Real Estate Rental Property #3 Update (July 05, 2013)

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So, I’ve been working hard trying to close Rental Property #3 over the last month. With interest rates rising, I was only able to lock-in 4.5% over 30 years. Still not too bad in the grand scheme of things, and another reason why I’m being so aggressive in securing more rental properties.

The loan is approaching the final stages of approval, and I’ve finished dealing with: inspection, appraisal, and insurance.

Inspection: The inspection went great — I hired a third party company that has no vested interest in the closing of this property. So, even though I visited the property myself and took pictures, I still strongly recommend anyone buying property out-of-state to hire a good inspector. You have to make sure to do your due diligence!

They pointed out a bunch of exterior flaws that I would have never caught with my untrained eye. This level of scrutiny is what I paid for, and by having them catch 10-15 minor things, it more than made up for the $400 fee. There was one major concern though — “the roof is nearing the end of its useful life and is fully depreciated”. Having the inspector write this up and document with photos allowed me to go back to the seller with “ammo” to renegotiate. We worked out an addendum that will guarantee the roof for 5 years, with any expenses being paid for by the seller. In addition, I locked in a fixed price of $3000 to install a new 30 year roof after this 5 year period expires. It’s basically an option that I can exercise whenever the need for a new roof arises.

Luckily, aside from the roof, there was nothing major (mostly cosmetic subtleties), and the interior passed with flying colors. The inspector was thoroughly impressed with the amount of work these guys put into rehabbing the inside. He mentioned, “you probably bought one of the nicest properties on the block. It’s gonna be real easy for you to find a tenant”. Just what I wanted to hear!

Appraisal: The appraisal finally came back, after about a week’s delay. Usually these things get done pretty quickly, so most everyone working on the deal was annoyed that it took so long. The property ended up appraising for $160,000, which is just slightly higher than the purchase price of $157,500. So, this is good news. It would have been problematic if the appraisal came in lower, as this would have really screwed things up from a financing side. Another hurdle cleared.

Insurance: Wow, insurance sure is expensive in Illinois! My first two rental properties in California are governed by HOA, so my insurance premium is only about $25/month. This property is going to cost me $115.50/month! And that’s at the discounted rate. At first, I went through another insurance company and their quote was $242/month. It’s usually the little things like this that will kill the return on investment.

Luckily, this property cash flows pretty well, so even though the insurance came in higher than expected, it doesn’t impact the bottom line too much. Still, things like insurance, property taxes, maintenance, vacancy, etc. are the “gotcha’s” that you always have to be careful about. You have to be extremely conservative with these items (over budget) when running your return on investment calculations. Currently, my numbers are suggesting that I will make around 15% cash-on-cash return on this property. This includes a rather high estimate (again, being conservative) on property taxes.

Since most everyone (myself included) is off today, we will most likely close next week. I’m guessing this should all be wrapped up by the end of next week. With this out of the way, I can start formulating my next strategy to acquire Rental Property #4!

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Wanting to learnLeighFI FighterDan23JC @ Passive-Income-Pursuit Recent comment authors
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Martin
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Fighter, I recently read about the inspections and benefits of hiring one. I wish I had one when I was buying my property. Your post reinforces this having one any time you are buying a property. If I ever buy another house I will definitely hire an independent inspector.

JC @ Passive-Income-Pursuit
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Man, already looking for #4! Looks good though. Are you thinking another out-of-state purchase or one that’s local for number 4? My wife and I are looking at buying our primary residence later this year. I should have jumped on it last year or earlier this year but we were comfortable renting. Of course now that’s changed. It’ll be great to get a house of our own, although I do like not having to pay for all the maintenance and upkeep.

Dan23
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Dan23

Are you hiring a manager and does the 15% include the manager costs if so? Any worries you have about buying out of state?

Leigh
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Holy crap is that insurance expensive! Mine went up this renewal period (!!! at renewing my condo insurance already) – it’s now up to about $20/month, which still isn’t that bad.

Hope you had a good long weekend!

Wanting to learn
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Wanting to learn

Wow! Great job! Now that I have around 250,000 dollars saved up (both tax deferred and taxable VTSAX), I am really wanting to start getting into rental properties. From the very, very little research I’ve done it seems like it offers a cash flow that just can’t be beat if you do things right. Do you have any resources you would suggest for a newcomer? (besides eating up the rest of your blog?)

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