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Closing on Our First Rental Property

We’re closing later this week on a 3 unit, 100 year old rental house. It’s in a prime location, close to the university and hospitals. It’s currently rented until summer of 2010. (In the area, leases are usually signed for the following school year in the spring.)

It’s our first real estate investment and our first venture into being landlords. Getting Started in Real Estate Investing [1] has some of the resources and evaluation tools we used for this deal. Here’s how it all came together.

Negotiation and Financing

Offer. We got a heads up from our Realtor about the house two days before it was listed. We set up an appointment immediately. The house was listed for $285,000. We offered $260,000 for the property with the seller to replace the siding. Another offer came in the following day and they countered without the siding at the same price, so we took it.

Inspection. After the inspection, we found the major problems to be the furnaces, air conditioners, and water heaters were at the end of their life expectancy. We asked the sellers to replace the furnaces and air conditioners, which they agreed to. It will cost them about $9,000.

Loan. We secured a 5.875% 3/1 commercial ARM with a .25 point. We needed a commercial loan because we’re buying it with our partner under an LLC. With 20% down and some money in reserves for maintenance, we’re throwing in $32,000.

Insurance. We’re getting our landlord liability policy through Allstate [2]. They had a cheap rate with good coverage. We’re also considering moving our personal insurance policies there, because their umbrella covers the landlord policy, which is not common at other insurance companies.

Management and Maintenance

Contractors. Angie’s List [3] has ratings of local contractors. The popular categories are: plumbing, electricians, remodeling, roofing, carpeting, landscaping, and painting. They’ll be helpful when it comes to getting some of the work done in the inspection that we’ll be responsible for.

Management. Our partner will be handling the property management. It’s part of the reason doing this partnership was appealing. Scott and I don’t have any interest in handling the phone calls and dealing with the tenants. In exchange for his services, he’ll get a cut of the rent.

Apartment Searches. I had a few people contact me asking if they could rent our new apartment. However, since it’s already filled, a good resource to search for apartments is at Apartments.com [4].

Cash Flow

Here’s how the numbers look on a monthly basis:

  • Rent: $2310
  • Mortgage payment: $1230
  • Taxes: $450
  • Insurance: $65
  • Utilities: $65
  • Management, maintenance, reserves, etc: $350-$450

Based on the amount of maintenance needed each month, it should cash flow between $50-$150 to start off with.

Leverage Strategy

As always, I like to use other people’s money when it makes sense. Last week, I got an offer for a 5.99% for the life of the balance transfer on a couple business credit cards [5].

Combine that with Penfed’s 2.99% balance transfer [6] offer right now and we’re financing the whole thing. By using this money instead of our own savings for the down payment, it will triple our IRR! We’ll have a bit of negative cash flow on paper, but the tax savings for depreciation should cover it.

Next Steps

We’re busy planning our action steps for our next property. Now that we know a little more of what we are doing, we’re going to also include foreclosure listings [7] and home auctions [8].

We’re actually going to an auction this weekend to see if we can’t score a deal, as one of the local builders is unloading more than 50 properties. If it’s exciting, I’ll post updates on Twitter [9] while we are there!