Rental House #1 – How to get $682 Cash-flow on $1,225 Rent
June 2013
How to Buy a Rental House Like a Boss
After that fateful lunch in Spring 2013, D and I banded together with three other guys who were eating lunch with us that day. Our goal was to buy some rental houses, and have an experiment with renting to tenants. This situation was a scary proposition for many of us. Would they trash our newly purchased house? What if it burned down? Flooded? Infested by rats? Could we sell it later? All of these questions and more were at the top of our minds as we embarked on this journey.
So we started in the most obvious place we knew, the MLS. Houston has a great platform called HAR.com Luckily, my business partner had his real estate license, so we were able to see houses and make offers. We looked for several days and quickly found a winner. 23906 Ham Driver Fill (We’ve changed the name of the street to keep it anonymous). This house was listed for $91k. It was a three-bedroom two-bath house with a detached garage and needed zero work to make it rent ready. It was a hot market at the time, so we quickly offered the list price as we thought it was priced right. D was awesome and got it under contract super fast.
Option Period & Warranty
In Texas, you can purchase an option period typically for ten days for a nominal fee. In this case, we paid $100. During these ten days, we conducted an inspection. We only did this because it was our first one and we wanted to make sure we were managing our risk. Very quickly we learned how to “feel” out a house ourselves and not pay for an inspection. This inspection yielded no big surprises, so we didn’t amend the contract at all. We also had the seller pay for a one year home warranty, which we never used. Again we were new to this and wanted to make sure we had mitigated all the risk.
Rental Property Financing
This is where we really got excited. We had a buddy that had access to interest-only mortgage products, (rates tracked by LIBOR), which meant our monthly payment would be like $120. The rate adjusted monthly which was a little, risky but LIBOR was a cartel in the UK and hadn’t moved much in recent years. The other downside was that the loan required 30% down. Also, of course, we wouldn’t be paying anything down on the loan because it was interest-only, but our monthly cash flow would be insane!
Rental House Pics
| Line Item Detail | Amount | Comment |
|---|---|---|
| Purchase Price | $91,000 | |
| Down payment 30% ($5460 from each of 5 partners) | $27.300 | 30% down on a libor loan |
| Closing costs which included first year of insurance | $1,845 | |
| Total cost of deal | $92,845 | |
| Anticipated Rent | $1,225 | |
| Monthly Mortgage | $92.90 | Libor loan at 1.875% Interest only loan |
| Anticipated monthly Expense | $200 | Average of $2400 a year in expenses |
| Taxes and insurance | $250 | |
| Monthly cash flow | $682 | |
| Rent to Purchase price Ratio | 1.34% | Age old wisdom says 1% we shoot for much higher |
Net Worth Update
My Net worth before buying the rental house,
Net worth post rental house purchase as we think we gained a little equity. You’ll see we didn’t get a ton of net worth boost from buying it, but you’ll see the net worth continue to snowball as the Net Real Estate % continues to climb. $682 a month of cash flow will do that. That’s $8,184 a year!
Read about House #2
