@Jorge Quintero Firstly, congratulate yourself for wanting to get started at 22! I was on the same boat as you, a few months ago. However, I already had my primary residence at that point. If you don't have a primary residence then you can start small (2 -4 units)or go big(5+) for a house hack- whatever you're comfortable with as long as you're thorough running the numbers and familiar with investing process and what's involved.
Something you might want to look into before you get started
1) Soak up as much info as you can so that you know what you're doing.
2) Pick a niche and try not to get distracted by various means of investing.
3) Build your team before hand - insurance agent, local community banks, lawyer, realtor, property manager and handymen.
4) Run numbers on a LOT of properties just to get familiar with the process.
5) Research on neighborhoods that work out for you.
if you are comfortable with house-hacking, go for FHA or conv mortgage on a duplex. Find out what lenders require. Work the numbers against what you read here. There is no "safe" answer, and most learn best by just doing it.
@Mihir Bhimaraju thanks for your response! I’ve definitely been trying my best up to this point to follow the six steps you’ve outlined. In terms of a niche though, say I decide to focus my energy on SFRs. If I wanted to close a deal, are private lenders willing to lend me money if I have a good deal with careful analysis? Or are they typically only looking to lend to people with more experience?
@Jorge Quintero If you can't get approved for 3.5% or 5% down (FHA) for whatever reason, you can get with family and friends (private investors) to get started. You pay cash for the property and do a refi after 6 months ( holding period) and give back their money + interest. Hard money lenders are unlikely to do a deal without a track record.
SFs are a simple way to get started. You can get away with a lower down payment, easy to analyze and some renters prefer only SFs. It would be an added bonus if you're handy and can fix up. I can't fix worth nothing- so I need to rely on rehabbers. You can buy a home that could need rehab or cosmetic repairs and fix it up yourself. You can get these homes much cheaper than retail price. That's something else you can think about.
I gained a lot of confidence analyzing deals just by running a lot of numbers- even on homes I wouldn't buy. It's not complicated, at all. If you can do it for a single family, you can do it for a duplex. If you want to keep it simple then that's a good place to start. You can also network with other investors in your area and see if anyone's willing to see if you analysis is accurate or not. Take it from there.
@Mihir Bhimaraju I’m seriously considering house hacking my first property but just used SFRs as an example. Now that you mention running numbers on properties that I might not even buy, what are the tools or methods you use to determine if a deal is a good buy? I’ve been reading the BP book on rental properties and it seems like a lot of numbers need to be correctly estimated to have an accurate number of the cash flow you can expect.
For example, I know how to find rent, mortgage payments, and taxes, but am lost on how to account for things like CapEx, Rehab, or insurance costs. Do you have any advice you can provide?
@Jorge Quintero I just noticed you're a fellow electrical engineer. Cheers! :D
I usually "binary sort" deals- deals that meet 1% and deals that don't. All you need is the rent and sale price for this. You can quickly eliminate deals that won't make money for you this way. Then you move onto deals that have potential. This is where you spend more time analyzing the ROI. You're right- a lot of numbers need to be accurate. That's how you know what to expect and whether it's a good deal or not.
For insurance estimate- call up multiple insurance agents and see what they'd quote. That's the only way you'll know. Make sure there's a tradeoff between good coverage and good price.
CapEx & Repairs- It depends. If it's a turnkey home- they're minimal, as in you won't need to repair a whole lot. You're basically saving up a % when poop hits the roof ( sometimes literally). That's why they suggest 10% for Cap & 10% for repairs. Now, if you buy a home that needs frequent repairs, you'll end up spending more. Make sure you get an inspection and preferably a walk through from a handyman. This helps. For ex, I bought a place that needs significant work done. I spend more than 10% - but I knew that before going in. So it depends on your deal.
You'd also want to get to know any utilities you're responsible for. It's a deal killer sometimes if you end up paying gas, water and electricity. Hope this helps.
You're an engineer man! I'm pretty confident you'll get a hang of it once you take the plunge.
I also have no experience but looking to flip my first house after rehab. Do I have to worry about construction permits or will the contractor handle it it? no I will not be in performing work on the house, just contractors.
@Mihir Bhimaraju When you say saving 10% for CapEx, is that every year? Also, I did read about the 1% rule! Have you applied that rule to multiple markets or does it happen to work for the market you’re investing in?
And yes! I believe electrical engineers are some of the most hard working and intelligent people out there! I’m fairly new but am getting a better hang of it everyday! Glad to know another electrical engineer has already made the jump to REI and is succeeding.
@Trevor M Mccollum A licensed, insured contractor should be dealing with permits. But that's something you'll have to confirm by checking on the forum posts concerned with flipping. I only know this because I met up with a contractor on a rehab project and he mentioned about pulling permits to do a complete rehab. I didn't go through with the deal so I'm not the right person to comment on it.
@Jorge Quintero There are quite a few "rules". 1%, 2%, 50% rule etc. They're good guidelines to go by. The basic concept is to make sure you're making more than you're spending. Once you identify all the expenses, subtract that from the monthly rent- you should be in the clear. That's all it comes down to.
10% capex, 10% repairs are for every month. For a $500 rent, $50 goes to capex, $50 goes towards repair etc. Make note of the expense categories in the analysis calculator. That'll give you an idea.
1% is my absolute bottom line. Properties in good neighborhoods usually hover around 1%. Lower income n'hoods offer close to 2% but there's not much room for appreciation, lower rents etc. It's best recommended to buy in decent locations that are safe, have good school systems and are close to amenities.
@Mihir Bhimaraju thank you for the quick response
@Mihir Bhimaraju excellent answer! I really appreciate your help. I’ve definitely learned something today. I will be applying these concepts this week.
