Purchasing your First Rental

Your first rental is probably your most challenging. Everything is new and no matter how much you research, nothing is ever the same as experience. So here’s an idea of what to expect from my experiences. I’ll be super transparent as to not sugarcoat anything.

I was 23 at the time living at home and putting money aside to pay for my MBA. During my schooling I learned a lot and I believe that’s what really gave me the edge to just go for it. I met with a local businessman and realtor who also owned rentals to gain knowledge on his experiences and insights- which I highly recommend to anyone looking to get into the industry. To have someone with experience to help guide you is very helpful when you’re just starting off and even throughout your career.

At this time I was making roughly $42,000 a year, living at home, with no real expenses aside from my car, phone, insurance and schooling. The reason I disclose my income is because I don’t want people to think you need to be making $60K, $70K or $80K to get started. Of course the more money you have is very helpful, but it is quite possible to get into the rental business on a lower income with the right budgeting. So once I had saved up what I needed for school, I saved an additional $10,000 to invest. I started looking at properties, the cheaper the better for me because I didn’t have a ton on money. At the time, prices were a little bit lower than what they are now in this area (Williamsport, PA) and I was able to purchase a three bedroom double for $55,000. The property had only been on the market for a week and I won in a three way bidding battle. The place was in rough shape, but it was fully rented. I would recommend starting with a property that is fully rented for your first property if you don’t have a lot of cash to invest for improvements. Personally, if the property was not fully rented I don’t think I would have been able to make it work given the amount of investment it needed. So the $10,000 I saved I used towards the down payment. Typically banks require 20% down for commercial loans, but some are a little more flexible than others. I was fortunate and didn’t have to put the full 20% down on this purchase (but I have had to do the full amount on future purchases).

So my game plan when I purchased the property was to fix up the exterior and chip away at the interior over time. I figured if the people rented it in the condition it was in, anything I do is just bonus. So I did my best to estimate the exterior work, including a new garage, porch, chimney, few windows and general clean up. I figured roughly $10,000. Since I had used my cash for the down payment, my lender recommended I get a line of credit for improvements. The line of credit had a very low interest rate so I could use it, pay it back and re-borrow it for future projects. Unfortunately I underestimated the renovation work by about $7,000, so I had to get creative in how I spent money. I feel that I have since gotten better with estimating, but as a rule of thumb it’s better to estimate high and come in low versus the other way around. On the plus side, the experience forced me to really understand budgeting and how I spent my money. I would recommend doing an income- expense sheet prior to purchasing a property and revisiting it often until you understand where your money is being spent and why.

The one thing that has stuck with me that both my realtor and lender told me was don’t use your money use the banks. I never agreed with this because I felt if I couldn’t afford something I’m not going to buy it. I have learned though that the power of leverage is so important in real estate and you can get so much more for your money if you do it correctly. So when things got tight on money, I took advantage of 0% financing for 6 and 15 months offered by some companies- Window World and Lowes in particular. Utilizing the different financing options allows you to keep your money longer and pay it back in smaller increments. The saying ‘cash is king’ is quite true. It’s better to keep your money then feel obligated to pay all your debts at once. As long as your properties are making more money than you owe, you’re in good shape.

So once I had this first property renovated, I was able to get it reappraised and utilize that equity towards the down payment of the next duplex. Utilizing equity towards a new purchase is very appealing and one of the main reasons taking on these dilapidated homes is so attractive (aside from the fact that we actually enjoy fixing them up!).  Again utilizing equity instead of cash allows you to keep your money for improvements or issues that come up along the way.

Things aren’t going to go perfectly and you’ll definitely run into issues, but it is all a learning process. So as long as you do learn from your mistakes and continue to move forward you’ll be good. Thousands and thousands of people have been landlords before you and there will be thousands and thousands after you. If you’re like me, take comfort in knowing that you’re not reinventing the wheel and there are plenty of resources if you need help. You can even shoot me an email and I’d be happy to offer my insights! So best of luck and look forward to seeing your projects!