Baby steps in Buy and Hold
I am a 32 year old engineer, I know nothing about real estate, and I am totally smitten with the idea of buy and hold investing. Having learned about BiggerPockets earlier this year, everything related to RE is still new and scary. However, I got the bug and am now obsessed with the idea of passive income. So this post is me sharing the first steps I took on my road to financial freedom. Whether I get to that goal or not - only time will tell.
One frequent bit of advice you hear on BP, especially if you are interested in buy and hold, is this: buy a duplex/triplex/quad, live in one unit, rent out the rest. When I first read this, I thought - BRILLIANT! At the time, my wife and I were renting an apartment, I had a stable job and was tossing around the idea of buying a house. But I wasn't really serious about it - the apartment was a great deal and the location was amazing, plus, the houses in that area were way out of our reach. However, I was well aware of the financial benefits of owning vs. renting and, having discovered that great piece of advice on BP, I felt that it was a sign from above. So, I got all serious and started looking. Very quickly though I realized that the lucrative dream house, the almighty key to my financial freedom, the golden bullet of real estate investing called "the duplex" is not to be found in my neighborhood, my city or anywhere close. Neither was a triplex or a quad. All we had was condos, townhouses, and SFMs. Bummer. Small multi-family homes could be found in the cities, but not in my suburbia. I was overcome by despair - how could this be?! I was about to throw in the towel and forget the whole crazy idea, but reading BP encouraged me to start thinking creatively. I knew I could succeed!
Ok, I thought, I want to buy a house, but I can't buy a duplex... I can't buy a duplex, but maybe... I can make a duplex! Ta-da! I knew people in the area rented out their basements - I looked at a few of them when I was searching for a place to live. Basement, mother-in-law suite, accessory apartment, granny flat - it goes by many names, but the idea is the same: an independent living space, usually separated from the rest of the house, that can be inhabited by tenants. Thus, my new plan was hatched - buy a single-family house with a rentable basement. (You might wonder - why a basement and not some other part of the house? In my area, the vast majority of single-family house are built with basements, so it is the most common type of accessory unit, but there are many other possible home layouts with accessory apartments). More specifically, I identified two main requirements that defined a "rentable basement" - a separate entrance and a full bathroom. That's it. "Well, what about a kitchen or a kitchenette?" you say. Yes, it would be ideal if the basement came with a kitchen, but I figured that even if it didn't, we could put one in ourselves as long as the overall layout could accommodate it. Some quick back-of-the-envelope calculations showed that if we were willing to do some of the work ourselves, it could be done with $3-5k.
In order to maximize the chances of finding something, my wife and I agreed that we weren't going to be picky as far as our own, personal requirements go. We weren't stuck on finding a house with a garage or a certain number of bedrooms. We stayed flexible. This made all the difference.
I won't bore you with the part about how we looked at and researched different neighborhoods, but I will say that getting out there and seeing many different houses, helped us zero in and figure out what type of basement we needed. It had to be in excellent condition, have at least two rooms of decent size, be partially above ground or have excellent lighting, and have normal ceiling height, where you didn't have to crouch under air ducts and plumbing. Exposed ducts and pipes add little to the charm - kind of obvious, but, again, not as obvious as you'd think until you see it. So basically, the basement had to feel like an apartment and not someone's half-finished, dusty storage space. These additional insights helped us eliminate a large portion of the houses we saw. Even though we were initially open to the idea of doing a full rehab if the price was right, the more we looked, the more we liked the idea of a freshly-rehabbed space. The market was also such that even a complete basket case of a house commanded a price not too different from houses in much better condition.
We finally found THE ONE. It was a freshly-rehabbed flip, slightly farther from our ideal location, but it fit all the other criteria. Plus, the living space that would be ours was practical and spacious, with a great, airy addition that basically sold us on the house. No, it didn't have a garage, which I secretly wanted, and the storage space was nearly non-existent, but, like I said, with a focus on the greater goal, we were willing to make some sacrifices. It was a three-story, split-level home, with a half-basement (partially above ground), that consisted of a rec room and a bedroom, with a total living space of about 650 sq. ft. It also had a spacious laundry room, which was ideal for converting into a small kitchen. A word on laundry. It was clear from the start that we would almost certainly have to share the laundry with our tenants. As long as it doesn't require you to enter their main living space, it's not a big deal - most people looking for a basement apartment understand this and are completely ok with it. Just make it clear when you make your craigslist posting. In our case, the laundry/kitchen room was adjacent to the outside entrance and separated from the rest of the basement by a door, so it wasn't a problem.
