This morning I woke up to an extra deposit in our bank account. I’d be lying if I told you I hadn’t been checking the account for days waiting for this transfer to come through. After all the months of work and planning we received our first rental property income check!!! Since we plan on subsidizing our cruising with rental income I figured I would take a moment to share the economics.
First, a re-cap: Erin and I were renting this place and had ZERO plans on buying a house. We figured we would buy a boat and that would be like buying a house, so we were content to rent. Several years into our happy renting our landlord approached us and said that he would be selling the property within the next year. Graciously, he offered to let us purchase it if we were interested. Well, we were not interested… but… we didn’t want to move! So I told him we would think about it and get back to him.
Our biggest hurdle was ignorance. We just had no clue what the mortgage process was like and we mistakenly thought that our massive student loan debt would disqualify us from a normal bank loan. I tried to get our landlord to owner finance but it didn’t make sense for them so I hesitantly called the bank. I’ll never forget that conversation. I was sitting on the starboard settee in the Alberg and speaking with a Mortgage Broker. He brushed past our student loan debt and said it wouldn’t be an issue and got right down to getting us the best deal he could.
Without getting into the nitty gritty here is what we ended up with:
Purchase Price: $65,000
Down Payment: $6,500 (10%)
Loan Amount: $58,500
Interest Rate: 3.125%
Cash to close: $7,040.07
I had also worked out a deal with our landlord that he would credit us $335/mo for each month that we continued to rent after agreeing to purchase the house but before actually owning it. So upon closing we got a check for $1,934 plus our returned deposit of $1,022 which was a nice $2,956 total 🙂 The cash out of our pocket to buy the house was:
Cash to close, $7,040.07 – check from landlord, $2,956 = $4,084.07
$4,084 bucks and we owned a freakin house! Crazy. Then things really got crazy… We had been paying $875/month in rent. Our new monthly mortgage bill including escrowed taxes and insurance? $550 bucks. So we were paying $325/mo LESS to own this house and we were gaining equity each month all the while.
OK, so now that I knew how crazy easy it was to get a great deal on a mortgage (and a great deal on a house) I was hooked. I started reading all about real estate and listening to podcasts constantly. I figured we would rent out the house when we left but as the kids started to grow we realized more space was needed. So why not rent out the house now? As you know, thats what we have done! Here are the numbers:
Monthly Rent: $1,030
Property management at 8%: -$82.40
Equals a $947.60 check in our inbox once a month!
Mortgage payment: -$550
Equals $397.60 left in our bank account each month!
Now, out of that we are setting aside 5% for vacancy, 5% for small repairs that come up, and 10% for capital expenses. Even when we take out all of that money we are still left with $191.60 each month. We will be setting that aside for now as well but one day that money can be used to travel the world 🙂
I know it doesn’t make sense for everyone, but I hope this provides a small example of how you could gain income without having to go to work each day. We put a little more than $4,000 into a house that pays us $397.60 every month plus equity. Once the house is paid off it will provide us with a full $1,000 per month. And, if we ever really needed some money down the road… we could sell it – we already have have another $20,000 just in appreciation. I don’t think we will do that though, the monthly check is just too awesome! 🙂