Holly Johnson is a writer, blogger, and travel junkie who has made a living from sharing her and her family’s strategies for living frugally while making the most of life.
She and her husband, Greg, wanted to explore ways to build passive income, and thought an investment property could provide the answer. Here’s her story of how she did it — and her tips for others who want to buy their own investment property.
Greg and I decided we wanted to build passive income and wealth, and we thought it made sense to start as early as possible. We’d already invested in the stock market through our 401(k) plans and wanted to diversify our assets further. We were only 27 years old when we made the decision to invest in real estate, and buying an investment property felt like something of a risk. But we liked the idea of investing in a tangible asset — something we could manage and improve over time.
Buying our first investment property
We live in central Indiana, where real estate is relatively inexpensive, so breaking into real estate investing was feasible for us. We purchased our first rental property in 2007 for $85,000: a three-bedroom, two-bath home with a small backyard.
When we purchased that house, we needed excellent credit and a 10% down payment to get a second mortgage. Now it’s typical to need a 20% down payment for a second home or rental property, and excellent credit is still a must.
Saving for the down payment on our second mortgage
Choosing to buy an inexpensive home made it possible for us to save the amount we needed. We had to come up with $8,700 in cash, so we budgeted to set aside a few hundred dollars per month to put toward the down payment.
That was a big part of our nest egg at the time, and saving that kind of money each month — in addition to what we paid on our first mortgage, contributed to our 401(k)s, and needed for our normal expenses — was not easy. But we eliminated expenses wherever we could and embraced a frugal lifestyle, knowing that it moved us closer to our goal.
Acknowledging and addressing your risks
As new owners of an investment property that would be used as a rental, we worried about the potential risks: Damage to our property, tenants failing to pay, having to evict. To eliminate at least some of those worries, we set aside 10% of the rental income for repairs and maintenance. We created an emergency fund that was just for the rental, in case we had to replace big components like HVAC or the roof.
Having that cash on hand to make required repairs would allow us to deal with them immediately and move on. Additionally, we required a security deposit up front to help cover potential damage or non-payment by tenants.
Finding good renters and being a landlord
We now have two single-family homes that we rent out. For us, the hardest part of owning income properties was not saving up for it — it was learning to deal with our new role as landlord.
Here are some strategies we still use to find good renters, making our lives easier and our investment more profitable.
- We keep our rent slightly lower than average in the area. This seems to keep renters in our properties longer — one of our properties has been occupied by the same couple for nine years. Every time we get new renters, we typically spend money fixing small things to get the property ready for new renters. This results in time when the property isn’t being rented and therefore isn’t producing any income.
- Verify a potential renter’s employment and salary. We do this by asking for a recent pay stub or for the contact information of their employer. Ideally, tenants should be making at least three times the monthly rent.
- Ask for their previous landlord’s contact information. Tenants may not always be able to provide this, (like if they’ve never rented before), but previous landlords can supply a wealth of knowledge.
Buying a rental property is not easy: For many of us, it takes a lot of work to save for the down payment and pay an additional mortgage. And being a landlord can be tough — things will always break, leak, or stop working, and it’s the landlord’s responsibility to fix it.
But having investment properties has been a good move for our family. Of our two homes, one is paid off and the other is around 50% paid off. We’ve diversified our income sources, just as we originally intended to, and that makes us feel more secure.