Nerves of Steel

An offer I made on some real estate has been verbally accepted. The closing would be in about 15 days if everything is in order (which it never is).

I’m finding myself a little nervous about this one. I’m not sure why. My first house was a complete risk for me. I had no idea what I was doing. I’d never purchased a house before, I’d never painted a wall before, I’d never worked with drywall and plaster. Yet it all worked itself out pretty well and I came out of it with a great investment holding and a ton of new skills. So you think I’d be more confident about the 2nd house.

I think the issue is that I’m finally getting a little low on cash. I ought to have just enough to purchase this second house and get it fixed it up in a few months. Then still have just enough left over to buy one last investment property by next spring, before I’m pretty much wiped out and have to start saving rental income in order to put towards my next purchase.

There’s this little bit of “what if” in my mind that makes me worry if I’ll have to blow all my money on a new roof, or run into some legal issue with the town that costs me $10k, or never be able to find a good tenant who would want to live where it is…

Necessity demands that I take the risk though, in order to get the returns I need in order to be financially independent. It will only be temporary, as the rents start coming in I’ll only be living on about 1/3 of my income and saving the rest into a cash reserve, and then into securities. So I’ll only be “at risk” for maybe 6 months with all my holdings in some rental properties, little cash and minimal reserves elsewhere, until I can save enough to build up a comfortable cushion again.

The only other option is to get a job to pad the coffers. But that is also the worst case scenario if my investments fail, that I’ll have to get a job. So I may as well roll the dice and wait until I have to do it (leaving some cushion so I won’t be looking for work in a panic).

The house that I have a verbally-accepted offer on is a 3 bed, 1 bath single-family home. It’s in a much more urban area than my other place, a short walk to the commuter rail, grocery store and a state university. It’s on a postage-stamp sized lot. It has no driveway which will be an annoyance for my tenants during winter storms. It has a slate roof that looks ok, asbestos siding that’s in good shape, and generally pretty good bones. The wiring has been updated, but the electrical panel isn’t installed so I’ll have to get that in place first thing. The plumbing looks generally ok and even if it isn’t it’s a minimal consideration since it’s just one bathroom and one kitchen all on the first floor with a full basement (easy to work on/fix). It has cheap linoleum floors and dingy carpets that all need to be replaced. Maybe some plaster/dry-walling work to be done. It will probably need a new furnace, which will be the biggest expense for me. It has an old oil steam furnace. The nice thing is, there’s already a town gas line in the house that was used for the stove, so I could use that existing line to install a gas steam furnace. – Which would save the tenants some money on their heat bill. And me when the place is empty.

It’s a good investment at less than $25k. I’m hoping to have it restored for less than $15k and it ought to rent out for $800-$1,000/month. Depending on how good I’ve got it looking when I’m done.

At the crazy real estate peak in 2006 it sold for over $150k. Can you imagine? Rents weren’t any higher then. Buying a $150k property in the hopes of renting it for $1k/month???

Anyway, I’m excited to get the key in my hands and get to work. If I do have it in 15 days hopefully I have can have the place fixed up and rented out by, say, October 1st. Then it will be time to take a break, focus on fall-semester exams in December. Then start looking for the 3rd place next spring.

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12 Comments

  1. Posted June 24, 2011 at 4:03 pm | Permalink

    I have no experience with these things and don’t know if it makes sense, but have you considered forming a holding company / property management company that can take out a loan to purchase the second property?

    If the refurbishment and renting works out, you’re all good. Otherwise, the loan isn’t on you. (I guess you have taxation issues to think about…)

  2. Posted June 25, 2011 at 8:34 pm | Permalink

    seems to me even if you are off on the repairs by 10k you still have enough cushion to make it work.

    I love your plan with the properties and to move into finacial assets over time.

    when I was younger I did a bit and it worked out well for me. I would have done more but I’m not handy. Also, my pals in the biz all had horror stories of demon tenents. I wanted to step out while my luck held.

    fo a while I was renting for myself and a landlord at the same time. best of all worlds!

  3. Posted June 26, 2011 at 10:49 am | Permalink

    I’ve considered looking for financing. Without a job it’s tough to get anyone to give me a loan. I have some friends who I could probably talk into it. But I think I’d prefer to do it without having to take on any debt at all and all the compromises that come along with that.

  4. Posted June 27, 2011 at 11:16 am | Permalink

    Wow! I was surprised to read you had no experience with repairs prior to purchasing your #1. Still you must have done a good job at it – congrats, quick learner :).

    Good luck with this one. “What if”‘s and worry is a normal and common thing, I suppose. Just make sure you keep them tamed so they are not blowing out of proportions. Healthy amount of worry won’t hurt though, that helps prevent poor decision making.

