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 townhome (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.
- 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
- 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.
- 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.
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