What and When to Buy – How We Decided to Purchase Our Rental Property
February 17, 2011The past couple weeks have been a flashback in time for me as I have been providing some basic general principles regarding the purchase of investment property. What I’d like to do this week is to tell you a story about a certain financial professional and his wonderful wife and the lovely discussions they had before they pulled the trigger and bought an investment property.
It was a pleasant time back in those days, two newly married professionals having dinner conversations surrounding things like vacations, the day’s work, retirement, etc. Financially they were on a good track (they better be!) but they soon discovered that both of them had more than a passing interest in rental real estate. Knowing that they weren’t savvy in this type of investment, they excitedly decided to take the next year and a half and learn as much as they could about investment properties.
The great thing about that time is that both parties found out a LOT about the investing personality of the other. The wife is ultra diligent in learning everything there was to know. Dotting the “i”s and crossing the “t”s would be an understatement. At times the husband wondered whether she was also looking up the etymology of certain terms!
The husband on the other hand was more of a “get me to the bottom line” type of learner and one who also relied on his financial background and financial instincts to help him make decisions. I’ll let you think about who won most financial “discussions.” (If you guessed the husband, well you had a 50% chance to get it right.)
So after a year and a half of researching, talking to various people that were involved in real estate investing, attending seminars and running a multitude of spreadsheet scenarios here is what we came up with in a nutshell:
Property type: We decided upon a fourplex primarily because of the vacancy factor. If we have one vacancy that is only 25% compared to 50% with a duplex. (Stay tuned next week to see how this almost killed our pocketbook!)
To live or not to live there: We opted to live there as one of the units was a 3 bedroom/2 bath area that was bigger than a lot of houses in the vicinity. This also allowed us to get the more attractive owner occupied loan rate.
Investors: We did decide to get minimal assistance from my family and a friend so that we could have a better down payment. We drew up a contract that stipulated what will happen to their investment depending on market conditions and when we sell.
Property Management: Since we were going to be living there, we decided that I would be managing the property as that way we could keep more of our income as opposed to paying someone.
Ownership: Being that this was our first property we vacillated between joint ownership and an LLC, but in the end decided upon joint ownership (for now) because of its simplicity, low cost and how we were insured. That said, when we purchase our next property we will be utilizing the LLC (as we would have more at risk).
Location: We purchased in a beach community, with nearby schools, close access to both freeways and a major retail mall. I could also ride my bike to the beach in 20 minutes – NICE!
So there you have it, a whittled down version of what went through our thought process to buy our investment property. Of course there were many “what if” conversations and going back and forth on different properties. Oh those were fun times! Now, was our decision the right one? Well, I can tell you we still have the property even after the real estate collapse; however we have learned many lessons and have made some mistakes along the way. But to see what those are, you will have to wait until next week!