A few years ago, I did it! I got through the highly feared “analysis paralysis” stage and closed on my first deal. How was it? Easy as pie. Smooth as silk. A piece of cake. A walk in the park. Insert any other lame cliché here.
For those of you on the brink of offering on your first property, I understand why you might be hesitant. This is likely the largest purchase of your life. It is difficult to find the perfect property that meets your cash-flowing and emotional needs.
The bottom line? For a house hack purchase, your goal is to cash flow. You will likely not be living there for more than a year, so ignore any emotions, run the numbers, and if they work, put in an offer.
OK, so you have done away with your “feelings” of finding a beautiful property. You run the numbers and all of these catastrophic scenarios run through your head: What if I can’t find renters? What if the furnace breaks? What if the roof falls off? The list goes on.
There are countless scenarios of what could go wrong. Just ask Chicken Little. However, those crazy scenarios are the exception, not the rule.
To those of you who may feel uncomfortable making that first offer on a house hack, this is article is for you. I’ll describe the seven steps I went through in closing my first house hack—and you’ll learn just how easy it was.
7 Steps I Took to Land My First House Hack (& Rent It Out) With Ease
Step #1: Build a team.
The first step is to build a team. As things come up (i.e., repairs, tax planning, litigation, etc.), your team will grow. However, there are only two teammates that are absolutely crucial to your first purchase: your lender and your agent.
Once I knew I was moving to Denver, the first thing I did was reach out to the BiggerPockets community and ask for lender recommendations. I then went through the process of getting prequalified with four to five different lenders ranging from big banks to local credit unions. By getting prequalified, I developed an understanding of what I could afford.
Once prequalified, it was time to find an agent to help with the property search and closing. Again, I reached out to the BiggerPockets community in Denver and met with six to seven different agents. Though it was not easy to decide, I ultimately went with someone who was good with numbers and did not try to sell me with any emotional talk of purchasing my first place.
Step #2: Find the property.
The search is on.
Living in Denver, Colo., one of the hottest real estate markets in the country, you get a lot of naysayers saying that cash-flowing properties are impossible to find. Maybe it’s impossible for them, but it was relatively easy for me.
My agent gave me access to the MLS portal, where I would receive automatic email alerts each time a Denver metro property within my price range hit the market or decreased in price. After a month of running the numbers and declining various properties, I found one that might work.
Step #3: Analyze the property.
The property was a completely renovated duplex. Made up of two 1-bedroom, 1-bathroom apartments, this property had been on the market for two months (an eternity in Denver), with the price recently reduced to $400K. The property was located in an up and coming part of Denver, about 1.5 miles from where I work—an easy commute by bike or foot.
I asked property owners in the area what they were getting for rents. One of them told me what they were renting their 1-bedroom apartment for, and I knew I could get a little bit more, given mine was brand new.
With the assumed rent, I ran the numbers using the BiggerPockets calculators to see where my rents would need to be in order to cash flow (or live for free). The numbers did not work. I would be losing ~$750 per month. While this is cheap “rent” (in quotes because I would be paying myself) and I’d be benefitting from the loan paydown, it was not good enough.
What did I do? I decided it was impossible to find a property in Denver. So I continued watching reruns of Desperate Housewives.
Just kidding. I asked myself, “How can I make this property work?”
Given the location and the new build, I knew it would be possible to rent this on Airbnb. After doing some research, I determined that I would be able to make ~$1,000 per month by renting out my bedroom while making a pseudo-bedroom in the living room where I could sleep. With an extra ~$1,000 per month, I would be cash flowing $250 per month on a duplex that is walking distance from the office.
That works for me.
Step #4: Make the offer.
After talking it over with my agent, we decided to put an offer in. My first offer… Eeeek.
We ran the numbers again and determined a price point of $360K. While not a complete lowball, this gave us enough wiggle room for the negotiation.
