:max_bytes(150000):strip_icc()/0-refinance2020buyrentals2021-8a7269e057a6418d876f94b7ce6d1a7c.jpg "This Homeowner Refinanced in 2020—And Bought 4 Rental Properties Just 1 Year Later")
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This column was the fifth in a series of articles that offer insights into personal experiences with the products and services that you read about on Investopedia every day.
When interest rates dropped in 2020, John Egan took his chance and refinanced his mortgage.
“I saved a significant chunk of change—$500 a month—and that extra cash led me to a cross-country journey into the world of real estate,” Egan said.
By the end of 2021—less than one year later—Egan had bought four rental properties, a big step for someone who previously owned just a single home.
Some properties were profitable, but others became more trouble than they were worth, Egan said. Today, he owns his home and just two rental properties, but he learned some valuable lessons about investing in real estate along the way.
I Refinanced My Mortgage and Saved Over $500 Per Month
When Egan bought his home in Austin, Texas, in 2018, he got a mortgage with an interest rate of 4.63%. Fast forward to 2020, average mortgage rates had fallen below 2.70% by the end of the year, so he grabbed the chance to refinance his mortgage at 3.25%, and it remains there to this day. In today’s high interest rate environment, that would be a mouth-watering APR.
The refinance cut his monthly mortgage payment by roughly $520.
“I thought to myself, ‘what could I do with this extra cash?’ I don’t know what triggered the idea, but I started looking into buying a short-term rental property,” he said. “But I didn’t know how, or where I was going to buy it.”
Don’t settle for the first interest rate with the first lender when looking for a mortgage. Shop around and you may be able to save money with a lower interest rate—whether it’s for a new purchase loan or a refinance.
I Quickly Bought a Condo in Nashville
After doing some online research about successful short-term rental markets, Egan settled on Nashville (a place he’d never been). One of the main reasons he picked Music City: Three of his relatives live in the Nashville area, so he figured he could stay at the property from time to time.
Egan reached out to these relatives for Realtor recommendations—recommendations from friends and relatives are golden—and ended up contacting a Realtor friend of a Nashville cousin. The Realtor and her colleague found an impeccably furnished condo in Nashville’s Midtown neighborhood. After viewing the condo over FaceTime, he made an offer, which the sellers accepted.
Egan’s Realtor then connected him with a Nashville lender (FirstBank), where he was delighted to snag a five-year commercial loan with a 4.00% interest rate. Private mortgage insurance (PMI) isn’t required for commercial loans, but he still made a down payment of more than 20% of the loan amount.
In February 2021, Egan flew from Austin to Nashville to tour the condo and sign the reams of paperwork. That day, he became a first-time owner of an investment property.
I Loved Owning a Rental Property—So I Acquired 3 More
Egan had been bitten by the real estate bug. Throughout the remainder of 2021, he acquired three more short-term rental properties:
- A condo in Palm Springs, California
- A duplex in Galveston, Texas
- A condo in Gatlinburg, Tennessee
All three of those markets are popular destinations for leisure travelers, as is Nashville.
Palm Springs
In the desert oasis of Palm Springs (another place he’d never been), Egan relied on a friend and former employer who’d switched careers to become a Realtor. The Realtor located a lovely, fully furnished condo, which he decided to buy, and hooked him up with CrossCountry Mortgage, which approved a conventional 30-year fixed-rate mortgage with a 3.375% interest rate. Egan put down more than 20%, so he didn’t pay PMI on the loan (PMI may be required for conventional loans with down payments of less than 20%).
Galveston
Egan hardly knew anyone in the coastal community of Galveston, so he combed the internet to find a Realtor in that market and settled on someone who is also part of the LGBTQ+ community. In this case, he figured he should at least do business with a “family” member, so to speak. The two zeroed in on a fully furnished, Victorian-style duplex a few blocks from Galveston’s popular Seawall.
Egan used the same mortgage company that had lent him money for the Palm Springs condo and scored a fixed interest rate below 4.00% with a 30-year conventional mortgage (with more than 20% down and no PMI, once again).
Gatlinburg
Gatlinburg, a charming town in the Great Smoky Mountains, turned out to be Egan’s last investment purchase. Just as with Nashville, Palm Springs, and Galveston, he’d never been to Gatlinburg. However, that didn’t stop him. Egan’s research showed that Gatlinburg was a prime market for short-term rentals.
