REAL ESTATE: FAQ

Below are answers to questions we are often asked about our rental properties, investments and real estate experience.

WHY WOULD I WANT TO BUY A RENTAL PROPERTY?

The idea of buying my first rental property came from my parents. They said that paying rent was not a good idea. They explained to me that I was helping someone else pay off their investment property. They said that rent was wasted money, that I could never get back. They encouraged me to save for a down payment so I could buy my own property. I could either live in it and pay it off myself, or even better eventually rent it out and have someone else pay it off for me. They told me that buying real estate is the only asset that a bank will allow you to borrow money on. They said that creating passive income by renting out a property could allow me to create my own financial freedom, one small step at a time. The key was to ensure that the rental income was greater than all the expenses that come with owning the property, including the bank loan. If the income exceeds all the expenses, then it would make sense that I would be able to buy another property, and then another. However, if the expenses were exceeding the income, I would have to go to work and earn money to pay the difference. To create a great investment property, I would aim to buy a property that made money from the first day I owned it.

HOW DO I BUY MY FIRST RENTAL PROPERTY?

I was advised to get rid of any bad debt as the first priority, or even better not to get into any debt in the first place. Once this was accomplished, I was then encouraged to save for the down payment on my first rental property. The next step was to buy a small one or two bedroom rental property. Saving the down payment for the first property required diligence and budgeting. Purchasing the first investment property was a frightening step. I needed to find out what was the potential income/rent on the property and what were all the expenses going to be. The key was to ensure that the rent would cover all expenses and the deal would put money in my pocket, every month. I remember my father telling me that I needed to look at more than 20 properties in person before I made my first purchase. I also needed look at the income and expenses of each of these properties, as well as the location. There were many things to consider when buying my first rental property.

WHAT IS A FINANCIAL MODEL THAT HAS HELPED YOU?

To eliminate wasting time I would only look at properties that fit a financial model. I could look at 100 properties online and then find maybe 5 or 10 properties that were worth evaluating in detail. If the property cost $100,000 the rent would need to be greater than $1000 per month, If the property cost $150,000 the rent would need to be greater than $1500 per month etc... This model was "only a starting" point. It was very hard to find this kind of deal, but having this process sifted out a lot of properties that would not make financial sense. This saved me a lot of time.

HOW DO I FIND THE DEAL OF THE DECADE?

When everyone else would say "It is not possible to find that kind of deal", I learnt to say "The deal of the decade is out there, every week". I was told that I needed to look for opportunities that others cannot see.

SHOULD I BUY ONE SMALL RENTAL PROPERTY EVERY YEAR?

At a Real Estate investment seminar over 30 years ago I was advised to consider the goal of buying one small rental property every year. Just do it. I tried to stick to that plan. At that time my goal was to save $10,000 per year as a down payment on a small apartment each, and every year. The long term goal was to have as many small properties as possible that would generate income. Many times when I purchased a rental property it was not the best looking property. However, if the numbers and location worked that was most important goal. Again, the key was to ensure that the rent would cover all expenses and put money in my pocket, every month.

SHOULD I KEEP THE PROPERTY IF THE RENT DOES NOT COVER ALL THE EXPENSES?

I owned a small two bedroom condo in Sydney, Australia with a great view that I lived in for a few years. When I was moving out of this condo I looked at the possibility of renting out this condo to create an investment property. However, the rent did not cover all the expenses so I decided it was a better decision to sell. This property had a great view and I was able to buy it at a low price. I did some work to improve the property while I lived in it, which helped increase the value of the property. I decided to sell the property, rather than rent it out because the rent did not cover all the expenses. This property was more like a flip. I purchased it, remodeled, lived in it for a couple of years to ensure I did not have to pay capital gains tax. Sold at a profit.

SHOULD I KEEP OR SHOULD I SELL A PROPERTY?

After Mark and I were married, we often found ourselves in the situation of moving due to work circumstances. We would live in a property and then decide to rent it when we moved. When we were buying a property it was all about location so that the property would rent easily, if we needed to move. The decision to keep a property and rent it out would be based on if we could ensure the rent would cover all expenses and put money in our pocket, every month. In Australia we were taught about the tax benefits of negative gearing. This is where there is a loss because the expenses are greater than the income. We have learned through experience that a loss is not a good idea for us, even if there is a tax benefit. We decided it was important for us to make sure that the rent would cover all our expenses, if we were going to keep the property.

WHAT IF I CAN'T SELL A PROPERTY?

We were unable to sell our family home when we were moving to the US to relocate for Mark’s work. In this financial situation the rent did not cover all the expenses. Ensuring the rent will cover all expenses and put money in your pocket was our primary goal, however this was not possible with our family home. The price of the home was expensive, so it was not possible to generate enough rental income to cover all the expenses. It took a while but we finally sold this home. We were very lucky to get a small amount of capital growth after holding the property for some time.

HOW DO I CREATE A FULLY FURNISHED RENTAL APARTMENT?

We owned a two bedroom, one bathroom condo in Canberra, Australia that we decided to furnish. We were moving overseas, so rather than pay for storage for on our belongings, we decided to furnish the apartment with our own belongings. The rent we received after furnishing the apartment was much higher than we were receiving at that time. Also, because the apartment was rented fully furnished, we did not have to pay for storage for our belongings. For more than 10 years living overseas we did not pay for storage on our belongings. In fact, our belongings helped us generate more income. The rent on this property easily covered all expenses and put money in our pocket, every month. This fully furnished rental apartment made great financial sense for us. We eventually sold the apartment for almost three times the purchase price and the mortgage was almost paid off by the tenants. This property was a big winner.