[Side note: I know many people say, “If you’re not embarrassed by your offer, it’s too high.” In many smaller or buyer’s markets, I agree. However, in a booming seller’s market like Denver, there are multiple buyers lined up at almost every property, so a lowball could easily be ignored by the seller.]
Over the next few days, we negotiated back and forth and ultimately settled at $385K selling price. Once the negotiation was settled and the offer was accepted, I sent over the earnest money.
Step #5: Perform due diligence and close on the property.
Immediately upon acceptance, I let my lender know that I had a property under contract, so they could start their diligence and meet the required timelines.
We got the inspection (including a sewer scope) done with only minor tweaks to the property required including the installation of a railing, grounding electrical wires, and making sure all of the doors fit properly. The seller fixed them without a problem.
The lender hired an appraiser, and the property came back at $390K. Given the sale price of $385k, that means I built $5,000 of equity immediately upon closing (woohoo!).
It took the lender two to three weeks to underwrite the loan.
On June 17, 2017 (one month after offer acceptance), we were ready to close. I brought a cashier’s check to the closing and sat down with the seller, my agent, and the title company. We reviewed and signed all of the documentation. After an hour and a few hand cramps, I was officially a property owner.
Step #6: Find tenants.
In many (if not all) states, it is illegal to have a lease signed before the property is closed and in your possession. However, I found that there was nothing stopping me from advertising and showing the place during the closing process. This is exactly what I did and what I recommend you do to reduce the initial vacancy.
Once the property was under contract, I created a rental listing using Zillow Rental Manager. This service creates one listing and uploads it in a nice format to Hotpads, Trulia, and Craiglist.
Once the inquiries started to come in, I scheduled a brief, 10-minute phone call to gauge the credibility of the potential tenants. I did not want to waste time showing the property to unqualified tenants. In the call, I asked the following questions:
- Where do you live now?
- How much is the rent?
- Why are you moving?
- What is your (and your spouse’s) annual salary?
- Do you like/get along with your current landlord?
- Do you have any pets?
- Have you ever been evicted?
If they answered these questions to my liking, we would set up a time for a showing.
Because the place was brand new and already in “show condition,” there was not much for me to do. I immediately began to show the property. The apartment is pretty small, so the showings typically would not last longer than 10 minutes. I would meet the potential tenants at the property, talk with them for a few minutes, and then give them the tour.
After I showed them around, I would go outside and let them explore the apartment by themselves. That way, they could talk amongst themselves comfortably without me butting in.
Once I received interested tenants, I collected a $40 application fee to confirm interest and pay for the background/credit report. As part of the screening process, I made sure the following boxes were checked:
- Obtained credit report and confirmed credit score of at least 600
- Performed a background check and confirmed there was no criminal record
- Requested the last two pay stubs to confirm annual salary
- Called two or three previous landlords
- Called employer to make sure jobs were stable AND that pay stubs matched what was reported
Once the boxes were all checked, I let the tenants know that they had been accepted.
Step #7: Sign the lease with your tenants.
I closed on the property at 10:00 a.m. on June 17th, and at noon on June 17th, I signed the lease with my tenants. We met at the property, and I ran them through the lease. I also created a “layman’s lease,” which is the lease in an easy-to-understand PowerPoint presentation, without the legal mumbo jumbo.
They signed the lease, and the process was complete.
There you have it—my first house hack. It went extremely smoothly, with few hiccups. I know you hear all about the crazy stories that happen, but again, I would bet that this is the exception rather than the rule.
Did I get the best deal in Denver? Probably not.
But I am certainly better off than those who passed on this deal because they let their inner Chicken Little get the best of them.
My suggestion for those still looking to find their first purchase is to just do it! You’re not going to get rich from one property. So stop trying. Real estate is a get rich slow game.
Even if you lose money, you’ll learn valuable lessons along the way, and in 20 years, you will be glad that you purchased the property. Just ask anyone who has owned a property for 20 years.
Where are you on your journey to land your first deal?
Leave your questions and comments below!