    Again, good luck. I hope things will work out beautifully.

  5. Posted June 30, 2011 at 12:17 am | Permalink

    Hello, I’ve been following this blog for a while and thought I’ll comment. The house sounds like it’ll provide a great ROI hope it works out for ya mate. Also if you think 150k for 1k a month is absurd, my brother recently bought a house for 330k and is expecting a 1.4k month return.

  6. bigato
    Posted June 30, 2011 at 1:31 pm | Permalink

    Let’s hope this buying ends well. As I told you, I bought my first house some days ago and now I’m fixing some things to be able to move in and stop paying rent. Also, I had no prior experience in the repairs I’m doing now. Also learning lots. You are in a very good market for rent in your place. In my place I can say renting is not much lucrative now. Maybe I can think in a way to make it work as investment. But now I’m trying to negotiate a house for 35.000 reais (brazilian currency), a house that is already rented by 300,00 reais a month. I hope to spend less than 5.000 reais fixing it. I don’t think it’s a very good investment; but it’s worth because for buying that house I will be able to use some money that is locked away and is not earning interest. Something like that roth’s and ira’s and all that names that you use in USA. Also there is a good chance to sell the house for something around 50.000 or 60.000 if I have some patience. But these are the rents here now: you can get around 400,00/month for a property that can be sold for 50.000. Taking in account that the Brazilian government guarantee me 6.7% over inflation each year if I buy their papers, I in doubt about investing much in properties here. What do you think? I’m jealous of your numbers!

    As I am very conservative, in you place maybe I would buy this second property and maybe hold on a little before buying the third one; or maybe not buying the third and putting your money somewhere where it would grow less, but would be more readily available if needed be.

    Although there is also the market to consider. Some people that deserves respect are saying that we are near another big crash; in this case, real state would seem a good idea to me. People will always need a shelter.

  7. bigato
    Posted June 30, 2011 at 1:34 pm | Permalink

    Although if the worst case is just that you will need to get a job again… maybe, even being conservative, I should say go for it anyway.

  8. Posted July 1, 2011 at 6:42 am | Permalink

    @dmitry thanks. I am a quick learner! It’s one of my best assets ;-)

    @Bigato Can foreigners invest in that 6.7% gov’t return? Too bad rental rules in Brazil aren’t conducive to landlording.

    @burak Good luck to your brother. Sounds like that’s only a 5% return before any expenses. Maybe he’s hoping the market will appreciate significantly? Though it tends to only appreciate at inflation-rate levels unless you can buy/sell and time a boom/bust cycle.

  9. bigato
    Posted July 4, 2011 at 5:27 am | Permalink

    Mike, I’m having few time these days (fixing things before moving to new house), but it seems that you can do it. I did a quick research that told me that you have to do it through a financial institution that will represent you. The site is http://www.tesouro.fazenda.gov.br/tesouro_direto/conheca.asp
    I don’t know if it will gonna help you (it’s in portuguese), but if you can’t find the answers you are looking for, ask again in two weeks and I will research it better for you.

  10. Jeff
    Posted July 10, 2011 at 8:54 pm | Permalink

    Hey Mike, followed you here from the ERE website where I mostly lurk and occasionally post as JWH…

    How you’re finding these houses that are so affordable? I know the last one was an auction, are you going to the courthouse to bid? finding them on the net? You’ve inspired me!

    Thanks, and good luck!

  11. et
    Posted July 13, 2011 at 8:10 am | Permalink

    ..if everything is in order (which it never is) – why not in order? What kind of problems are you having?
    I’ve bought and sold vacant land and various residences during the last 20 years, in several places. Everything has always been in order. Of course, I’ve never done it as an “investment”.

    Hope it all went well!

  12. Posted July 14, 2011 at 7:24 pm | Permalink

    @jeff These are bank owned foreclosures I’m mostly looking at. They’re in rough shape and not in the best neighborhoods. Some of them have boundary or title issues making them unmarketable. But I figure with my law degree I can clear those issues up sometime in the next 10 years at minimal expense. There’s also major stuff like heating systems that need to be replaced, a cracking foundation, no driveway and no on street parking permitted… they way I look at those is I figure the rent they make ought to pay for the property in 2-4 years for it to be worth it for me. I’m not counting on much resale value down the road.

    @et The banks are so flaky on me. They’ll “pool offers” for weeks and make a side deal with their friend. They will hold out for weeks trying to get someone to give them $500 more. Even though I’m offering cash and ready to close ASAP. Or the bank rep who’s dealing with the property is on a two week summer vacation and won’t get back to me until the Tuesday or Wednesday after he gets back to work.