Recently the topic of our own rental houses came up. We sold one of our rental houses in Arizona, and we were so happy to get out from under it. The house was never supposed to be a rental property. We lived in the house for 3 years, after buying it in 2007. We planned to sell the house when we left Tucson. 2007……I think you see where we’re going with this. The housing crash happened in 2008, leaving us with an upside-down mortgage on the house. We tried to sell it, but buyers scoffed at paying the price we were asking. We decided to rent out the property, even though it meant we would be paying out of pocket for part of the mortgage. We’d heard stories of people mailing the keys to their banks, basically washing their hands of the property, and getting a ding on their credit. While we understood the sentiment, we just could not bring ourselves to do the same.
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It turns out the sun and the heat are pretty darn harsh on houses in Arizona. Expensive repairs were happening often, and it often meant more money coming out of our pockets.
Over the years, we kept paying the mortgage, and the rent payment never really reached the point of being able to cover the mortgage AND the repairs. We learned a hard lesson from this – we should have followed the parameters of the 1% Rule in real estate investing (Investopedia.com). This simple rule says if the monthly rent does not exceed the property’s monthly mortgage payment, don’t buy it. As a rule of thumb, the monthly rent must be equal to or no less than 1% of the purchase price of the house. Say we buy a house that costs $100,000. The monthly rent payment would be $1000, or 100,000 multiplied by 1%. So, as an investor, you would want to get a mortgage loan with monthly payments of less than $1000. This rule is only used for quick estimation because it doesn’t consider other costs associated with a piece of property, such as upkeep, insurance, and taxes. At the time we bought the house, we didn’t follow this rule. We figured we would fully enjoy the house and the pool, and then just sell it. Houses never fail to appreciate, right? Wrong, wrong, wrong.
Something else to consider when buying an investment property – where is it located? The rental house was in a desert area. I still remember Matt saying years ago that one day, Arizona and maybe some of the surrounding states would run out of water. For those of you who don’t know Matt, there have been quite a few things he’s predicted that eventually came true. I’ve learned to listen! A few years ago, we rented a beach house in the country of Oman, where water was brought to the beach house via a big truck to replenish a big water storage tank on top of the house. There was no plumbing connected to the city, and this is the norm in many parts of Oman. We did run out of water quickly, and we realized we take water for granted. It got me thinking about the rental house in Arizona, and how climate change is affecting their water source. Arizona’s main water sources are the Colorado River, ground water, and other small state rivers. Already this year, 84% of the state is experiencing severe drought conditions, and this affects the farmers and the ranchers. Tucson has a monsoon season every year, but some years are better or worse than others. If you haven’t heard or read the news, the federal government declared the first water shortage on the Colorado River this year, which is bad news for Arizona farmers, and for Nevada and Mexico.
When the current tenants decided to leave for greener pastures (see what I did there?), Matt and I looked at the big picture. The house was just above the price that we paid for it. We were not getting enough rent to cover the mortgage payments, which included taxes and insurance. We’ve been watching the effects of climate change. We decided to sell. We have some wonderful memories of our time in the house, the pool, the neighbors, and the school. We’ll cherish those memories. But the next rental house we buy, you better believe we’ll be running all the numbers, and checking all the investing rules twice!
Photo by Jean Estrella on Unsplash
