We Purchased Our First Rental Property in 2014. We made money with our rental property business model of renting rooms on Airbnb and Craigslist. Let us show you how to make money on rental property.
Buying our first rental property was probably the single best financial decision that we ever made! In this article, we discuss our experience, from buying the property, renting it out and then selling it three and a half years later for a profit. This was the first step in our journey towards financial freedom!
We purchased our first property in the thriving college town of Bozeman, Montana. This is a beautiful place to live with plenty of great hiking and skiing in the Bridger Mountains.
We were living in a rented two bedroom apartment and we realized that we were throwing money away by renting instead of building equity in a house that we owned. The relatively, high cost of rent in Bozeman made it an easy choice – we had to buy a house.
How We Got Started with Our First Rental Property
Buying your first rental property can be difficult unless you already have substantial capital. We only had about $12,000 at the time, which took us a while to save. But we were sure that buying a house was probably the easiest solution to our financial problems. We had faith in our rental property business model. It is not easy to make money on rental property but the rewards can be worth it.
We decided that this would financially benefit us because everyone needs somewhere to live. Real estate has been responsible for generating more millionaires than any other investment medium. Renting out single rooms is a passive way to generate significant income.
The problem is getting started – buying that first property can be hard. Banks require you to put 20% down on an investment property and often they will charge higher interest rates.
We found that the solution was to buy a larger house than we needed, live in it, and rent out the rooms to tenants. This is perfectly legal and a great way to get started, if you have limited capital. If you occupy the house, you only need to put down 5% and you can move out in as little as a year.
How We Saved up the Money for the down Payment
We started a very basic website that helped us make some extra income and we lived very frugally in order to be able to save up for the down payment. You can find many side hustles and ways to make extra throughout this blog if you want some ideas. If you invest in your financial future and just put aside 10 hours a week to start a business or a side hustle, you will be surprised at what is possible!
The cheapest and best way to get your first rental property is to purchase a house with the maximum number of bedrooms that you can afford. This way you can rent out the other rooms, while you live in the master bedroom. This will help you will maximize your profit by renting out the single rooms to various individuals.
What We Looked for in Our First Rental Property
We purchased a four bedroom, three bathroom townhouse as our first rental property. We bought it brand new so that there would be no hidden problems or repairs that might ruin our chance of making a profit from the property. We actually bought the house for a very good price – about $10,000 less than market value. We think that this was because the builder that we purchased the house from needed a quick sale for cash flow purposes.
Our rental property business model was to rent out the extra rooms to individuals for the highest rent possible. In return, we would supply everything that they needed and take care of all the bills. By living in the master bedroom and renting out the other rooms, we would essentially live mortgage free. Clearly, the more bedrooms we had to rent out, the more money we would make.
In general, the more bedrooms a house has, the more expensive the house is . This was a difficult financial decision for us as we had to put a minimum of 5% of the house value ($227,000) as a down payment. This was about $12,000 which was all of our savings at the time.
Bonus Tip: If the seller is adamant that you must pay the closing costs (several thousands of dollars), offer to pay more for the house instead of paying these costs. This spreads the closing costs over the length of the mortgage (30 years). We asked the seller to accept an offer of $8,000 above asking price in exchange for paying our closing costs. This helped reduce this upfront expense for us.
As first-time home buyers, we were a little bit worried about owning a home and nervous about maintenance/repair costs. But we found that buying the home brand new helped us to avoid any unexpected repairs. Since we had to use all of our savings as the down payment, it felt like we were taking a risk – albeit a very calculated one. If you are purchasing a house to live in as your primary residence, you are only required to put a 5% down payment (assuming that you have good credit).
Our gamble paid off nicely! We had very little maintenance costs during the time that we owned the house.
Four Bedroom Townhouse Versus Single Family Homes
It was a really good feeling to watch the Zillow Estimate rise dramatically just a year after we bought the house. We bought what is called a ‘townhouse’ in Montana. A townhouse in Montana is just what other areas call a ‘duplex’ which is two separate houses that share one wall. Townhomes are extremely popular in Bozeman and they make good rentals.
Our rental property business model
The reason for buying a townhouse, instead of a single family home, is that we really only cared about the number of bedrooms. More bedrooms would mean more money in rent. Single family homes in Montana are twice the price of an equivalent sized townhouse.
When you buy a rental property, most of the cost is for the land. We found that it is much more profitable to have more bedrooms rather than a large yard. You can see the tiny yard that our property had in the picture below. Just a small grassy area and a tiny patio only big enough to have a barbecue! Having a tiny yard reduces the cost of maintaining the property and makes chores like mowing the grass much less of a hassle. Future tenants will appreciate the lack of a lawn to mow and your wallet will appreciate the much higher return on investment!
Our single room rental property business model
We rented out the extra bedrooms to individuals that replied to our advertisements on Craigslist and Airbnb. We charged $750 a month for the bedrooms – we never had any problems with rental occupancy of the rooms. This ‘single room for rent’ business model is definitely a high risk, high reward business model. The tenants that are looking to rent a room long-term, are often troubled in some way. We realized quite early into this venture, that it is very important to screen tenants very carefully. Screening tenants and conducting background checks are very important, especially when renting out rooms individually.
