My Journey in Rental Property and Real Estate Part 2: What I Wanted in My Second Rental Property

What I wanted in my second rental property

After my first rental property deal, I finally somewhat understood what other people meant when they said owning real estate and rental property were arduous endeavors. It seemed like everything that could have gone wrong, did go wrong with the first deal. In any case, the deal went through and I did my best to learn from it.

 

The Second Rental Property Is The Most Difficult

The second rental property will be the most difficult from a purchase stand point, unless you buy it after you have had your first rental property for more than two years. This is because most banks will count the first mortgage against you on your debt-to-income ratio and not count the income until you have proved it for two years on your tax returns. In my experience, I have had better luck with smaller banks in bending this rule.

 

Saving

About 18 months after the purchase of the first rental property, I started getting near my savings goal for the down payment on a second property, in which I needed 20-25 percent. This meant saving over $30k. This took all the fiber in my being to save that much that fast. I drove a rusted out, 16-year-old, small truck with over 215k miles and lived with a parent much longer than I wanted to in order to save.

Anything to reduce my expenses. My parents definitely helped me save this fast, by allowing me to live cheaply. I even moved out of my building after a year in order to get a new tenant in there making me money.

 

 

Good To Haves

In my next property, I sought cash flow.  This is not to say that I did not seek this on my first property, but I had a much better idea of what made me money and what didn’t.  On my checklist of good to haves: good location, solid foundation (poured foundation was a plus, over blocked), long-term tenants, possible sweat equity, tenant paid utilities, newer windows, brick building, pitched roof (not a fan of flat roofs), no fireplaces (tenants starting fires? Yeah, great idea…), a four-unit building, and the appearance of being well cared for.

Items that I considered as negatives were: crime ridden neighborhood, any foundation issues, roof leaks, other water leaks, signs of current or previous termites, and signs of current or previous mold.  These are my opinions, and you may disagree with them.  That is welcomed.  I am eager for you to let me know why, in either the comments or in an email.  I just ask that you disagree constructively.  

 

Four Is Best

Personally, having four tenants is safer investment when just starting out than having less tenants, such as in a duplex or single family home.  My thought process is that if you were to lose a tenant in a four-unit multifamily, you still have 75% of your income versus 50% or 0% with a duplex or single family home.  This is an opinion, but it has proved valid so far.

Personally, having four tenants is safer investment when just starting out than having less tenants, such as in a duplex or single family home.  My thought process is that if you were to lose a tenant in a four-unit multifamily, you still have 75% of your income versus 50% or 0% with a duplex or single family home.  This is an opinion, but it has proved valid so far.

Not only that, in my market area, four unit buildings are just about the same price as duplexes or triplexes.  This is not to say that if you find a great deal on a duplex or triplex, you shouldn’t take it, because you should.  In fact, I almost bought both a duplex and triplex before I finally bought a second four family.

 

Deferred Maintenance

The more deferred maintenance costs that you have, if you are just starting, will stifle your growth in the long run. This is not to say that you can’t be clever and leverage your money and property well. One of the items that I will most likely do later on is buy and fix distressed rental properties, put tenants in them and either sell it or do a cash out refinance for the after repaired value.

Both options have the same goal in mind, to have as little of your money invested in the property as possible. By maximizing the number of properties you can buy with your money, it increases your potential profit.

 

Goals

Goals are your motivation when buying properties.  Is your goal to have a couple? Or to have thousands?  This is something only you can decide.  Mine is to have enough of them to do whatever I want, whenever I want.  At this point, this can mean several things.  

It could mean retiring early, or it could mean working as a contractor in my current profession, cybersecurity.  All I know, is that I want to have the freedom to choose.  The tangible goal is to add four zeros to my net worth, hence the website name, Plus Four Zeros.

No matter your goal, the faster you are able to make it happen, the better.  Choose your second property well and do not feel like you have to rush. Being hasty and emotional will lead you to make bad decisions and lose money, unless you are extremely lucky.  Knowing all the details about a particular property takes time.  It is a competition though.  

Other buyers and investors are out there looking at the same properties at the same times trying to get the best deal.  They may find, view, and make an offer on a property before you, but that does not mean that it is a good property.

 

No Warzones!

I wanted a property that I knew could make money no matter what market. That means choosing a place that I could see myself living. I sought a four family that was on a street with single family homes, in a low crime area. Property managers will not manage rental properties if it is in a bad area sometimes. There are exceptions. Something else to think about is that the worse area you buy in, the worse tenants you may also acquire, and the harder it will be to sell.

 

Good Tenants Are Worth It

Good tenants are worth their weight in gold. Tenants that have solid jobs, all their teeth, and a clean background are difficult to come by if you are buying in certain areas or your rent is at a certain price point. I knew of another landlord who had a 33-unit building, which was three stories tall. A tenant was being evicted and extremely disliked their property manager.

They bought and poured gravel down a three-story stovepipe. It cost the owner something to the effect of $8000 to fix. Long-term tenants are typically more content where they live currently and so long as you do not upset the apple cart, they will hopefully continue that way.

 

Is It Well Cared For Currently?

The last item that I look for in a building is the way it is currently being cared for. Is the yard edged? Are there any bushes? If so, are they trimmed or overgrown? Are the common areas clean? Are the outside drains clogged or the handrails loose? Is the boiler ever serviced? Some owners just do not take care of their properties. This is similar to looking for a used car. Did the previous owner change the oil at the required intervals? Does the engine make any weird noises?

This is not a difficult concept and it is something everyone knows when they see it. The goal of this item is to learn about if you may have future issues before you buy. If the property does not appear to be well taken care of, this is not a deal breaker. Planning a small cash buffer can help if it may need a little maintenance right after you buy.

Overall, all of us are eager to own profitable rental property and real estate. These are just a few of the items that I personally sought when purchasing my second property. You may have more experience in dealing with mold or termites and may completely disagree with what I am advocating.

Please let me know if you agree or disagree in the comments or via Feedback@PlusFourZeros.com. We can all learn if you do. Thanks for reading and I hope you found this valuable.

 

Part 3 can be found here!

Check out My Journey or my Blog for more articles!

By Trey Stevens

Feedback@PlusFourZeros.com

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