SUCCESS STORIES: PAT & EMILY - BUYING OUR FIRST INVESTMENT PROPERTY

In our last BLOG we talked about budgeting and paying down “bad debt”. This week we want to introduce Pat & Emily. They have worked very hard over many years to get out of “bad debt”, which is a huge achievement. They have also saved the money for a down payment to purchase their first income producing asset.

Great work Pat & Emily!

Through our blog, we will walk you “step by step” through their journey, and share all their experiences and nuggets of wisdom with you.

Written by Pat Kohan & Emily Hiza: We are Pat and Emily, a couple in our early 30s, married for 2 years and recent homeowners. This is our journey into purchasing our first investment property. We, like many young adults, know we should be investing. So, we started researching by reading books and “how-to” blogs. We even watched HGTV and imagined becoming TV famous! But through all that we had yet to pull the trigger. Why?

We had acquired quite a bit of information (enough to know we were on the right track) but were still confused about the exact process and some of the finer nuances. Putting your savings on the line without an organized plan seemed too risky for us! This led us to finally ask Louise Barnard to be our mentor. She has 30 years of real estate experience and has successfully owned and managed dozens of properties around the world. Having encouraged us to go into real estate even before we were married, she offered to guide us through this process step-by-step. What a true educational asset she has become as we pursue this dream! Her concise process and knowledge is invaluable. We want to share our questions/concerns and what we learn along the way so others can follow these steps to financial freedom.

Are we even financially ready? Luckily, we are free of “bad debt”. Louise actually counseled Pat immediately after college to eliminate his student loans, medical bills and credit card debt. He was pretty deep in debt but with Louise’s help he was able to climb himself out.

This means, we have no high interest consumer debt like car payments or credit cards, and we’ve been saving for years to afford a down payment on an investment property. After hearing all this, Louise gave us a big thumbs up!

Step 1: Eliminate your “bad debt” and create a savings plan for the down payment Where should we look? Up to this point P&E have had two phone calls with Louise to begin the education and exploration of buying a property. For personal reasons we have narrowed our location search to Fort Collins, CO (we live here currently and our family would want to use the place for personal visits). We also decided that we would like to buy and create a profitable vacation rental, rather than a standard rental property. With this information, Louise asked us, why would someone come to your town? What attractions or areas around town would they want to be close to? Fort Collins is a cute college town with a downtown area called “Old Town” that Walt Disney himself liked so much he modeled Disneyland’s “MainStreet USA” after it. This made our answer pretty easy, Old Town. Full disclosure: this is also the most expensive part of Fort Collins.

Step 2: Decide on a location and target a lively neighborhood What type of properties should we be looking at? With a neighborhood in mind, Louise’s next question was what type of property we wanted. Detached home? Condo? Townhome? Studio? Our question back to her was what would give us the most freedom to pursue our careers, travel, and eventually raise a family, yet still give us the highest returns on our investment? Her reply, “you want this to be as low-maintenance as possible which means a condo or townhome could work really well for you. These types of properties have many benefits because of shared maintenance labor and costs.

Louise also shared why she doesn’t look at large houses that sleep more than 8 for a vacation rental, even if the price is right. Larger numbers can attract groups & parties, which can result in property damage. Targeting families, has been the most successful strategy for Louise. She finished off by saying that, the most important rules for any investment property are: 1. Location 2. Location. 3 Location. Yes, It’s that important.

Step 3: Determine what type of property works best for your goals How much do we spend on our investment property? Over the years we have been able to save $150,000 to start this investment process. Through our research prior to working with Louise, we learned that to purchase an investment property we had to put at least 20% towards a down payment. This left us with the idea that we could afford a $750,000 condo. However, to be a short-term rental we’ll need to furnish the place. With Louise’s help we re-calculated what we could afford based on spending $100,000 on a down payment, which means our maximum price we want to pay is $500,000. We then have around $50,000 left over to get the place ready for short-term rental.

Step 4: Calculate what you can afford knowing you will need to put 20% down and prepare the place for short-term rental (upgrades, furnishings, etc.) Next Louise wanted to understand what nightly price comparable rentals are listed for in the area. She browsed short-term rental sites to see an average nightly rate. In the Old Town neighborhood a rough average is $200 for a condo/apartment/townhome, with some properties closer to $400.

Step 5: Calculate nightly rental rate for comparables by browsing VRBO and AirBNB BEAUTIFUL! There are 30 nights in a month and we can collect $200/night, of course we want $6,000/month in income! “Not so fast,” says Louise.

A general investment rule states you want to consistently collect 1% of a property’s purchase price each month. So for a $400,000 condo we would need to generate $4,000 in rental income each month. $4,000/month at $200/night means we would need to rent out this particular condo for 20 nights.

What is a realistic expectation for how many nights we’d rent it out? At the bottom of each VRBO listing is a calendar of availability. It’s not glamorous, but adding up a listing’s reserved nights will give you a data point for your area. Doing 10 of these quick calculations will give you a rough average. For Old Town the average VRBO in our price range was reserved for 17 nights per month in the nearest two months.

However, there are many factors that will determine the success of a vacation rental. The most important factors are outstanding location and demand. Supply and demand always play a part in vacancy rates. It is important to ensure the location is desirable and in high demand. As well as these two key factors, management plays a large part in the success of a vacation rental.

The items that needs to be managed well are customer service and the website. Guest customer service is critical. It is important to see any issue or complaint that arises as an opportunity to provide “5 Star” service. Owners need to work very hard to ensure that every guest is happy, whatever issue arises. This will often require you to go above and beyond what any other owner would be willing to do, however if you provide 5 Star service every time, your guests will reward you with fabulous reviews every time.

An outstanding website with updated calendar availability, professional photo’s, a large number of 5 star reviews (over 50) and prompt (within 3 hours) replies will provide an appealing website that will attract more bookings.

Step 6: Calculate average reserved nights for comparables in your area Using our example above, 17 nights x $200/night results in $3,000, but if we can increase our nightly rental to $250 with high-end amenities and service we will generate $4,200 per month – over our 1% goal for this example!

Step 7: Determine if the 1% Rule is possible in your area. If yes, keep moving forward! Louise was excited about the possibilities for a vacation rental in Fort Collins. And if Louise is excited, we are excited! We are ready to keep taking steps towards our financial freedom and learning along the way.

1. Eliminate your “bad debt” and create a savings plan for the down payment 2. Decide on a location and target a lively neighborhood 3. Determine what type of property works best for your goals 4. Calculate what you can afford knowing you will need to put 20% down and prepare the place for short-term rental (upgrades, furnishings, etc.) 5. Calculate nightly rental rate for comparables by browsing VRBO and AirBNB 6. Calculate average reserved nights for comparables in your area 7. Determine if the 1% Rule is possible in your area. If yes, keep moving forward!