I was sitting in the living room of a couple looking to sell an unwanted house in Cartersville. The house was their previous home that they’d turned into a rental property.
I did what I always do when we sat down. I asked them how could I help them and then I told them, “My job is not necessarily to buy your house. My job is to solve real estate problems. I’m going to ask you a bunch of questions that may sound a little weird, but when we get through, I’ll have a solution. It may include me, or it may not include me, but you’ll be able to judge what the best case scenario is for you once we’re done. Is that fair enough?”
Their answer was, “Yes,” so we began. I queried them on what the house rented for, what their mortgage payment was, and what the mortgage balance was.
Their problem was that the property didn’t pay for itself. They mistakenly thought their monthly cashflow would equal the rent minus the mortgage payment. So for instance, $1,000 a month in rent minus an $800 mortgage payment meant they could pocket $200 a month. Right?
That’s not how rental properties work. There are other expenses that you need to take into account like repairs, vacancy, taxes, insurance and management. All those add up to about 35 percent of your net rents, which we call the expense factor.
So with the above scenario, 35 percent of $1,000 leaves only $650 to pay an $800 mortgage. That means instead of making $200, this house would cost $150 a month – this scenario represents a common beginner mistake.
Realizing their rental house didn’t break even was one of the main reasons the couple wanted to sell. They were also getting ready to retire and wanted to cash out some of its equity to go travel the world.
I asked them why they hadn’t put a “for sale” sign in the yard or listed it with a realtor. That’s when they told me they really wanted their renter of seven years to buy the house. We talked about that at length, and I guided them on what to do, what to ask the tenant, and even helped them overcome some of their fears.
As we finished that portion of the conversation, the wife gave me a puzzled look and asked, “What exactly is it that you do?”
You see, I had just guided them towards a solution to their problem, which didn’t include me, and I hadn’t asked for any compensation in return. That puzzled her.
I told her, “As an investor, I make my living buying unwanted houses. These include properties people have inherited or homes they need to sell because of life changes – things like job transfers, job losses, divorces, etc. I also buy houses from people who are tired of being landlords.”
She said, “Like us?”
“But in order to feed my babies, the deals we buy must have a discount in purchase price, so we can resell them for a profit. Or they must have rents high enough to pay the mortgage, take out an expense factor and have some money left over for a positive cashflow. Without those factors, I literally work for free, and we don’t eat.” I explained.
It was then that she understood why the solutions I’d given her didn’t include me. The couple needed their equity to travel, and the house didn’t rent high enough to pay for itself.
As I left she said, “But didn’t being here today constitute working for free?”
“Yes,” I told her. “But I believe what Zig Ziglar said, ‘You can have everything you want in life, if you just help enough people get what they want.’” And that’s exactly what I do.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.