The story of my third rental property in Alabama

A while ago, I met a fellow military member who owned six rental properties that he acquired over two years. I had him explain how he did it, and decided I would do it too!

I bought house #1 in cash for $30,000. It needed a lot of work and was quite the challenge to remodel (This is an understatement).

I bought house #2 in cash for $45,000, but this one was move-in ready! Didn’t even have to vacuum. Way easier.

How did I get an awesome deal on these and house #3??

It takes a certain personality to do this.   I was uncomfortable doing it at the beginning.

Truth be told, still am today. But it’s essential.

Luckily, my wife has no problem doing this:

The secret is:

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I’m going to reference two awesome books in this post. They are must-have’s if you want to know money.   They are books by finance blogger Jim Collins (http://www.jlcollinsnh.com) and a trader turned probability expert and essayist, Nassim Taleb.

Why would I talk about both of these books in the same post.

Simple.

Reading both gives you almost everything you need to understand money. Damn close anyway.

Beer and Foam

Jim Collins book The Simple Path to Wealth has a section I love where he compares the stock market to a glass of beer. These glasses contain different amounts of beer and foam.

If you use a little skill to pour the beer, you can have a glass full of mostly beer with very little foam on top.

Pour the beer too quickly, you’ll have mostly foam and very little beer.

What if somebody else pours your beer into a mug that you can’t see through and then hands it to you. You have no way of knowing how much is beer and how much is foam.

The same problem exists with the stock market.

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This is going to be a short, simple, down-and-dirty tutorial to help you look for or make offers on rental properties.

Going from simple to complicated, the first thing to understand is the 1% rule, which is easy to do in your head, and can save you the trouble of breaking out the calculator for properties that are overpriced.

1% Rule

The 1% rule is quick and easy. Monthly rent should be at least 1% of the acquisition price. The acquisition price may be a higher number than the purchase price. It’s purchase price plus the money to get the house ready to rent.

Example.

$80,000          to purchase house                plus

$20,000          remodeling                            equals

$100,000        acquisition cost.

$100,000 home should rent out for at least $1,000 a month, or it would not be a good investment.

          What is the logic behind the 1% rule?

If a house will give you 1% of the purchase price each month in rent, then it gives you 12% of the purchase price each year.   That apparently means the investment makes 12% a year!!!!

          WOW, THAT’S AWESOME! I’M RICH (ON MONEY!!)

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I had a chance to avoid an eviction.  I don’t think you can avoid them all, but this one, yes.  I didn’t listen to the obvious warning signs.

My experience with purchasing my first rental property was scary enough to give up on real estate investing for the rest of my life!

Actually, my wife recently remarked to me that she was SHOCKED when, after going through the stress of purchasing the first rental property, she realized I wasn’t going to stop. She said she thought I had enough!!!

If you haven’t read about my first rental yet, read about it here.

After I bought this house, I discovered the seller had concealed the fact that something under the house had pushed up the floor almost two feet in the middle of one of the rooms. It was quite the ordeal figuring out what it was and how to fix it.

Also, while the house was vacant, someone decided to climb into the crawl space under the house and steal all the copper plumbing.

So I guess real estate investing isn’t for me!

• But my love for real estate runs too deep!
• My threshold for self-punishment still not met!

I had a desire to succeed in real estate.

I decided to get back on that horse and keep riding!

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After moving back to the USA from Japan in 2012, I started a new job in Alabama.  I met a fellow military member who shared my passion for real estate.  Meeting him had a profound effect on my life financially.

What he did with real estate is exactly what I wanted to do.

And he was wildly successful.

His Background

When I met him, he had been living there for two years.  In that time, he purchased four houses with cash, remodeled them mostly on his own, and rented them out providing substantial cash flow each month (especially without a mortgage!)

He bought in the range of $25-35k, putting a few thousand and sweat equity into them, then renting them out for around $750 a month.  The numbers were REALLY working for him.

If you apply the 1% rule to these properties, a house that totaled $40k in cost to rent out should pull in $40o to be “worth it.”

These were almost double that.

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I can trace some very fortunate events that have transpired in my life financially back to one chance encounter.

Many important lessons came out of this encounter, but today we’ll focus on the property manager aspect of it.  I will give you 5 tips to find the perfect management company.

Think you can manage it yourself?  What a headache.

Also, these companies can end up being worth far more than their fees just through their contacts and understanding of the rental market.

It’s working for me, and it can work for you.

I own several rental properties debt-free giving me a passive income that I could retire on today.

But I won’t.

I’m gonna keep buying properties and raise our passive income to a very comfortable number that will allow me and the Mrs. to retire-in-style.

I’ve developed a system and built a team of people over the past few years that is really working for me (literally and figuratively).

I’ll share all these with you in the hope you learn from my luck and missteps.

At the beginning of 2014, the only real estate I had was my primary residence in Washington D.C. which was paid off and rented out.

I wasn’t making much money from it.  It was too high-end in too nice of a neighborhood.  High cost/low rent.  It was actually a poor investment as a rental.

So how did I go from one rental with unimpressive returns to several rentals with impressive returns in a short time?

I met the right person (financially), and was prepared for the opportunity.

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I’m going to tell you what I’ve learned flipping six houses in D.C., all while living overseas.

Next, I’ll share exactly how much I made (and lost) on each of these flips.

I’ll close out with my recommendations on flipping as an investment strategy.

          Let’s get started!!!

So I flipped a house in D.C.

It was the subject of my last post.  I detailed how I go from no clue about flipping to trying it once.

Now I have a small clue.

          How did I do?

I cashed a big, fat check for:

$16,908

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