into the marketplace trying to learn and understand what it meant to be a landlord while avoiding losing money and plunging toilets.

Naturally I found BiggerPockets to whom I’m eternally grateful for! This is an epic community of individuals who own real estate that are willing to help or are seeking real estate ownership and willing to ask questions and learn together.  If I recall correctly, I spent every Saturday and Sunday morning for about a six-month period from five to seven a.m. reading about real estate, studying our market, and reading forums on BiggerPockets to take in as much knowledge as I could.  I’d contacted my realtor on a property here or there that I thought might meet the 1% rule and then turn around to find out it had severe mold damage, or some other atrocity and continued my search for the elusive property that fit the criteria to become a landlord.  Eventually I stumbled upon a unique listing that wasn’t bank owned yet but was beyond short sale and was listed as a twin home.  For those unfamiliar, a twin home is like a side by side duplex, but each side is owned individually and carries its own unique PID (Property Identification Number) so in a sense it’s like a townhouse but they rarely have an have a homeowner’s association.

I drove by the house as it was just a couple miles from my residence and contacted my realtor, she did some digging and notified me it would be best to wait a few weeks until something resolved itself in the courts.  In the mean time I knew someone that worked on my team that owned one side of a twin home so I called him to ask him a few questions about how things might go regarding a roof, siding, or shared ownership of a wall without an association.  While I can’t remember exactly what he said about it, I went away feeling good about it because twin homes began to resemble the price point of a town home (cheaper than single family foot for foot), without the association dues and thus closer to the 1% rule deal.  My realtor got back to me a couple weeks later and notified me that we could put in some kind of an offer, but somehow, I could lose some of our down payment if the owner got themselves out of whatever situation they were in.  Candidly, the details of this part were fuzzy, but we decided it didn’t make sense to invest in something we didn’t understand and weren’t interested in losing money before we even got started.

I kept looking for the right property in different cities and counties but every time I found something, there would be something wrong with it and the price didn’t reflect the repairs needed. Some might say it was analysis paralysis, others might say it was good due diligence, but we kept looking and trying to find something that would work.  My phone rang on a Saturday from the gentlemen on my team that owned the twin home, we worked Monday to Friday for the most part, so I was answering thinking it was a goof off call or something serious.  I’ll never forget what he said, “Hey, I wanted to talk to you about a couple things.  First, I’m moving to Arizona and I was wondering if you know the guy that owns the franchise down there and any chance you could put in a good word for me to get hired?” I did know the gentleman that owned the location in Arizona and had no qualms whatsoever about helping him get set up and hired down there if there was anything I could do. Then I asked, “What’s the second thing you said you wanted to talk about?”  He replied, “Do you want to buy my house? We bought it for $160k, we have about $25k into it, and my dad and I just want what we’ve put into it, $185k.  Our realtor said we could list at $205 and might get $210-215k, but we just want to know it is sold.  No realtors, just a contract between the two of us.”

I knew the rents weren’t going to meet the 1% rule, but they were close, and I’d just found the mythical “off market deal” by talking to people about what we were trying to do, and a deal fell in my lap.  My wife and I looked at the property with our then six-month old that very weekend and within a couple hours agreed to buy it at their asking price pending a few reviews of local comps.

While I didn’t use my realtor on this transaction, I had referred her to a number of friends for both sales of their property and helping them acquire their new homes.  As a result, she was willing to take a quick look and affirm that the price range mentioned was accurate and we went ahead and self-managed a purchase agreement with no help from the realtors.  We went into the deal thinking we’d get about $1,600 in rent for a 4 bed 2 bath twin home with the tenant paying all utilities and self-managing lawn and snow.  On the high end we thought maybe we’d get $1,650 but that seemed aggressive, and while this didn’t meet the 1% rule, we felt good about the deal and getting our feet wet in real estate.  The house had some new flooring, new appliances, all new windows, two new patio doors, some new light fixtures, a remodeled bathroom, and overall was very well cared for by the seller.

We closed on June 8^th of 2017 and our hired property manager was on site that day to take pictures and get it ready to list.  All we did was touchup paint in some areas of the house, paint a bathroom, and put some landscape block glue on a retaining wall for safety.  She came back confident in her listing at $1,700 a month and had the home leased within a few days of ownership, with a move in date a whopping ten days after we took possession.  Victory! Not only did we have a tenant that paid a deposit and rent within ten days, we had it before our first mortgage payment was due, we couldn’t have been happier!

The first few months were great; the rent came in on time or very close thereto and we had a single individual living in a four-bedroom house with a cat and a rabbit as pets.  The story takes a bit of turn and we went on a ride there up until about the eight month mark when rent no longer came in, there were long and detailed stories as to why, and eventually the tenant asked to break the lease and we honored that request to move on and part ways.  Oh the joys of real estate investing!  Fortunately, there was no need for an eviction, no cash for keys offers, we did allow her fourteen days in exchange for ability to show the home as much as possible to get it filled very quickly.  We weren’t bewildered or turned away but certainly we wanted the place rented and ready to go, upon the former tenants exit the home was still in excellent shape and required nothing more than a final clean out, carpet clean, and a minor sink repair that I performed myself.  Our property manager felt terrible about the situation and although the tenant had survived the six-month “tenant replacement warranty” she agreed to place a new tenant free of the initial lease fee which we greatly appreciated.  Once again, she had the place leased within a handful of days, to qualified tenants that met our criteria and the rent had increased to $1,750.  This time rent was paid on time, we had no issues, and when I went to inspect the home about six months into their lease I was blown away.  They had the home decorated so well, upkept in such a great manner, it was like they had the place in better condition than I had given it to them.  While this isn’t always the case, nor do I anticipate it being the case it was a perfect bounce back after the first tenant experience we’d had.

At the end of their first year lease when we began to understand they intended to sign at least an additional year, we asked what it would take to get them to stick around for a second year or longer and they asked for new carpet in the living room and common areas leading to the bedrooms.  This was a reasonable request as it wasn’t new when they moved in so I countered with the opportunity to replace the carpet with a LVT flooring that would match and carry on from the kitchen/dining room throughout the living room, common space and leading up to the bedrooms in lieu of carpet.  She bout keeled over with joy and said, “You would do that!?”  It was a perfect win-win, we get carpet out of our unit replaced with long lasting hard floors, and she received the replacement for the carpet she wanted and ultimately an upgrade to better looking floors.  They ended up signing a two-year lease and at the time of this writing they’re a year into it, paid 100% on time through the COVID Pandemic situation and have been nothing shy of excellent tenants requiring very little attention.  In addition to this, they finished sheet rocking my laundry room, which didn’t need it but it’s the husbands trade so he just did it, fixed a step that ended up failing leading into the garage (we comped them for it), and offered to sheetrock my home garage if I paid for the materials for both my home garage and the rental property (I haven’t taken them up on this offer).

While we had a weird experience with our first tenant, we have had a great experience with our second tenant, and it led us to be even more hungry to add long term rentals to our portfolio.  We were so incredibly fortunate to get that phone call and this off market deal by luck because since then, we’ve not received any other off market deals but we also haven’t put in the effort required to do so but I do have some ground work laid for one that could come into fruition someday.  We were landlords and hungry for the next deal as soon as we could save up the next down payment.