So, how in the world were we going to purchase a rental property?
What we needed was a financial advisor. But, we didn't have the money to spend for someone's pricey advice either. So, we plugged into other resources. My husband's brother recently started selling real estate & my husband's uncle had been involved in real estate for years and years. Our first step was to pick their brains.
We also had a couple friends who had tried some real estate investments, so we also talked to them to find out what did work and what didn't work.
Next, my brother-in-law put my husband in contact with a loan officer/ financial wizard from a bank that his real estate company worked with. This guy truly has a gift. He was able to run through numbers with my husband explaining exactly how to make this possible.
When my husband came home & tried explaining it to me, I was still very resistant to the idea. But, I agreed to go with my husband to meet with the man again so that he could go through the numbers with me and explain it in more detail. (By the way, this guy probably spent about 2 hours or so between the meeting with just my husband and the meeting with the 2 of us. He never charged us for his time.)
Now, I need to preface this by saying that we were super close to paying off our mortgage...like within 4-5 years. The only reason this was the case was...
1. Our house was super inexpensive to start with. Originally my father-in-law bought it at an auction (the house was 2 doors up from them and had belonged to his uncle & aunt). My father-in-law in turn sold it to my husband (this all transpired before John & I were married). Keep in mind this house had belonged to an Old Order Mennonite family. There was no electricity, no insulation, very limited plumbing, and a LOT of cosmetic work. Fortunately my husband is a handyman extraordinaire and did the work himself. We are STILL working on it.
2. My husband had set up the mortgage as a 15 year mortgage as opposed to a 30 year.
3. We had been working toward paying it off early & put a little extra in each month...some months more than others.
We were sooooo close. And, what the man was going to suggest to us felt like going backwards to me...but I'm getting ahead of myself.
Originally our plan was to pay off our house & then start saving toward a larger home with more acreage for us & to save for money toward a rental property. Our plan also was (and still is) to keep our current home and eventually rent it out as well.
This financial guy showed us how to get started on our plan now.
Here's what he suggested...and what we implemented.
- Refinance our home. (I debated whether or not to share actual numbers with you. It makes it easier to understand if I do. And, originally I typed it out that way. But, then I thought about it a little more & I don't think my husband would be too jazzed about me including the specifics and sending them out into cyberspace. So, I'm going to be as general as I can, but hopefully you can follow along.). Our house is assessed at higher than what we owed (and also was we originally paid). We refinanced for about 65% of the value of the property for 30 years, giving us a chunk of money to work with after closing costs.
- Use the money received from refinancing to make a 20% down payment on a rental property.
- Retain a portion of the refinancing money in an special account to use in the event the property needed repairs, etc.
- We then purchased a 2 unit property valued higher than it's selling price (It was in pre-forclosure).
- The money collected from rent covers the full mortgage of the rental property and all but $25 of our personal mortgage.
- The money that we usually set aside for our own mortgage continues to get set aside in a savings account. That money is not to be touched. It is the money that we will continue to save toward a different house for us. In 5 years time we should have approximately $50,000 saved toward a down payment.
The specifics were ironed out. I really struggled with going from being completely debt free in 5 years to having TWO 30 year mortgages. But, I eventually came to terms with that.
The other struggle I still had was more of a spiritual nature....to be discussed next.