Investing in real estate, specifically small rental properties where I’d buy single-family or multi-family houses for the purpose of renting them out has been one of the things I wanted to do. However, the three musketeers of fear, doubt, and uncertainty discouraged me from taking any action toward residential real estate investing. So far, the only real estate investing I have done include the purchase of my primary residence and some REIT investing.
Meandering Into Real Estate Investing
Fortunately, I ran into Terry Sprouse of Fixer Uppers and Rental Houses a while ago and he sent me a copy of his book: Fix ’em Up, Rent ’em Out. Currently, I am about two third of the way through this small 133 pages book and I have to say I am very impressed. It’s a well-written Cliff Notes on real estate investing. I wish I had know about this book a long time ago — unfortunately, my introduction to real estate investing started with an infomercial and ended up with a purchase of Carleton Sheets’ books and tapes.
Terry Sprouse’s Philosophy
One of the things that stood out right away was this little section that Terry wrote:
Components of your new philosophy include:
- Focus your energies on what gives you satisfaction and meaning in life.
- Use problems at work to fuel your desire to succeed in real estate investing.
- Recognize setbacks as opportunities in disguise.
- Absorb new information like a sponge when learning to make your own repairs.
- Don’t pay others to do what you can learn to do yourself.
- Make time to learn the necessary skills to earn money with fix-up houses.
There are a few more bullets on this list. What impressed me about this list is that it could be generalized beyond real estate investing and used to help you succeed in any endeavor.
Why do I want to be in real estate investing business?
I have long recognized the value of becoming a landlord as a way to build wealth. In his book, Terry clearly spelled out the three principal ways that you can make money from real estate investing:
- Appreciation — Just like any other real assets investment, historic home values have increased on average about 5% per year adjusted for inflation. It’s hard to imaging that in 1940 average home values in the U.S. was less than $20,000! Although we hit a little bump in the road with the sub prime problem we are having, I have no doubt that this long-term trend will continue
- Rental Profit — The difference between rent and PITI+M (principal, interest, taxes, insurance, and maintenance) is what you get to keep as profit.
- Principal Pay Down — Lastly, the amount that goes toward paying your principal portion of the mortgage is also part of the profit.
Moreover, I believe investing in real estate teaches you a lot of valuable skills, including property management, repair and maintenance, negotiation, business analysis, etc.
Why I haven’t started with real estate investing?
As good as it sounds, I haven’t started pursuing my dream for several reasons:
- I don’t want to deal with bad tenants — I think this is the biggest fear for most prospective landlords, and Terry confirmed this in his book. However, Terry shared many ideas, tools, and resources that could be use to effectively address this issue.
- Investment money — Currently, single-family home prices in my neighborhood average around $600,000. To avoid private mortgage insurance (PMI), I’d need 20% down payment or $120,000. I don’t have this kind of money because most of my money is tied up in retirement accounts. However, Terry demonstrated a creative way of coming up with the initial down payment for someone in my situation.
Aside from the two reasons above, I guess the ultimate roadblock for me is finding a property that can generate positive cash flow. I am borrowing this cash flow calculation worksheet from Terry to demonstrate my example:
|1. Sales Price||$600,000|
|2. Down Payment||$120,000|
|3. Amount of Mortgage (1 minus 2)||$480,000|
|4. Interest Rate (30 years fixed rate)||5.95%|
|5. Monthly Principal & Interest Rate (P&I)||$2,862|
|6. Taxes & Insurance||$360|
|7. PITI (5 plus 6)||$3,222|
|8. Rental payment — Median rental price according to Rentometer||$2,325|
|9. Monthly profit||-$897|
This is based on my house and from what I can see, it would be very tough to get positive cash flow in my neighborhood. Terry’s rules of thumb are to either make a minimum of $100 in monthly profit, or charge 1% of the mortgage amount. I doubt that my neighborhood will support a $3,322 or $4,800 monthly rent for a single-family home.
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.