Buying my First Property (Advice, please)

13 Replies

Hi BP!

I wanted to ask a question of anyone who might be able to give me a little insight and/or direction. Thanks in advance! Here's the situation:

I've been learning a lot through BP and books about REI, however my experience in real estate doesn't go much beyond that. I would like to make a purchase to begin my real estate career but I'm not sure what I should do.

I am in my mid to late twenties and recently graduated. I have a large student loan debt that kills my debt-to-income ratio making conventional loans difficult to get. I live in the Bay Area (peninsula) of California (San Francisco and the surrounding area if you're not familiar). The issue out here is that prices for homes are extremely steep, making cash flow difficult to obtain. I am also planning to be engaged soon, meaning I will need a primary residence. My job requires that I stay in the relatively immediate vicinity of San Francisco. I potentially could acquire a seller-financed deal for a 2/1 SFH from an extended family member (property is awaiting an inspection so that I can make an educated offer) that could be used as an investment property, however it is a little far to use as a personal residence. I am trying to make sure that the deal is still good. Even though seller-financing is a great way to get good terms, it still may not be a good deal.

My thoughts:

  • Seller-Financing may be a way around the Debt-to-Income Ratio and the competitive market
  • I can try to find some private/portfolio lenders. But with little experience this will be difficult.
  • Ideally, house-hacking is the way to go to blend investment with a primary residence
  • Cash flow will be harder to obtain
  • Even if I get the 2/1 SFH for good terms, it would deplete my liquid cash and put me further off from getting a multifamily (likely better cash flow)
  • As an alternative, I would be able to find better cash flowing property out of state or much further away in CA. I would have to rent for personal residence, though.

My questions:

  • Is it better to do out of state or more long distance investing and gain some cash flow while still renting?
  • Should I not get the SFH since it may not provide much cash flow and maybe defer me from my goal to get a multifamily.
  • Is there anything I may be missing?
  • Any other ideas

I really appreciate anyone's advice and/or thoughts. Thanks again BP.

What condition is the 2/1 SFH home in? What year was it built? How is the aesthetic appeal?

Hi @John Griswold

I don't know how much work will be needed yet. But the owner has told me that there is some sort of leak in the bathroom (has been around for a few years likely) and that a new roof is needed. Built in 1927. Quaint and nice neighborhood. House isn't the nicest on the block, yet not aesthetically unappealing. It'll need a little landscaping too.

Great Question Justin. Hey first i would get as much information on the SFH as possible after the inspection is complete. Also sit down and write out your complete game plan and stick with it. If the numbers are right, and it sounds like a good deal then i would consider it, but i wouldn't just jump on the first deal that comes. Far as investing out of town i wouldn't recommend that at all. Especially for a first deal until you gain more knowledge and get some skin in the game. I would say try to get a property that's close to you so you can watch over it much more often.

These are my two cents .... If the 2/1 property is in the SF/Peninsula area, then you really can't go wrong with that deal. I'm assuming it's in your price range and the terms are favorable with your extended family. Unless the price is ridiculous (I'm thinking under $800k in a decent area), you will build equity fast (not to mention not needing to qualify thru conventional loans AND avoiding the bidding process AND obscene rent rates). The other scenarios you mentioned are good options as well but you have a great opportunity to get into a Bay Area property without much hassle with plenty of upsides. Worst case scenario is you get into this deal and later decide you want out; instant equity/cash to buy elsewhere and/or rent/airbnb out your property in this market. 

Thanks for the input so far, I really appreciate it.

@Account Closed Thanks for your input. I have thought about this as well too. It could be a foot in the door that will allow me to leverage more in the future. Just for clarification, when you said, "Unless the price is ridiculous (I'm thinking under $800k in a decent area), you will build equity fast," did you mean that unless the price is ridiculously high I should build equity fast? or that if the price is ridiculously low (under 800k) I wouldn't be able to produce equity quickly? I'm assuming you meant the former, but if you meant the latter, could you please clarify as I think I might be missing something and not fully understanding what you mean. 

Yes, sorry let me clarify. I meant to say paying more than $800k in the good parts of SF/Peninsula would eat up your equity. But I just re read your post and it said the property is too far to be a primary ... Whereabouts is it? I would be cautious and think a few years ahead ... will this city's growth/jobs continue to rise (i.e., SF, Oakland, SJ) or could there possibly be a bubble that brings value way down. Regardless, getting a seller financing deal is a coup. 

