About this time last year, we purchased our first residential rental property. We hit a few snags with getting it renovated and rented, but for the most part, I would call the effort a huge success. We had hoped to add another rental property this year, but with our other investment project bogged down, we decided to wait until next year after the everlasting house flip finally sells. Things never seem to happen on my timeline, though, as a house I have been watching for months recently had a large drop in the sale price. I really don’t know what to do, so I’m asking my readers if we should buy another rental property.
Let me be honest, I am getting a bit ahead of myself. I don’t have financing secured. I have been churning credit cards, which is not a smart thing to do if you are applying for a mortgage. We originally though that we’d use money from the flip and our HELOC to purchase the next property, but that is not available right now. We do have amazing credit scores, no debt except for mortgages, and a good cash reserve. If we can get a loan, here is why I think we should consider buying right now if the price is right.
Yes, Buy the Sucker Yesterday
- Location, Location, Location-There are actually a couple of properties available in good locations. One of them already has a good rental history. Both are 3 bedroom, 2 bath properties with around 1500 square feet on sale for around $90,000 or less.
- Cash Flow-Figuring on 20% down, the mortgage payment would be around $375 per month at a 4.75% rate. Adding taxes and insurance, it should be around $500 per month. Knock off another $100 if we decide to use property management. We should be able to rent for $900-$1000 per month, so bingo, positive cash flow!
- Interest Rates are Going Up-Since we aren’t the rock stars who can pay cash for a property yet, we have to get financing. Rates aren’t going to get any lower in the near future.
- Financial Independence– Rental property is part of our long term plan for financial independence. It isn’t totally passive, but when things are going well, it’s really easy to deposit that rent check every month.
- Extra Money! -Jim just got a new job that adds about $1500 per month to our income. We were going to put this all into savings until we decide how to use it, but we could afford the payments without any pain if it came to that.
No, Run Away As Fast As You Can
- More Debt– I hate debt, good or bad, and adding this mortgage will increase ours. If we want to have rental properties, it is a fact of life at this point, but that doesn’t mean I like it.
- Rentals Are Always Risky– Buying a rental property can always end up a nightmare. One innocent looking tenant who turns out to be Walter White could ruin everything. Just because we’ve been lucky so far doesn’t mean we always will be.
- Spending a Lot of Cash– With any investment property, you almost always have to put 20% or more down. We have more than enough for the down payment and closing costs, but it is always a little scary to spend that much money.
- Too Many Irons in the Fire– We already have a rental. We own half of a commercial building. We are involved with slower than slug speed partners in a house flip, and I’m about to sell the last part of my optometry practice at the end of the year. Maybe there is just too much going on to consider adding another piece to the puzzle right now.
Those are some of the pros and cons for expanding our real estate empire. I am really curious to see what positives and negatives you can come up with.