How I Started In Rental Real Estate and How You Can Too

How I Started In Rental Real Estate and How You Can Too

I’m almost embarrassed to say it, but I lived with my parents until I was 26 years old. From a purely financial standpoint, it was great. I didn’t pay rent, didn’t pay utilities, and didn’t buy groceries. My only expenses were my car and my cell phone.

It wasn’t until I got my first real job that I had to move out of my house. The job was selling pharmaceuticals and required me to live in the geography of my client base. That said, I had a make a move. So, what were my options?

This was 2003, so the real estate market was hot. That said, renting didn’t make sense. I had enough money saved up from living at home that I was able to put a little down on a townhouse. Back then, you also didn’t need 20% down. I was able to get a townhouse by only putting down 10%.

Our First Home

So, why did I chose a townhouse and not a single home or condo? Well, a single home was out of my price range and a condo felt like an apartment. I thought a townhouse was a nice balance, particularly if I was able to find one with a garage to store my sales giveaways and drug samples.

I lived in the home for a year before I proposed to my then girlfriend and we got married shortly thereafter. I knew at that point that I would not be in this townhouse for too much longer. When my wife got a job in another state, I knew we had to move, so my options were to either sell the townhouse or rent it out.

This was 2006 and the real estate market was still hot. Everyone was getting into rental real estate so I thought I could do it too! I crunched the numbers and figured out that the rental income would more than cover my mortgage, insurance, association fees, and repairs. We also had enough money for a 10% down-payment for a new home so we didn’t need to sell the townhouse to buy a new home.

Our Second Home and First Rental Property

We moved to our new home in the summer of 2006. Prior to the move, I was able to find tenants to move into our old townhouse once we moved out. I decided that since I lived within 75 minutes of the town home, that I could manage it myself. I looked at on-line resources to help me draft up a lease agreement. It was pretty smooth sailing as we never heard from our tenants, but I received a check every month, on-time for the rent. I was officially a landlord!

Our Second Rental Property

After 1 year of being a landlord, I was having the itch to build my empire and purchase another rental property! Remember, we were not 1 percenters at this point. A combination of living below our means and a lax set of rules around obtaining mortgages allowed us to be in a position to own a rental property.

So, how did we buy our second rental property? We didn’t have enough money in cash for a downpayment, but remember, this was early 2007. The finance rules were more relaxed. What I did have was a line of credit on the town home (our 1st rental property). The line of credit was enough for a downpayment on a new rental property.

So as soon as we found the rental we wanted to purchase, I wrote a check drawing from the line of credit from the first rental and deposited the cash into my bank account. I then used this cash as a downpayment for the second rental! The math worked. The rental income from the 2nd rental would cover the mortgage and the line of credit, so we purchased our next rental!

Our Position On Rental Properties Now

Our second rental property was purchased in May 2007. We have not bought another rental property since then for several reasons.

  1. We had 2 rentals to our names when we did not have any children. Our lives are so busy now that its difficult to manage more than 2 properties.
  2. We’ve experienced so many headaches with the properties that we didn’t want the stress.  We’ve received the 2AM call, the 5AM call, one eviction, vacancies….its too much stress to put on ourselves.
  3. We became 1 percenters since the purchase of our second rental.  The tax advantages to rental properties disappear for us as we cannot deduct many expenses since our incomes are too high.

What Can You Learn

What’s the takeaway here? Well, if you’re established in your home and don’t have much money saved up, it becomes difficult. However, if you’re just starting your adult life, buy a small first home that is below your means. Live below your means and save money to buy your second home without having the need to sell your first home. Easier said than done, but it is realistic. We did this when we didn’t even make 6 figures.

About The Author

Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

18 Comments

  1. Paul @ RealtyNetWorth.com

    Are you not an ideal candidate for Self Directed IRA holding of the current/future real estate investment(s) ?

    Reply
    1. iam1percent

      I’m not sure. I’m not familiar with self-directed IRAs

      Reply
      1. Paul @ RealtyNetWorth.com

        An outline/ overview. Pick a trustee firm, Roll into new SD IRA ( any type you pick: traditional, roth, etc.) account they set up, pick the property, they fund purchase, do non value adding management ( minimal ) or have others manage it, leave profits in tax deferred.

        Designated page has links to very good WSJ overview, trustee providers, etc.

        http://realtynetworth.wordpress.com/sd-iras/

        Reply
        1. so

          A self-directed IRA would be horrible for you, for at least the following reasons (in descending order)

          1) (this is big) Everything in the IRA is taxed at ordinary income rates upon withdrawal, INCLUDING the appreciation on sale, which would normally be a long-term capital gain. At the top tax rate, that’s a difference of 16%, or one dollar out of every six going to the tax man.

          2) It adds complexity to what you’ve already described as something that takes a lot of time.

          3) Even if you don’t get to deduct your losses, you do get to carry them forward, which can be helpful to shield future income if these properties really pop (or when you’ve paid most of the mortgage and when you are near the end of the depreciation schedule). I do not believe the carry-forward loss can be incorporated into the SDIRA.

          Reply
          1. iam1percent

            Thanks so! This is why I love when you comment…you obviously know what you’re talking about.

