Good Decision/Bad Decision: Real Estate

Good Decision/Bad Decision

Today’s subject will hopefully be part of a regular series of Monday posts.  As you recall, I recently started Gratitude Wednesdays.  This series will focus on my past decisions to shed light on some financial wins and losses.  My hope is to discover what I did right, and help others avoid my mistakes.  Whether epic fail or triumphant victory, these were my decisions.

The topic for today is Real Estate.

Are all rental properties good rental properties?

Bad Decision

Our first foray into rental properties was not on purpose.  My wife and I met in the most urban of settings as students.  Although we never wanted to leave, we knew that eventually children would necessitate moving to  the suburbs.

Fast forward several years, and we were hunkered into our four bedroom with two young kids, and a sprawling backyard.  But we missed the city!  We longed for the hustle and bustle, night life, and world of excitement right outside the  front door.

So we settled on a pied-a-terre just off Michigan Avenue.  It was a one bedroom, one bath condo in a high-rise.  We negotiated the price down, closed, and converted the dining room into an extra bedroom.  We dutifully decorated with mid-century modern furniture.

The plan was to stay there on the weekends when convenient, and enjoy our lost youth.

Three months later, the apartment was mostly unused.  Our kids were too young to sleep in the same room, and were either laughing or crying the whole night.  The shiny glimmer of city life looked much different as we closed in on middle age.  We were in the depths of parenting toddlers, and hadn’t much time to put our dancing shoes on.

So we rented the condo.  Which was fine, but not the blockbuster real estate move:

• We bought the condo for $250K but only could get $2000 a month rent
• The HOA’s were almost $1000/month
• Property tax $4000/year
• The condo association was a bit of a pain, and required all sorts of restrictions on the rental

Not an utter fail, but also not as impressive as it could be.  We still own this condo and rent it today.  It does cash flow, but not as well as some of our other properties.

Good Decision

A few years later, we were in the midst of the real estate and economic downturn. Searching MLS, my wife found a condo in foreclosure in a popular part of town.  We negotiated the bank down and threatened to walk away multiple times.  The condo was listed for $250K, we purchased it for $200K.

Upon closing, we were able to rent the condo quickly for $2000/month.

This was a good investment:

• We followed the 1% rule by renting for $2000 on a $200K purchase
• The HOAs were low at $225/month
• Property Tax was almost nothing at $2500/year
• The area was full of students and young professionals, we had our pick of tenants.

In Summary

We are not real estate wizards.  We have, however, learned enough to own four rental properties that all cash flow.  Our first purchase was not meant as an investment, and therefore does not have the best returns.  Since then, we have learned to have an eye on cash flow, and choose low risk properties.

If you are interested in being a landlord, expect that you will make mistakes and have some hard times in the beginning.

This is natural and should not stop you.