Looking Back At My First Rental Property
It’s been a little over 3 years since I purchased my first rental property so I thought it would be interesting to look back and see how I did. I learned a ton from the process of purchasing this property. Although this was the third property added to my real estate portfolio, I credit this little gem with being the catalyst for catapulting my real estate career. Check out my blog post, My First Rental Property, to read the full story of how I purchased this property.
The Deal
List Price: $150,000
Purchase Price: $155,500
Down Payment:$31,100 (20%)
Loan Amount:$124,400
Interest Rate: 4.875%
Monthly Payment: $1,000
Closing Date: 3/3/2020
3 Years Later
Estimated Value: $375,000
Price Appreciation: $219,500 (141%)
Loan Balance: $117,500
Estimated Net Rental Income (3yr):$15,600
Principle Pay Down: 7,000
Total Return (3yr): $242,100
ROI: 778% (259%/year)
3 Year Report
As you can see the results are pretty good. This is not the part were I start bragging about how great I did or how easy this was. This is the part where I try to summarize why the results are so good, a couple of key lessons I learned and how anyone can do this with some hard work, patience and belief.
ROI and Leverage
The first thing to notice is the 778% ROI on my initial investment of $31,000. This astronomical return is due in large part to my use of leverage. Read more about how using leverage can accelerate your return in The Power of Leverage. My thesis for buying this property ended up being correct and it did appreciate nicely (141%), however my overall ROI skyrocketed to 778% because I took out a mortgage to purchase the house. Besides the fact that I could not afford to pay $155,500 in cash for the property (so never could have bought it in the first place) leverage allowed me to put down only 20% but still collect rent while the house appreciated. Some experts like Dave Ramsey hate having debt but the smart and responsible use of debt can put you in a position you could never be in without it. But what if I was wrong about the neighborhood and it didn’t blow up like I thought it would? Well my risk was relatively low ($31k initial investment) and I was still going to collect at least enough in rent to cover the mortgage every month.
Purchase Price Above Asking Price
As I describe in more detail in My First Rental Property I ended up in a bidding war for this property and paid $5,500 (3.5%) above the asking price. That’s quite significant in the real estate market. Typically buyers try to get a “deal” on the property or at most pay 1% over asking price. Since I felt strongly about this property I decided to be as aggressive as possible. I felt that if I was right, the slight “over payment” wouldn’t make a difference in the long run. Since I was taking a mortgage for the house the extra $5,500 would make a small difference in my monthly payment, which would be covered by the rent. In hindsight I was right about the house and the transitioning neighborhood (which always helps) and the extra $5,500 I paid ends up being a drop in the bucket compared the $242,100 in total return to date.
Loan Pay Down
One of the most often forgotten factors impacting ROI for a rental property is the principle pay down of the loan. If you are collecting at least enough rent to cover your mortgage then the tenants are paying down your mortgage every month. Due to how amortization works, the amount of principle being paid down each month is lowest at the start of the loan. As time progresses, more principle is being paid down each month. Although you don’t see that cash in your pocket immediately, it’s certainly going towards your net worth and will be deep in your pocket when you sell. Don’t forget to include the principle pay down when calculating your ROI on a deal. In this example the principle pay down so far has been about $7,000. That might not sound like much but it equates to a 22% return on my $31,100 initial investment over a 3 year period. That’s not something to sneeze at.
Lucky or Good?
You know the saying “it’s better to be lucky than good”? While there’s definitely some truth to that I prefer to be both. My philosophy is to work as hard as possible and know as much as possible to put myself in the position to be lucky. My results after just over 3 years is a combination of hard work, determination and luck. I looked at a ton of houses, analyzed comparable sales, researched neighborhoods and new developments in the pike which led to my thesis. Because of all the work I did and knowledge I had amassed, I was able act quick and decisively and was confident submitting a very strong offer. That being said, although I ended up being right about the neighborhood I never guessed things would change as fast as they did. I never expected the demand in the area to skyrocket shortly after I closed on the house. My target investment timeline was 5-10 years. I never imagined I would have such a low vacancy rate and the house would appreciate 141% in 3.5 years. So I was absolutely lucky in this case. However, I never would have been a position to be lucky if I hadn’t put in the hard work leading up to the purchase.
Not Easy But Worth It
My only concern when writing this post is that I might give the impression that this is easy. Just go out, buy any house and you will see similar returns. That type of mindset can get you into a lot of trouble so please proceed with caution. The message I hope you take away from this post is how rewarding real estate investing can be. In my opinion real estate investing is the best way for most people to build long-term wealth and potential financial independence. Just please keep in mind there are risks and it’s not a get rich quick scheme. You need to be willing to put in the work, make sacrifices and be patient. I also highly recommend reaching out to someone you trust and know has been successful. Mentors are great when they have real, hands-on experience and have your best interest in mind. Before you get started make sure you understand the investing options you have in real estate and the associated pros and cons. I also recommend doing a self-assessment to determine your risk tolerance. Be honest with yourself because no matter how great an investment strategy sounds, if it doesn’t match with your risk tolerance it will be a nightmare.
What’s Next
Even though this house has appreciated dramatically in a short period of time I don’t have any plans of selling it any time soon. Since this house was designed very well, has high quality finishes, is the perfect size for a rental (3 Bed, 3 Bath), is well maintained and has a “Wow” factor that I look for, it rents very easily. I also see another leg up for appreciation in the neighborhood. There is still a lot of development activity and the house borders a piece of land that could become an expanded portion of a nearby park. Based on my research, a vacant piece of land, across the street from my property is slated for redevelopment and the master plans show it would not only be the expanded portion of the park but would also connect to the Atlanta Beltline. So residents of my property would be able to walk less than a minute to a park or continue to the Beltline. Of course this could take years to happen or never materialize at all, but I’m willing to wait and see.