          2. Paul

            That’s why I approach each client/situation with questions and info vs. advice. Each individual is unique and at a minimum needs to review e.g.: do you want cash now or cash later, will you be in a higher tax bracket now or later (speculation based on tax law which during my career has gone from 70% to 28% to 39.6%)
            1) Here is where we look at entities and retirement/expected tax brackets, changes in cap gains taxation – which is frequent and swings all over.
            2) Should be less complex in that you are required to not active manage the property, only select it.
            3) Now we look at what kind of properties you want to place in the portfolio – cheaper cash flow property or more expensive on a per piece basis appreciating properties. This is where I’ve used large land holding/subdividing, office buildings, and apartment complexes as useful tools.
            Unmentioned. Hopefully you’re playing Sec1031 tax deferred exchanges into the mix. about 25% of deals annually would benefit, only about 3% actually take advantage. This is a tool I used for a person who bought a complex in FL for 250k w/ 50k down, we sold for 750k for a 500k profit on the 50k drop, and sec 1031 ‘ed it into a MI commercial office building.

  2. Mrs. Pop @ Planting Our Pennies

    I would actually recommend a duplex as a great way to start in rental property. Living in one half and renting the other is a good way to ease into a landlord role. We almost bought a triplex as our first home (we would have lived in the main unit), but because we were outbid, we ended up with a single family home and a duplex purchased over 18 months. The duplex is great because it’s one property to manage, with two income streams.

    Reply
    1. iam1percent

      Yes! Buying a duplex and renting out 1/2 is an even better way to start!!

      Reply
    2. Paul

      Had a client that did this. The 1st tenant forgot to mention he lied and really did smoke so the owners smelled it to there distaste. Tenant also didn’t mention that he would have loud outbursts when off of his meds he took to prevent another suicide attempt. After 34 yrs as a 2nd generation broker/investor I highly recommend you 1.live at a distance 2.Don’t tell the tenant where 3.Place a ‘deductable’ fee, e.g.$25 per, on all repairs so they didn’t nag you daily.

      Reply
  3. Dillon

    My friends have lived in a house near a college campus for the last several years. They recently put their house on the market. I think it would be a great property to buy and rent out, but I really have no idea. I know they have done tons of repairs to it so the roof, the plumbing, the flooring, etc. is all new and won’t need to be repaired for awhile. I have no idea if I can rent it for more than the payment- how do you figure that out?? And I am afraid I would be a crappy landlord because I am not a people person, so maybe I should factor in hiring a management company??

    Reply
    1. Jonathan

      Dillon –

      I have found that “keeping the peace” – that is, maintaining a good relationship with tenants during good times and bad, is a major key to landlording. You don’t have to be a great people person, just be fair and honest and responsive.

      As to figuring out the numbers, you can look at comparable rental properties in the area to figure out what a similar unit is renting for, taking into account the quality of your unit of course. You can estimate the payment with any mortgage calculator, you can look up property tax bills with the county, you can get insurance quotes or ask another landlord what insurance rates tend to run. Personally when evaluating a real estate purchase those three things (payment, tax, and insurance) are what I focus on as they are the “fixed costs” of a property investment. The rent, vacancy, and maintenance are things that I control to a greater extent.

      Reply
  4. krantcents

    I have always recommended to my students to keep their first home as a rental. It is the easiest way to enter the rental market. As you pay down the mortgage, you can add to your rentals. I took a different tact for myself, I invested in apartment buildings and accumulated a 9 unit, 24 unit and 10 townhouse units before I bought a shopping center. It was my basis for financial freedom.

    Reply
  5. Jonny

    Excellent read…

    Proves that being frugal pays off in every sphere of life, including buying a home which is typically the biggest investment in our life. When we don’t feel that we are in a position to buy a big home, we shouldn’t. Instead, buying a small home in the beginning, living frugally and saving money for a bigger home is always a good idea.

    Reply
  6. RichUncle EL

    Thanks for sharing this post. Now I understand how you became a landlord. Did you hire a managment company after the 5am call or are you still running things?

    Reply
    1. iam1percent

      I didn’t. I still manage the property. I haven’t had a major event in about 1.5 years (knock on wood)

      Reply
  7. Canadianbudgetbinder

    We are in our 30’s as well, no kids and have enough to pay our mortgage in cash now. We don’t make 6 figures like the both of you but we are frugal and smart with our money. We are not in the 1 percent either. Prices for houses where we live are quite high now so if we ever move we will either keep this as a rental or sell it and buy another home then a rental home. We would like to be landlords but like you said, lots of headaches come with it as well. We’ll get there eventually. Great blog by the way and thanks for connecting with me on Twitter! Mr.CBB

    Reply
  8. Amy @ JobCred CV Builder

    Very inspiring. Rental is a very stable source of income with no marketing efforts required compared to other types of business. It’s really a winning investment.

    Reply
  9. KK @ Student Debt Survivor

    We’ve been thinking about buying a rental property and/or buying another home and renting out our condo. Right now we don’t have the money for the downpayment, but likely will in the next year or so. Real estate will likely be part of our retirement strategy, so it’s something we’re really interested in/excited about.

    Reply

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