Our secret to commanding high rent from each of the rooms was that we fully furnished the extra bedrooms. People will pay more for fully furnished rooms, and it is required if you want to rent through a site like Airbnb. The added flexibility that furnishing rental rooms provides, more than pays for the cost.
We even included unlimited coffee, tea, and oatmeal for our tenants – both long-term and short-term. This really helped us to be able to ask for the maximum price for the rooms.
This really paid off as we were able to rent rooms to long-term tenants for $750 per month per room – this is considerably higher than the going rate in the area. We upgraded our internet to the best package available, to be able to accommodate more people. We could probably have asked for even higher rent, as the rooms were generally filled within a few days of advertising for tenants. Bozeman is a good market for landlords though and this will probably be quite different, depending on where you live.
Here is how we prepared the house to ensure that our guests had the best experience:
- We bought new guest towels, pillows and bed sheets for each room.
- We supplied everything – including bathroom toiletries, coffee, tea, even oatmeal and fruit for breakfast.
- We ensured that the house was always clean and tidy.
- We upgraded our internet to the fastest package available to ensure that all our tenants and guests received fast internet service.
We were making an average of $2,000 a month, more than enough to cover our $1,450 mortgage and even enough to cover our utilities. We were essentially living rent/mortgage free and utility free. This helped us to save a lot of money those couple of years that we lived there and rented out rooms. We learned that if you provide value, you may be surprised how much people are willing to pay.
Tenant Stories – the Good, the Bad and the Dangerous!
The best thing about renting out rooms in your home (apart from the extra income) is that you get to meet some great people. It can be very fun to meet people from all over the world and we became good friends with a few of our tenants. We got to see a wide variety of personalities and lifestyles.
Unfortunately, we were also exposed to a some poor behavior, mental illness and some weird situations. We had a tenant that nearly blew up the house when we were out hiking (they left the gas on and it filled the house….). We had a tenant move in his girlfriend without asking, then left the country for months while she lived in our house without our knowledge….needless to say they were eventually evicted!
We also had one guy that wanted us to drive him all around town as a free extra just thrown in for renting a room. He wanted us to pick him up at the airport at 2am and be his personal taxi service and drive him to Yellowstone National Park for free. Needless to say we did not take him up on his offer….
If you are thinking about renting out rooms or your house as a whole, you should expect to find out that people are crazy. It can be frightening to have these people live with you. People can be so inconsiderate and incompetent that they are a danger to you and your family. Not everyone will be respectful of your house or furniture. This is part of running a rental property. We are very patient people but we found ourselves getting angry at certain tenant behaviors.
Renting Our House to Long Term Tenants
We moved out of the house after a couple of years of living with tenants. We were tired of living with other people and we wanted to move to California for business. We decided to keep our Bozeman house and we hired a rental property management company to find tenants and rent it out for us. We definitely did not make as much money by renting out the house as whole as we did when we rented out the individual furnished rooms. We still made an extra $200 – $300 a month after paying our mortgage and the property management company.
We learned a lot about rental property management companies – for example that they don’t always have your best interests at heart. We had to insist that the property be rented for a higher price than they recommended – if we had just listed it for what they suggested, we would have lost money. We pushed them to rent it for more and we had to take on the advertising for the property ourselves, but we got it rented quickly for the price that we wanted.
Selling the House
In early 2018, we decided that we wanted to sell the house. Our main reason for selling the rental property was the dramatic increase of the house’s value. We were also tired of dealing with tenants that were breaking rules (like taking down all the smoke alarm detectors). We sold the house for a nice profit. All said and done, we made a tidy 6-figure profit from the house in a little as three and a half years.
Conclusions – buying your first rental property
Renting out rooms in your home is not a perfect money-making solution for everyone. If you have a low tolerance threshold for other people or don’t want to sacrifice your privacy – this might not be a good side hustle for you. However, if you are okay making these sacrifices, renting out your house can be a very lucrative way to make some extra money.
We found that by using a combination of Craigslist and Airbnb, we were able to achieve a 100% occupancy in our four-bedroom investment property. We don’t claim to be expert landlords – most of our success was a combination of luck and timing. Bozeman is a great market for buying investment properties and the growing university population drives the cost of rent up. These things all made it possible for us to turn a 6-figure profit for an investment of only $12,000. Not too shabby!
We learned so much from buying our first rental property. The profits that we made from renting and selling the property were crucial in helping us establish our other businesses. Overall, we highly recommend starting a business by renting out your spare bedrooms – you will be very happy you did.
Russell and Maleah
Have you had a good or bad experience with a rental property? Let us know about it in the comments below. It is not easy to make money on rental property but it can be very lucrative!
Would you consider this type of rental property business model? Hopefully this article helps get you started with buying your first rental property.