How I Accidentally Started Building Passive Income.
I moved to Florida back in 2010 on a whim, I had a little money saved up, and I wanted to make sure my family had a gauranteed place to live. We were staying with my finance’s cousin until we could get on our feet. I spent my days looking for deals on property. After a few weeks I came across a private seller with an 3 bedroom home. The owner needed quick money, and only wanted 21K. He was renting the property to tenants who were about to move. The tenants were very messy, and had about 5 pets. The home had roaches and part of the floor coming up in the kitchen and all the carpet smelled like urine. I paid cash for the home and suddenly I owned property, this was house #1. After purchase my fiancé and I ripped up the carpet and put some cheap carpet in it, we replaced the kitchen floor with some peel and stick tiles, and painted the walls. I wasn’t thinking about building passive income, but rather how much it was going to cost me to fix up.
I think at the time I spent around $2000 on making the home livable. The house did what it needed to, it provided gauranteed housing for my family and I, the exterior was ugly and it was located in what could be described as an industrial area, and not very attractive. I loved the fact that I had a home, that I didn’t have to pay a mortgage on, all I had to worry about was the taxes which were low. We lived here happily for 2 years.
Fortunately the ambition in me always pushes me to want to upgrade things. I knew on the market I could sell the home for around 35K, and the type of house I wanted to upgrade to was around 65K. I began searching for houses again for about a month before I came across a gem in Clearwater, FL, in a super convient location, close to the Tampa bridge and the major highway in the area. It was a nice looking home with a for sale sign that read 69K with contact info. I called while I was sitting in the homes driveway, and spoke to Phil, who flipped homes for a living. Phil explained he bought this home in a lot of 10 houses from the bank, and that he was looking to sell immediately. I arranged to check out the inside, and was viewing the house the next day. It was a little outdated but I loved it. The location was PERFECT. I had about 30K saved up and I knew I could get close to 35K for my current house, so I immediately listed my home for sale and told Phil I wanted to make an offer of 57K. I figgured listing my primary home cheap it would sell fast, the same day that it was listed I got a call from a gentleman, who appeared to be interested in buying my house, what luck. The buyer told me he wanted to come take a look at my house immediately, and he did the following day. After his walk through he made a verbal offer of full price, luck was on my side.
Now before you rag on me for accepting a verbal offer, I want to just say in my defense, at this point I was new to this, no one ever thought me anything about real estate. But back to the story, the guy who was buying my home arranged to meet me the following Monday to sign the contract, I set up an appointment with a title company and was excited that I was a bout to move into my dream home. Unfortunately, my luck doesn’t usually work out as well as it appears, when Monday rolled around I did not hear from my buyer, I gave him a ring and was sent to the voice mail. WTF! He was just talking to me all every day. I called over the next few days probably somewhere near 30 times, this guy was obviously avoiding me. I hate unreliable people. Saddened, I decided to call Phil and tell him that I wasn’t going to able to get my dream house. Phil asked why, I explained to him what I had been through. Phil then suggested getting a loan, “my credit sucks” I said, but Phil had an answer for me, “what about a hard money loan?”. A hard money loan as I learned, is private loan through and doesn’t involve banks. Phil had a hard money lender named James that he introduced me to. Phil told me as long as I had 20% down he would approve me and didn’t care about the credit. I just had to make interest only payments and I had 3 years to make a balloon payment. I could come up with the rest in 3 years, this sounded like a good plan. Now I wasn’t relying on selling my old house and I was able to move, but what was I going to do with two houses. The answer almost came like clock work, I could rent it out to cover the monthly payments while I saved up for the balloon. I didn’t realize it then but I was laying the pavement to the road to retirement. I listed my home on craigslist for rent for $650 and found a prospective tenant immediately. I made sure to take the right steps to find a good tenant. I was happy I was now generating $650 per month without doing anything. I was building passive income. The payments rolled in like clock work and I was able to cover my payments which were $475 a month and still saving $175 toward the balloon without any work. This random chain of events was crucial and a staple in the beginning of my career as a real estate investor, this is how I accidentally started building passive income. My home was now an income generating asset, and no longer a liability.
This is around the time I had just finished up reading Rich Dad, Poor Dad, by Robert T. Kiyosaki which is an excellent read, frankly the man is a genius. If you are interested in building passive income, I highly recommend reading it if you are looking to get into real estate investing. The book itself isn’t going to teach you any real estate methods, however it changed the way I thought about home ownership vs owning properties that allowed me to begin building passive income.