My First Rental Property

It’s been a little over 3 years since I purchased my first rental property so I thought it would interesting to take a walk down memory lane. Although this was not the first piece of real estate I’ve ever purchased, this was the first house I purchase for the sole purpose of renting it out and holding it as an investment. If you’re interested in how this investment has performed to date please read My First Rental Property - 3 Years Later. Prior to the purchase of my first rental property in 2017 I purchased a Condo in 2009, which I turned into a rental in 2015. I also purchased a Townhouse as my primary residence in 2015. So although I had some experience purchasing real estate I had never purchased a piece of real estate as a pure investment.

The Backstory

To help paint the full picture of how I knew this particular house was the one for me and therefore was able to make a quick decision, I think it’s important to provide a little backstory. Towards the middle of 2016 I decided it was time to purchase my first single family house for the sole purpose of renting it. I had been observing areas in Southwest Atlanta that seemed full of potential with construction of the Beltline. I already noticed a lot of momentum and new development which was resulting in price appreciation. My main objective at the time was price appreciation, with cash flow being secondary. I wanted to keep the price of the house relatively low, to limit my risk, since this was going to be my first investment in a transitioning area. My main focus was on Adair Park and Capitol View since I had become familiar with those areas when I first starting looking at properties in 2015. Unfortunately by the time I was ready to jump in and pull the trigger, Adair Park and Capitol View had become extremely hot. The prices were rising to levels that I wasn’t comfortable with and the houses that were in my price range were in multiple offer situations. Long story short, I either couldn’t move fast enough or I repeatedly was outbid.

Time to Pivot

After looking at several houses in Adair Park and Capitol View, and missing out on all of them, I knew I needed to change my approach. It became clear that it was going to be difficult to get a house in those areas. They were just too hot. Houses were under contract within days and commonly for over asking price. Prices had hit levels where the upside was more limited and the risk/reward ratio wasn’t nearly as good as when I first started my search. I decided to expand my search to other surrounding areas which had not yet garnered the attention of investors. That’s when I discovered Oakland City and Bush Mountain. These areas were within a half mile and comparable houses were selling for half the price of Adair Park. I knew there was a ton of opportunity. At some point the excitement and attention would shift from Adair Park and Capital View to these underserved neighboring areas. I felt this would happen soon so I wanted to get in before the shift. Soon after I changed my target areas I stumbled upon this little gem in Bush Mountain.

How I Knew This Was The One

On a lazy Sunday afternoon, without any plans to look at houses, I happened to see an open house advertised for a property that looked extremely nice (from the pictures). Although pictures can be misleading, this particular house seemed different. It was getting late in the day so the open house was almost over. Since I didn’t have other plans I asked my agent if she wanted to check out the house with me and to no surprise, she was down. We wasted no time, jumped in the car and arrived at the house with less than 15 minutes to spare.  As soon as I walked into the house I knew that was the one. After looking at more than 15 houses, most of them being new renovations, I immediately knew this house was different. It was a relatively small house, 3BR, 2 Bath and just over 1,300 square feet but the curb appeal was great and the quality of the work was top notch. The overall design was well thought out and the finishings were high-end (Quartzite countertop and hardwood floors throughout). The asking price was $150,000 which was relatively high for the area but compared to neighboring areas like Adair Park, it was a steal.  

Not So Fast

Although the house was beautiful I did have some concerns about the street it was on and the overall neighborhood. The neighboring house was boarded up and in disrepair as were a few houses across and down the street. And since area had not yet caught the attention of other investors and builders, it was a bit sketchy. I didn’t want to get stuck with a house on a block that either never improved or took 10 years to improve, so I needed signs that improvements would continue. My general investment thesis is to invest in an area that is relatively early in its development but not too early and risk the area never improves. My concern was quickly alleviated when I learned the owner had already purchased the neighboring house with plans to fully renovate it. They were also under contract on the house across the street. So at the very least I knew that three houses in very close proximity would basically be brand new and high quality. That was enough for me since I felt that would spur even more improvements with other investors fixing up the remaining houses. Only one problem remained. I needed to have my offer accepted. Based on how hot the market was and the low price point, I knew this would be no easy task. 

Get In The Game

I remained aloof while in the house, to not play my hand in front of the listing agent, but as soon as we were out of sight (and earshot) I told my agent I wanted to submit an offer as soon as possible. Since I had missed out on several houses recently I wasn’t going to play any games. I knew I needed to move fast to have a chance. If you’re not in the game you have no chance to win. Later that evening when my agent reached out to the listing agent to submit my offer she was informed that several others wanted to submit offers as well so they were calling for “highest and best”. Great! Another multiple offer situation.

Let The Bidding War Begin

My mindset had changed since my previous failed attempts. My determination was at an all time high and I was going to do all I could to win the bid. I had learned my lesson in the past, trying to be too cute with my offers. Either offering slightly below asking or just a bit over asking. My mindset was always to get a “deal”. After several failed attempts I started looking at things from a different perspective. This is when I decided to stop listening to all the “experts” and the standard, cookie cutter advice that most supposed investing experts give. I started looking at the long-term and big picture more than just having a short-term perspective. I’ll explain my investment approach in more detail in future blogs. As my mindset shifted, it became clear that saving a few thousand dollars on the purchase price results in a small increase in my initial out pocket cost for my down payment and a sightly higher monthly payment (with a 30 year conventional loan). Second, since this will be a rental property, as long as I can charge enough rent to cover the mortgage it didn’t really matter in the long-term and didn’t impact my investment objective (long-term appreciation). With this in mind I decided to make a very strong offer.

My Offer

With an asking price of $150,000 I offered $155,500 and asked for no closing costs. On a percentage basis my offer was 3.7% over asking price. That is quite significant in the real estate market but I knew this would be a great long-term investment as long as my thesis for the area turned out to be correct. My rational for offering $5,5oo over the asking price was the following; I wanted to make a statement and felt $5,000 above asking certainly accomplished that. I figured that most people would not offer that much over the asking price but what if there was someone as crazy as me out there. So I wanted to go slightly over $5,000, but something like $5,100 could get me in trouble. Again in case someone was thinking along the same lines as me. So I was basically trying to outsmart myself. I made the assumption that there was someone out there who was just as serious as me and thought in a similar way. I though if I could outsmart/outbid myself then I should have a good shot. That’s why I decided to jump to $5,500. I figured the only way I would lose out is if someone jumped to $6,000 or higher and that felt was highly unlikely. Ultimately, in order to have no regrets I needed to submit an offer that I felt gave me the best shot to win.

And The Winner Is

Hopefully you’re not surprised to hear that I ended up winning the bid. Otherwise this would be a cruel joke, the ultimate click bait or a prime example of terrible story telling. I was very excited for a couple of reasons. Of course I was happy to get the property, however more importantly winning the bid the way I did taught me a tremendous amount and opened up many more doors in real estate over the next few years. My mindset and confidence changed forever. I learned to trust my perspective, my theses and my approaches. I learned that successful real estate investing is a combination of analysis and intuition. Of course the numbers and basic principles are important but my intuition cannot be replicated by others and therefore can be used to separate me from the rest of then competition. In a separate post I will summarize the results of this investment so far but ultimately I value the experience and lessons learned more than the financial return on investment.