Bob and his wife purchased their home as a wedding gift to themselves. It was a perfect house for them at the time—4 bedrooms, 2 bathrooms and 1,700 square feet. However, after three children and the need for a home office they were outgrowing their home. Their son was headed off to high school, and Bob knew that the high school his son was supposed to attend had seen its ratings gradually decline over the last 10 years. It was time for more space and a better high school for his children. It was no question for Bob that they were going to stay in the area—they had family and friends in the area they couldn’t bear to leave.

Their current home was close to shopping and the freeway—a desirable location for many. Bob really wanted to keep his house and rent it out because he was halfway into paying off his 30-year mortgage, and he purchased the house long before any sort of real estate bubble. Because of the location Bob thought he could get a premium in rent, so he created a budget to determine how much he would have to charge to cover his expenses and give him extra cash to put toward the mortgage on his new home. He already saved enough money for a down payment so he wasn’t worried about purchasing the new home, but the higher monthly mortgage payment would be an adjustment for him. Since he was staying local there was no need to hire a property manager so that was one less monthly expense.

Bob wasn’t trying to hit any specific returns; he just wanted to make sure he covered his expenses on his old home. His old home rented for $1,100 per month. His mortgage principle, interest, tax and insurance (PITI) is $735 per month, he manages the property himself and figures he can maintain the property for $80 per month ($1,000 per year) so he has $285 in cash flow. He is not a sophisticated investor so he hasn’t included a vacancy rate and defined a cash on cash goal and plans to use all the cash flow to fund any periods it’s vacant.

It’s not a great return, but he’s become an investor even though it was somewhat accidental.