How We Bought Our First Investment Property

by | Jan 10, 2021 | Real Estate | 0 comments

In 2019 my wife and I used the nomad strategy to turn our first home into our first investment property. The nomad strategy is a slow process in which you acquire a new primary residence every few years and turn your current home into a rental. We chose this strategy due to the high cost of the traditional 20% down strategy in Arvada, Colorado. Single-family homes start at around $375k – $400k in our area. Instead of going the traditional route, we put just 3.5% down on our first home with an FHA loan, and we used a 5% conventional loan on our second home.

I spent part of 2018 and 2019 deep-diving into free online resources to learn as much as I could about real estate investing. I became a real estate nerd to the point of annoyance to my wife. She’s on board now and actually pushed me to make the jump to buy our second home. We acquired our first home in 2015, which became our first rental property in 2019.

Learning About Rental Properties Before Taking The Plunge

I spent quite a bit of time researching my market and analyzing properties before we pulled the trigger. I used calculators at Bigger Pockets and listened to a ton of their podcasts. I also used Rentometer to get an idea of rents in my area. Both of these have a limited amount of free uses per month before you have to pay for the service. You can also use Zillow and look at similar properties for rent to get a good idea of what other properties are renting for in the area.

I fell into analysis paralysis in 2019 when I had everything ready to go from the financing side. I have to credit my wife for pushing me to purchase our current primary residence. Analysis paralysis occurs when you get stuck analyzing properties or continuing to research without taking action. It’s great to arm yourself with the proper knowledge, but it’s all for nothing if you don’t actually take action!

Purchasing Our Second Property As Our New Primary Residence

As I mentioned previously, we live in an expensive market, so we had to think creatively to get the down payment for our second home. We named our first home Old Yeller. Yes, we are both nerdy and love animals! Old Yeller had appreciated rapidly. We could tap into the equity and utilize a HELOC(home equity line of credit) to cover the down payment on our second home. We call our second home Baloo. Check out this article to get more info on how to purchase an investment property with a HELOC.

We gave our realtor the criteria for our second home and had him look at a listing while we were out of town. He really liked it and thought we would love it. We submitted an offer from our car on the way home from vacation. We had to move quickly in our market due to the competitiveness. You’ve got to take action when you find a property that checks all of the boxes.

Renting Out Our First Home As Our First Investment Property

We spent a day in early June 2019 cleaning Old Yeller and getting great pictures for our rental listing. It was a little stressful as we wanted to list our property for $2400 a month, but other properties in our area were renting for around $2000. Our property was updated and had a bit more to offer. We also used our team members to validate that our number was aligned with the rental market.

We listed Old Yeller for rent using Zillow on June 10th, 2019, and had 5 inquiries within the first day. We ended up renting to the first couple that viewed the property. In hindsight, we probably could’ve rented it for a bit more, but I was more concerned about getting a tenant in the property than getting the highest price. We had the rental deposit and a signed lease within 2 weeks of listing the property.

We closed on Baloo, our second home, on June 20th, 2019. We moved into Baloo within 2 days of closing.

Purchase Of Old Yeller May 2015 As Our Primary Residence

Purchase Price: $272,000
Down payment and closing costs: $14,500
Loan info: 30 year FHA loan with 3.5% down at 4.25% fixed interest
Monthly payment: $1850, including mortgage, escrowed property taxes, home insurance, and mortgage insurance since we had less than 20% equity.

Refinance Of Old Yeller In December 2017

We decided to refinance Old Yeller after it had 20% equity with rapid appreciation and a small amount of principal paydown. 

Refi amount: $266500
Loan info: Conventional 15 year fixed at 3.75% interest
Monthly payment: $2200

Renting Out Old Yeller In June 2019 As Our First Investment Property

Old Yeller rent plus monthly pet fees: $2450
Monthly payment: $2250
Money towards reserves and maintenance: $200
Monthly Cashflow: $0
Return on Invest: 9.28%

We had $0 in cash flow at this point to build up some reserves for maintenance issues down the road.

Refinance Of Old Yeller In December 2020

We are in the process of refinancing Old Yeller to take advantage of low-interest rates and to pay off the HELOC that we utilized to fund the down payment of Baloo. We will also get a nice bump to our cash flow!

Refi amount including HELOC payoff: $270500
Loan Info: Conventional 30 year fixed at 3.5% interest.
Appraised value: $425k
Monthly payment: $1500
Money towards reserves and maintenance: $200
Monthly Cash-flow: $750
Return on investment: 32%

As you can see, we will receive a large amount of cash flow from Old Yeller. We plan on using this to build up reserves and help fund our future investment property purchases. Also, the return on investment does not consider the massive amount of appreciation that Old Yeller has provided over the last 5 years. We plan on taking out a new HELOC on Old Yeller to help acquire more rentals. 

The Benefits Of Turning Your Current Home Into A Rental Property

You should know what to expect regarding maintenance issues with a property that you’ve already lived in. When you purchase a new investment property, you don’t have a clear picture of what issues might pop up. You should also know the area well, and what types of properties are hot, and the fair market rental values are in that area.

We are very passionate about real estate and enjoy sharing our information with others. Remember to arm yourself with the knowledge required but more importantly, take action when you find a property that meets your requirements and strategy.

What type of investment property are you wanting to purchase?