Property #1 in 2013

We closed on the house in January of 2013.  This post is about that house from closing to rented.

The story of how it rented:  We posted on Craig's List again for our house prior to closing.  We got permission to show the house 2 weeks before closing.  We negotiated this at the contract signing.  Our first post yielded several individuals.  One who filled out the application.  We checked him out and a court case came up where he was sued for non payment of rent.  It was a few years back and he seemed like he had a good story about why it happened.  We told him we would rent to him on a month to month basis.  That means at non-payment in the state of TN we can evict within 30 days.  We also said we would require first and last's month rent and a full month's rent in deposit up front and he could rent it.  The beauty behind this strategy is he can only apply the last month's rent to his last month.  Before you start poking holes in my strategy, let me explain the fundamentals behind it.

The idea was to sign a month lease that goes month to month after that.  The lease laid out the items above.  $950 would be held in reserve for the last month only and could not be applied to any other month.  Once the lease was over (1 month), all month to month terms would follow the rules of the lease until they moved out.  This way if he failed to pay rent, we could evict and apply the last month's rent to the month he did not pay after eviction.  This does not violate any laws of TN.

Yes, that strategy is heavily weighted in our favor but someone with the history he had (we found out later he had 2 prior events of eviction) we had no choice.  He verbally accepted the terms.  We didn't hear back from him for almost a week after repeated attempts to reach him so we decided to move on.  We don't know what happened but our strategy there most likely kept us from a bad situation.

Again we posted on Craig's List and found another renter.  She had just moved from another area where she was a victim of the 2007 housing crash.  She had just purchase a home and had to short sale when she moved to Memphis for a job.  She explained this all up front and that's exactly what showed up on the background check.  We told her he would rent month to month for 6 months and if she paid on time, we would do a year lease.  We told her rent would be $1,000 for our risk.  She agreed and not only paid her first month's rent + deposit, but her second month's rent up front for a total of $2,950 before she ever moved in.  She even paid her third month's rent 45 days EARLY!

The lesson here is this.  Always do background and credit checks on renters and don't be afraid to put things in your favor if they come back as a risk.  This strategy saved us from renting to a bad person and finding a good renter.

The financial story: We closed on the property and since it's right across the street from my brother, we decided not to use a management company.  After expenses, it cash flows $460/month.  Yes, you are reading that right.  This is not normal and in case your crunching numbers in your head, that's roughly 70% cash-on-cash return.  Try getting that in any other normal investment vehicle!  the 5-year and 10-year IRR's were over 80%!

After property #3 we're now sitting at $950/month plus our $1,000 month contributions for a total of $1,950/month cash influx every month.

UPDATE (12/23/13):
A couple of months ago we got notice the tenant was moving out.  It was kind of sudden because she had a loss in the family and was moving somewhere else to handle that situation.  We wound up using her security deposit (with her permission of course) to handle the pro-rated last month's rent and a few items that needed to be fixed.  Turns out she had smoked in the house and we had to have the air purified to get rid of the smell.  So as of this update it's unrented but has been turned over to the property management company that rented house #4 to get a renter in it.  As of Jan 1st, it will be the only property we have not rented.  Hopefully that will be rectified soon.