Your first bullet may well shoot you in the foot, seller financing as a way around Dodd-Frank and ability to pay. The ONLY way to circumvent that Act is to fall into the exemptions. Period! That Act states that any method or strategy used to circumvent the intent of the Act is a covered transaction. That means anything you dream up that appears to fly under the radar is subject to the Act, there is no way around it.

As to loans not covered under Dodd-Frank, you have predatory lending aspects that apply, not following the ability to pay guidelines will still put you in a mine field. 

How about we just follow the rules, apply the allowed exemptions and enjoy the strategies that are allowed ? :)

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@Kris Lai Thanks for the clarification. It's out near Richmond. A little far for a primary, but doable if necessary.

@Bill Gulley Thank you for your input, and thanks for the reply on the other thread too. I obviously don't know much about the Dodd-Frank Act and will either have to look into it personally or hire an attorney to help me out. Sounds like seller-financing isn't even an option these days? I think what I meant by that point is that since conventional loans have such strict guidelines, getting a loan directly from a person would have more room for negotiations and flexibility. Perhaps in my situation applies more to those "predatory lending aspects" that you referred to as i would assume seller-financing would not be covered under Dodd-Frank.

Seller financing is covered under Dodd-Frank, it's not like it use to be. Predatory issues stand alone in the financial arena as well as in that Act. 

We have well defined financing methods that can be used creatively when done properly. 

Never try to force a larger square peg in a smaller round hole, it won't fit, which means not everyone walking the earth can or should buy real estate. Not everyone can get on the bus at the corner of Hope and Desire, especially if you don't have the fare. There can be many ways to hitch a ride, but it's not always through financing. :)

Justin, 

I'm glad you're so determined and focused on making the right move. That is a good first step. I would recommend you find people in your area that you can meet up with, maybe roll around a couple neighborhoods with them to see properties they own. Sometimes getting that first hand look at a real life experiences can help you see your next step. Also you'll gain a friend and a mentor that can help you along the way. You might also try doing some side work for an investor/landlord to see what it's like owning and taking care of a rental property. This person might realize your determination and see you as a strong investment and become a private lender for your first deal. Don't bank on that, I'm just saying networking with people in your area can't go wrong. I started out the same way and have had a strong group around me that have seen the obstacles already and knows the ways around them.

I would say do everything you can to save some cash, find a house hack, work hard, and don't stop searching until you find a way to finance your first deal.

I bought and rented out my first property while renting somewhere else. It's not ideal, but if a tenant is paying your expenses, you have nice cash flow, and the deal is good then why not? You will have your money going to work building up cash from cashflow, plus getting equity. Richmond, from what I understand, is getting a lot of development money from Chevron and Kaiser. Where is it in Richmond? The barrio? Is it in a Suburb like El Sobrante? Hercules?

The only drawback to this strategy is that you will have to drive 25 minutes (45-1hr with traffic) to manage it. 

I used a property manager right off the bat (totally worth the 10% because I knew a good one)  and only lived 15 minutes away, so it's not the same situation.

I'm always of the opinion that if it's a good deal, it's a better use of your cash than sitting around collecting .001% interest in a savings account.

Disclaimer: I am far from an expert and this is all just my humble opinion.

@Bill Gulley I absolutely agree with you. I'm determined to make this all work. Not that I am going to force the situation, but I'm under the mindset that there are ways that can work. I just have to find them. Hopefully sooner rather than later.

@Benjamin Mahan  Thanks for your input and your support. It's always nice to get validated and you're totally right. I have begun the process of looking for meetups. I have a couple I'm planning on attending, unfortunately the schedules and timings just haven't worked out yet. I will go! In the meantime I am trying to followup with pretty much anyone I know that has invested in real estate. Extended family, family friends, the families of my friends. All my personal connections don't have a lot experience in really investing in real estate, but I'm exhausting those avenues first. Hopefully I'll get this moving along sooner rather than later. Just trying to be smart and cautious about it all.

@Matthew Maggy Thanks for your feedback. I think you're right. As long as the numbers work, it definitely wouldn't necessarily be ideal, but not bad either. The property is in a nice area, bordering Richmond and El Cerrito. I know the area is doing well now, but I haven't looked into the development money from those companies. It wouldn't surprise me though.  That could mean good things down the line!

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