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For those of you who don’t know, Greg and I own two single family properties nearby in the town I grew up in. Both are on fifteen-year mortgages with quite a bit of equity already. I haven’t run the numbers lately, but I’m pretty sure both will be paid off in around nine years if we continue on our current path. That’s a little bit after the mortgage on our primary home will be paid off, and it’s just in time for us to turn 45-years-old. Since we hope to be able to retire when we’re fifty (we’re both 36 right now), having our home paid off along with our two rentals at age 45 will put us in a pretty sweet spot.
Still, we often wonder if three rental properties wouldn’t be better than two. With interest rates remaining low, we have considered buying another property in our current town. While prices are higher where we live now, rents are plenty high to make up for it.
Lastly, we have quite a bit of cash on hand – and that’s even after maxing out retirement accounts, saving for college, and paying extra towards our mortgage. So, why not buy another property?
Our Local Real Estate Market: In a Nutshell
Before I dig into the details of our local real estate market, let’s take a moment to remember I live in Central Indiana. Housing prices are generally low here, which is why real estate is such a strong investment to begin with. Rents are also lower as a result, but not low enough to make being a landlord unprofitable. The key to making it work is finding the right property and pricing it so you’ll earn some extra money every month – plus have cash on-hand to take care of vacancies and repairs.
The two rental properties we own now are worth around $90,000 and $115,000, respectively. Both are three-bedroom with a living area and kitchen area, but the larger home has a second bath. To get a property in our new area, we would have to spend that at a minimum, but would plan to spend between $110,000 and $135,000.
To buy a property as a rental, we would need to put down at least 20 percent. That’s not a problem at all considering our current cash flow situation. Another detail to consider is the fact that we definitely want a 15-year mortgage. If we want this property to help us retire early, it needs to be paid off around the same time as our others and, at the very least, before our early retirement goal age of 50.
Once we decided to look, I starting pouring through the properties currently for sale. I haven’t found anything worth looking at yet, but with summer on the way, I know something could pop up at any time. To give you some perspective, I also looked up a few houses that could serve as an example of what we might buy when the time is right.
Rental Properties: The Possibilities
House 1 is listed for $135,000 and has three bedrooms and two bathrooms. It’s only 1,208 square feet, but it has hardwood floors, a glass-enclosed patio, and a fenced in back yard. Considering local rental rates, this is a house that would rent for around $1,200 per month.
House 2 is listed for $125,000 and has three bedrooms and two full baths. It was built in 1900 so it’s extremely old, but it has been completely rewired and re-plumbed, and properly insulated to bring it up to today’s standards. It looks absolutely beautiful on the inside, and it’s huge at 2,531 square feet. Considering local rental rates, this is a house that would rent for at least $1,300 per month.
Obviously, these are just two houses available in our current real estate market. Once we really begin our search, we’ll likely expand it to include Fishers, Indiana, a city with similar housing costs and rental rates. Still, this gives you an idea of what we’re working with. With low housing prices and high rents, we could do rather well.
How do the Numbers Work Out?
Without having a specific home to work with, we have to run the numbers using estimates. For the sake of coming up with something to share, let’s act like we’re buying house #2 – the three-bedroom home that could rent for around $1,300 per month.
It’s currently listed at $125,000, so let’s say we pay full price and get the seller to pay for our closing costs. We’re not moving into the home and it appears to be move-in ready, so let’s assume we buy the home and put it up for rent right away without incurring any additional costs.
Although the current fixed rate for a 15-year mortgage sits at around 3 percent, we’ll need to pay slightly more because this is an investment property and not our primary residence. As a result, we expect to pay more like 4.5 percent for a 15-year loan on any rental we buy.
If we paid $125,000 and put down $25,000, we would wind up borrowing around $100,000. With a 15-year mortgage at 4.5 percent, property taxes at 2 percent of the sales price, and landlord’s insurance costing another $70 per month, our monthly payment would be around $1,050 per month for this home. That leaves around $250 per month for profit and repairs. Like with our other rentals, we would throw any excess funds we earned right back into the mortgage.
We could get an all-inclusive 30-year mortgage payment for closer to $800 per month, leaving for $500 in monthly profit. Then again, that doesn’t really line up with our goals. I hated 30-year mortgages years ago, but even more so now that I’m 36-years-old!
Should We Buy a Third Rental Property?
Although I have been going back and forth over buying a third rental for a few weeks now, I’m starting to think that now is the time. Prices are still fairly low and interest rates are rather affordable. Plus, we have some cash on hand that needs a home. Lastly, I would really love to have an extra $1,300 per month to spend on myself during retirement in around 15 years from now. Wouldn’t we all?
Normally, I would be slightly worried about opportunity cost, but not this time. If we invested the same $25,000 and earned 8 percent per year, we would only have $79,304 at the end of the 15-year term. If we took that money out and withdrew the standard 4 percent from that point on, we would only have an additional $3,172 per year to spend in retirement. (If we invested $25,000 and left it alone to earn 8 percent for 30 years, we would have $251,566. We would be 65-years-old at that point, but withdrawing 4 percent would leave us with an extra $10,062 per year to spend on retirement.)
With the rental, on the other hand, we would have a paid-off property worth at least $130,000 within fifteen years. This property would pay out at least $1,300 per month – or $15,600 per year – straight into our hands. If we collected that $15,600 for fifteen years after our home was paid off, we would have another $234,000 and still be able to sell the property for a profit. And remember, that’s if rent never goes up over the course of thirty years. What are the chances of that?
There will be a few vacancies in there, along with repairs and who knows what else. Plus, there are tax implications that come with buying and selling real estate and investing. Still, income properties have been great investments for us so far, making the benefits of what’s behind door #2 a little too hard to ignore.
Should we buy another rental property? At this point, I don’t know. But I do have my eye on the local real estate market. When a house comes on the market that I really like, I might just buy it.
Would you ever consider becoming a landlord? Why or why not? Would you buy a third rental property if you were us?