Not knowing a soul in Gatlinburg, he asked his Nashville real estate agent for a Realtor referral there, and she connected him with a great local expert. Egan’s Gatlinburg Realtor introduced me to a local bank (Citizens National Bank), where he secured a seven-year commercial loan with more than 20% down and an interest rate of around 4.50%.
Investment Properties Can Be Profitable, But I Had to Recognize When It Was Time to Sell
When all the ink was dry on his contracts, Egan owned four short-term rental properties by the end of 2021.
“That’s a big feat, especially for someone who grew up in a rented townhouse; we never had nearly enough money to buy a house,” Egan said.
Today, however, he owns just two of those rental properties.
In the fall of 2022, Egan decided to put the Galveston duplex on the market after conferring with a financial advisor. The property was draining cash ($8,000 for a new air conditioner, for instance) and wasn’t pulling in enough revenue.
Although he sold the duplex for $30,000 more than he paid for it, Egan wound up losing money on the deal given all the money he had pumped into the property.
In June 2023, Egan decided to sell the Palm Springs condo following some less-than-impressive periods of rental income. Not long after buying the property, the homeowner association restricted rentals to 29 days or more, which seriously reduced the income-earning potential. Frankly, Egan needed the cash, too.
Fortunately, a prospective buyer came along within 12 hours of the Palm Springs condo being listed—an all-cash offer at the list price ($35,000 more than what he paid for the property) with no requirement for an inspection. Egan accepted the offer without hesitation. Thanks to a lack of lending hurdles, the deal closed within about 15 days.
6 Things I Learned About Owning Rental Properties
Investopedia / Zoe Hansen
1. Do Your Homework
“Before picking the locations where I planned to invest, I combed through mounds of data to narrow the options,” Egan said. “Among the most valuable information sources was AirDNA, a provider of data about short-term rentals.”
2. Make Sure Your Credit Score Is in Good Shape
“If my FICO credit score hadn’t been well above the 2021 average of 716, I wouldn’t have qualified for attractive interest rates on my real estate loans,” Egan said. “Lenders typically look for a minimum FICO score of 620 when you’re buying a house with a conventional mortgage, so you may need to take some time to improve your credit score.”
3. Seek Out Trustworthy Real Estate Professionals
“I was lucky enough to find Realtors who had my back; without them, I doubt I’d have had the confidence to buy four investment properties in less than 12 months,” he said. “Plus, in a few cases, my Realtors helped line up a lender. If you’re not sure how to find a trustworthy Realtor, ask friends, relatives, and colleagues for referrals, and check out each Realtor’s online reviews.”
4. Hire a Property Manager
“In each city where I owned a rental property, I hired a local property manager,” Egan said. “A property manager handles rental listings, guest requests, cleaning, and a host of other details for property owners.”
Egan had to rely on these property managers because he didn’t live close to any of the rentals, and he didn’t want to pile more work onto his already packed schedule.
“I was willing to pay a percentage of my income (in the low double digits) for someone else to look after my properties. The average property management fee for rentals is around 8% to 12% of the rental income.”
If you choose not to work with a property manager, bear in mind that you’ll have to act as the landlord for your rental properties in their stead. Before making that decision, research the duties you’d be responsible for and be certain you’re prepared to deal with them.
5. Keep Your Personal and Business Finances Separate
“As soon as I bought my first rental property, I figured that I’d need to keep those finances separate from the finances for myself and my freelance writing business,” Egan said. “To build this monetary wall, I opened a checking account for each property at a bank that’s not my primary bank.”
6. Know When to Sell
In his classic tune “The Gambler,” Kenny Rogers famously told us that you’ve got to know when to fold ’em. In the case of the Galveston and Palm Springs properties, Egan knew when to throw in the cards and put them back on the market. (Thankfully, the Gatlinburg and Nashville properties continue to perform well enough that he is able to at least cover his monthly loan payments.)
“Was this an ideal scenario? No,” Egan said. “I would have preferred to hang onto the rentals and try to squeeze more value out of them.
“Was it the right decision? Yes. Life’s too short to toss and turn in bed over money matters. Rather than keeping the rental properties and hoping for the best, I cashed out—a move that certainly spared me some restless nights.”