This has to be among the most boring money-making stories ever told, but that’s what I love about it. If you’re looking for some inspiration to get started on the path to winning at life with money, this is for you. Enjoy!
How it started
I originally purchased my townhome to live in with my then-girlfriend, Megan. We loved living there, and appreciated the proximity to our family, our schools (we were seniors in college at the time) and our jobs.
After living there for almost 2 years, we decided to purchase our next home and had a decision to make. The value of the property had increased about $25,000, but rather than cashing out, I decided to leave my roughly $35,000 of equity in the property.
Since we didn’t have any prior rental experience, the mortgage on this property and the property we were planning to buy were both taken into consideration when determining the amount we could be approved for on a second mortgage. It prevented us from getting approved for a more expensive home, but we could see the long-term strategy and decided to make the sacrifice.
Our total monthly expenses for the property were about $1,100/month including mortgage, association fees, taxes and insurance. Our first monthly rental rate was $1,400. After expenses, we were cash flowing about $250/month – not amazing money at the time, but I was pleased to have eased into being a real estate investor with what felt like zero risk! Having only put 10% down when purchasing the home through an FHA loan; I didn’t realize it at the time, but the annual rate of return on my initial investment was stellar at over 20%. It gets better though, watch what happened over the next decade!
How it’s going
Current reoccurring monthly expenses on the property:
- Mortgage – $589
- Association – $298 (this covers exterior maintenance, roof, siding, etc…)
- Taxes/Insurance – $280
That $135,000 home is now worth an estimated $275,000 according to Zillow. That mortgage payment of $589 has stayed exactly the same and the initial loan balance of $125,000 is under the six-figure mark and the rent has increased from $1,400 to $1,850. The gift that keeps on giving! This has also been a great way to use inflation to my advantage!
We have had some increases to our operating costs including taxes, insurance and maintenance over the years, but can expect regular cash flow of $500/month on average in addition to having our mortgage balance paid down.
Now, I have to admit that everything has worked to our advantage with increasing rents, great tenants and increasing property values, but we set ourselves up for this good luck by making the initial leap of faith at the age of 21.
Keeping your starter home as a rental when you decide to upgrade can be a great way to ease into real estate investing. Most mortgages require that you live in the property yourself for at least 1 year.
Buying a home that has good rental potential gives you some great flexibility for not having to commit to living at your first home for a long time. If you see yourself wanting to grow into a bigger place in the somewhat near future or wanting to keep your options open to relocating for a job opportunity, purchasing a first home with the intention to someday rent it out is a great way to provide flexibility for the future and is a first step in building your real estate empire! Now, if only I had bought 10 of these back in the day!! I’m always on the lookout for the next addition to my portfolio; often times the hardest part is making that initial leap.
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