On April 2nd my brother and I purchased our first rental property together. This 4 part blog series will walk you through how we found the deal, how we structured our partnership, how we financed the purchase, and some lessons we learned along the way. If you have been thinking about getting into rental properties, I hope this post encourages you to take the plunge and provides you with some information that I had to learn the hard way.
In February, my brother, knowing that I was looking to get into real estate investing, texted me and asked if I had $15,000 for a down payment on a $75,000 2 Bed / 1.5 Bath Townhome. The seller was another real estate agent working at the same firm as my brother and she was looking to liquidate some investment properties she inherited from her late husband.
At the time I had about $12,000 saved up for investments, so I was about $3000 short. We’ll get into the structuring of the partnership in Part 2, but for now, I’ll just say my brother was willing to bring the remaining $3000 to make the deal work.
After running the numbers, we decided the purchase was a good investment and we got a purchase contract done up before the property even hit the MLS. This was perhaps the easiest part of the process and really shows the power that relationships bring to your wealth building journey.
There are two useful rules of thumb that are extremely useful in determining the viability of a rental property. I must emphasize these are rules of thumb, not every deal that passes these rules is a good investment.
First, is the 1% rule. This rule states that property should rent for at least 1% of the purchase price of a home. Given our $75,000 purchase price, it needs to rent for at least $750 per month. Obviously, my brother being a property manager and real estate agent in the area knows the market and knew we could rent the townhome for at least $850/month. We just received a security deposit for our first tenants who will be renting the place for $995/month. Putting our monthly rent at about 1.3% of the purchase price.
Second, is the 50% rule. This rule states that you should expect monthly expenses such as maintenance, property management fees, taxes, insurance and vacancy to account for 50% for the monthly rent. These expenses don’t take into account the mortgage. So given our original target rent of $850 X 0.5 (50%), this leaves us with $425/month to cover the $350 mortgage payment, and anything leftover would be our cash flow.
Knowing now that we will be getting $995/month, our cash flow looks a lot better. If the market were to decline, our original $850/month estimate was conservative enough that it is unlikely that this property will lose money month after month. If you have read Rich Dad Poor Dad, you know this is key in differentiating between an asset and a liability.
Again, these are just rules of thumb, you should use a tool like the Bigger Pockets BRRRR Calculator, or build your own spreadsheet taking into account all estimated and known expenses.
Check back later for parts 2-4 where I will cover how we financed the purchase, how we structured our partnership and some lessons we learned along the way! Make sure you subscribe to the mailing list using the form at the top of the page to get updates straight to your inbox.
In the meantime, I recommend you check out Long-Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties. This is an excellent book by David Greene over at Bigger Pockets and it was crucial in helping me feel comfortable investing in a property from nearly 2000 miles away.