The two months after moving were a crazy, crazy time, with us unpacking, buying new furniture, and putting in the basement kitchenette all at the same time. To add fuel to the flame, two of those weeks I spent traveling for work, with my pregnant wife left behind to oversee the whole mess. Fortunately, my dad was there to help, and help he did, spending every single weekend at our house, doing everything from screwing together kitchen cabinets to waterproofing the laundry room. Needless to say, I have a great dad and a very understanding wife... There were several tense moments (ok, manytense moments) where we were ready to kill each other (my wife and I), but love is a funny thing and we managed to do everything without any bodily harm, other than very sore and aching backs and a few banged up fingers from swinging hammers. A few of our friends also provided invaluable help - sometimes you just need to ask. Remember how I said we thought we could put in a kitchenette if we did SOME of the work ourselves? Well, we ended up doing ALL of the work ourselves and it was worth it. The feeling of satisfaction when we finished was tremendous! And that $3-5k ended up being about $3.5k. Eff contractors, go sweat equity! :-) And don't forget to generously thank everyone involved - whether it’s food, beer, favors, an Amazon gift card or help on THEIR next project, people like to know they are appreciated.
In addition to the kitchenette, we did have to put up a separator wall on the stairs leading into the basement to block it off from the rest of the house. At first, we were thinking about putting in a door, but then realized that it would almost never be used. It was a relatively simple project, consisting of a wooden frame, covered by plywood with some sounds insulation for good measure.
I will end my amazing story of awesomeness by saying that a month later, we found a tenant, who is sitting in the basement as I write this, doing whatever it is tenants do and, hopefully, not making a huge mess in the process. Nah, I'm sure he isn't - he is a good guy (I did my diligence). If I were to continue, I would get into other topics that are well-covered on BP and other places, so I won't. At least for now. Let me just mention a few random things that have helped me along the way:
- Throughout this whole experiment (which is still ongoing, as far as I'm concerned), I tried to be ambitious, without getting arrogant. In other words, never underestimate the power of Murphy's Law. You are not entitled to anything from anyone, but you can reap the benefits of your own labor if you put your heart and brain into it.
- Brandon Turner's "Tenant Screening: The Ultimate Guide" (http://www.biggerpockets.com/renewsblog/2013/01/27/tenant-screening/) was super helpful. It is an excellent guide that has one downside - it is so informative and condensed that, even if you know nothing about dealing with tenants, you can actually get away with reading NOTHING else, which is not necessarily a good thing. I did try to read other books and articles, but after Brandon's guide it was hard to motivate myself to do so.
- craigslist.org is great, but so is postlets.com - it makes your ad pretty and automatically puts it up on other sites, like trulia.com and hotpads.com. And it's free. Internet is awesome.
- Research your county. Every county has different rules and regulations when it comes to accessory apartments. Go to the county's zoning ordinance website and actually read it. Some counties require a permit, some don't. Modifications and alterations to the house may require you to submit architectural drawings and obtain approval.
- I made friends with neighbors. Other than just making me (and hopefully them) feel all fuzzy and neighborly, my gut feeling is that neighbors who know you and like you are less likely to complain if they dislike your tenants or even the idea of you having tenants.
- My wife can be hard to convince sometimes. But I did everything in my power to get her on-board with this whole crazy idea. To most people I know, renting a part of their own house sounds ridiculous. Be prepared to defend your plan.
- I don't like asking for help. But in this case I did, because I could not have done this by myself. I was amazed by the things some of my friends could do. One girl did a professional-grade paint job on the kitchenette. She is an architecture student and works as a babysitter. I had no idea she could paint, but apparently she had some experience.
- Apartment-size fridge. Google it. If your kitchen is small, it's a much better alternative to full-size monsters.
- Owning vs. renting. I always knew that while renting doesn't build you equity, for some people, in some places, in some period of life it is the right thing to do. Sometimes you don't want to commit or just can't afford to buy. However, reading David Bach's "Automatic Millionaire Homeowner" really highlighted the benefits of buying a house for me. If you are on the fence and are considering buying a house, this book is great.
- Coming back to not being arrogant... when I started looking for tenants, I decided that I am now in the service industry and need to act accordingly. It's not the tenants who need something from me, it's I who needs something from them. Being nice can go far. Personal sympathy can overcome logic. Communication is key. I protect myself with a proper lease and due diligence when screening tenants, but I also try to be nice. Humans are balls of emotional frenzy, which can be contained and controlled with a personal touch.
Thanks for reading and I hope that my experience helps someone in a similar situation.