A few years ago, I had a tenant approach me and ask if I had any single-story units available. She lived on the second story of an apartment building I owned and was recovering from cancer, which made stairs difficult for her. At the time, all of my single-story properties were rented, but we had a great relationship, so I told her I would take a look at the market and see what I could find. She told me what she could afford to pay for rent, and I worked from there.
I eventually found a house on Main Street. It was about 30 years old; 3 bedroom, 2 bath; and 1200 sq. ft. The house needed some repairs, but overall, it had great curb appeal and would make a great rental house. Below is some of its financial breakdown at the time we bought it:
Purchase Price: $90,000
Down Payment: $15,000 (16% of purchase price)
Amount Borrowed: $75,000
Monthly Rent: $750
Monthly Payment: $435
Monthly Free Cash Flow: $140 (18% of the gross rent)
While a $15,000 down payment was less than 20% of the purchase price (which is what banks usually want to see), I knew that I would have to put in about $15,000-20,000 worth of repairs on the property, so I was able to build up my equity through that estimate. Our repairs included new floors, paint, appliances, plumbing and electrical fixtures, and a handful of other minor repairs. In the end, we only spent $12,000 on repairs, so I ended up having $102,000 in the house.
My tenant told me that she could pay $750 a month, and while that was a little low for the overall value of the unit, I knew that she was a great tenant and that the deal would benefit both of us. Even though $140 in free cash flow wasn’t a huge money maker at first, we were eventually able to raise the rent to $900 a month when our tenant moved out to live with her sister. This increase in rent bumped our free cash flow to $290 a month, which was a home run!
A few things about this study stand out to me:
- When you seek to honor others, you will be rewarded. I would have never found this property had it not been for my tenant. She served as the catalyst to push me into the market, and I ended up finding her house as well as the neighborhood in which I would buy five more great houses.
- The bank allowed me to borrow with less than 20% down because they knew that I would make up the difference in equity with repairs on the house. I had the cash available to immediately make repairs, which was significant when I built the expense into my total exposure.
- Because the rental rate on the property was low before my first tenant moved out, I didn’t have a very high cash-on-cash ROI (Return on Investment), but the house eventually developed a strong ROI when we raised the rent to $900.
Overall, this property was (and continues to be) a strong investment for us. Besides the exception of a single month, the property has always been rented. We bought it in 2014 for $90,000, and today it’s probably worth close to $150,000.