Before the bursting of the real estate bubble, flipping houses was popular and profitable. A home in need of repair would be purchased at a depressed price, rehabilitated and sold for a quick profit. This business model does not work nearly as well in the current depressed market. Buyers are more scarce and banks demand a larger down payment. Have you considered using your resources and talent on building a low-income rental enterprise?
For thirty years I bought and operated low-income residential rentals. This is a rental market that is seriously neglected in most areas. There are many families looking for furnished apartments at a reasonable price. If you are able and willing to invest your own time and labor, a profitable rental business can be established that will reward you financially and emotionally. This will require a minimum of investment as a large portion will be “sweat equity.
A Full-time Job Greatly Aids Real Estate Investment
I accomplished this while holding a full-time job in a power plant. Working a swing-shift schedule was ideal because it allowed me to work a lot on the apartments during daylight hours. Having a full-time job may allow you to reinvest all the rent proceeds into improving the property and build income and equity even faster.
We were fortunate to own a five-room rental cottage that was part of my wife’s small inheritance. We decided to look for a modest investment property to purchase and use the equity in the cottage as a down payment.
A Dilapidated Old 13-Room House Met Our Requirements
After searching for a short time, we found a dilapidated, old, three-story, multifamily home in a pleasant residential area. This property had 13 rooms. It was owned by a grocer who did not want to give it the attention or financial investment needed to achieve the potential income of the building. A property that is surrounded by nicer property always benefits from the neighborhood. It can be improved and still be in character with the neighborhood. Likewise, a poor neighborhood always deceases the value of a property.
We also decided to buy two mobile homes located in a mobile home park as additional rental properties.
Real Estate Equity Can Serve as Down Payment
We obtained a combined mortgage from a bank on the rental cottage we owned, the new apartment house and the two mobile homes. The house was $14,500 and the mobile homes were $1500 and $2000 for a total of $18,000. The mortgage proceeds were $25,000. This left us with $7,000 cash to begin renovation of the apartment house. This also allowed us to close the deal with no cash down payment. The equity in our rental cottage served as the down payment.
A new investor wishing to make a similar investment could use untapped equity from their home or save a nest egg sufficient to make the down payment.
Conversion of Sleeping Rooms to Housekeeping Rooms
The new apartment house had one four-room apartment, two two-room apartments, and the second floor had five sleeping rooms. A large bath was shared by the sleeping rooms. The three apartments and the two mobiles homes could be rented immediately. This would provide income sufficient to pay the mortgage payment, taxes, utilities and all current expenses.
The sleeping rooms had a small gas heater, a single bed, a table and two chairs. In order to increase the rent potential, we converted them to housekeeping rooms. This meant adding a small cooking range and refrigerator. This allowed the renter to save on food by doing their own cooking and increased the rent potential about $40 monthly per room. A room can be furnished for about $500 with used furniture and appliances.
Furnishing Low-Income Rentals Greatly Eases Renting
Furnishing low-income housekeeping rooms and apartments makes renting much easier, as this class of renter does not typically own much furniture. The bonus to the landlord is reduced apartment damage from moving furniture. The down side is that the renter turnover may be greater because they can move out with less effort,
We renovated all the apartments and housekeeping rooms over a two year period, using the profits from the current rents. We also converted the attic into an apartment. By keeping rent reasonable, we achieved an occupancy rate of about 90%.
Our experience with low-income housing demonstrated that there is a vast pool of low-income renters who will respond to the availability of basic, no-frills housing at a decent price. This business model requires buying old property that appears unusually dilapidated but is still reasonably sound. Several rental units in one building are a must. The initial cost and operating cost per unit is much lower in a multifamily dwelling. It requires extremely economical remodeling, using as much of your own labor as possible. A cardinal rule is do not spend money on cosmetic changes unless the rent can be increased enough to pay for them.
Disclaimer: I am not a real estate professional or investment counselor and take no responsibility for the results of actions taken or not taken after reading this article. I am stating my opinions, and they could be wrong. This article is for informational purposes only.
Related Articles by Stewart Lodge:
Flipping Houses Not Working? Try Low-income Rentals: Part II
The Trials and Tribulations of an Apartment Manager