Jorge, Before start looking for properties, please find the place you want to invest in since you are going to live there, a good advice is a SFH in a good school district, that property will sell faster than the one in a bad area,
@Jorge Quintero A comment on your finances (obviously the info you gave is limited but) if you can save 1.5k to 2k a month, why not save 2k every month? Assuming the $500 difference is going towards discretionary spending, it is my opinion that the money is better off in your REI account. Thats another $6k a year!
At the end of the day though, a 22 year old saving anything in a given month is incredible. Great job! If you haven’t already you should check out affordanything.com and coachcarson.com. Keep crushing it!
Learn YOUR market and learn TO market.
@Jorge Quintero we all had to start somewhere. Being a mechanical engineer I won’t hold the fact that you’re a electrical engineer against you ha. (Kidding).
There’s a lot of good advice on this thread but I’ll chime in for going the out of state route. I lived up near Dallas when I started and I really like how it’s worked out so far.
If you do plan to stay in Houston investing there is probably best, just be aware of where in Houston you do that given the recent hurricanes and flooding
Where to start? Easiest to start where you live. Then you get to look at your mistakes everyday. You will learn really fast.
In my journey, I like to know why the numbers are what they are, and remember that the tips and tricks are not hard and fast. They are guidelines. In my market, the 2% rule rarely applies. You need to run different scenarios to see what you are comfortable with.
So for landlording, what I did was went and found other local landlords and asked them.
Regarding rehab, I am also a slow DIYer cause I have time, want to see what is involved and I buy using banks. I try my hand in repairs to evaluate if it is worth my time and money doing it myself, what it really costs, and what is the headache. If it is too much? I hire it out i.e. On my current project this is the first time I have done a major exterior replacement, it is easy but the prep work takes the most time (just like in painting). In the future, if I didn't have the time, I would probably just hire a couple of laborers to tear it off. Water heater, easy. Minor electrical, easy. I have found that it is the tini-tiny details that end up costing and are often not taken into consideration initially. Tile work is not just tile work, it is backer, leveling, different grout for different uses, tile saw and tools, sealer, and time to dry at east stage. For the most part I have found that the cost of labor is about double (or more) of materials.
Now when I look at a home, I look at cabinets, exterior, laminate, tile work, and more and then estimate what it will cost to repair and then I plan it on a Gantt chart and estimate costs with a 10% overage + labor. I have a couple of finish carpenters/handymen that I can call to finish or fix if needed as well that just charge me time; materials is my responsibility. Then does it fit in my timeline and budget? Back to that time and money piece. If I wanted it done fast, i would have to hire it out.
And as a result of evaluating many and working a few of them, I can eyeball a project and figure it out a lot faster. Or I might determine that I really need to do a scope analysis on it. In performing analysis, I also created my own evaluation tools along the way. Just like I would suspect that you do in your job now.
And then what is your time worth? To me, rehabbing is a passionate hobby that happens to make money. If I didn't rehab, I might be spending money on cars or golf, etc. Everyone has their own opinion, you just need to learn to be confident of your own. And when I lose money? I learn the fastest lol. And am I really saving money with DIY? No, since it takes me longer I have loan and utility carrying costs. See, there is no best way, but I am comfortable with the process I have established. In the end, if my ROI is at least 15% then it is a win for me.
Im looking to get started on our first in 2018 as well. Were in Houston too! NW side, Cypress.
Great Steve I am looking to purchase my first multi-family property and have been taking notes everywhere I have lived looking at the rehabbing done, what could have been done better, quality of materials and for example screwing shelves directly into dry wall and no anchor used. I had two shelves to fall from the wall due to not having anchored them first. I look to do some of my own rehabbing so this is a good eyes open.
@Gerald, my recommendation is to watch the market every day. You will see what rehabbers are doing and what they are fixing and how.
To start investing without previous real estate experience, just simply purchase a property close to your home, then you will learn it fast from the first real purchase experience.
This was how I have learned it myself years ago.
Find a property in a decent area, Class B area, easier for starter to manage (avoid bad tenants), get a loan to buy it. That is it. Very simple.
Originally posted by @Jorge Quintero :
I am currently saving up for my first property and my goal is to have my first rental property in Houston, TX by the end of 2018! I am starting to become a lot more familiar with REI but one thing I'm confused about is, what might be the best way to start investing for someone with no experience and my age (22 yrs old)?
Some background on my finances: - I make about 48k a year after taxes - I don’t have any credit card debt. - Only about $5k in student debt - I am saving $1.5-2k a month with about $2.5k saved up currently - I have about $1.2k in expenses each month
I have big goals and want to achieve financial freedom (making about 1.5-2x my current monthly income) by Jan 1, 2023. I’m planning on starting with small multi family properties or SFRs next year and maybe moving into commercial real estate later on.
So back to my question, for my situation, would it be better to get a small multi family property and house hack it? Or are private/HML investors willing to take gambles on new investors with no experience? I have been able to successfully build relationships with other people in real estate thus far, but am wary whether people are generally trustful of new investors.
IMO if you can find one, buy a duplex, live in one side, and if you can swing it, rent out a bedroom or two in the side you live in.
After that, you can buy something else and move into it and leave the duplex behind him.
@Jorge Quintero you are in a fantastic situation. I had a friend in your exact situation who simply bought an owner occupant home with 3% down and moved in friends at market rent, lived for free for a year while saving the extra money. At the end of a year, he bought another owner occupant home with either 3 or 5% down and moved an extra tenant into the previous home and moved friends into the home he just purchased and lived rent free and pocketed $400/ month on the first house. He continued to do this until he could also purchase a rental with a "Hard money into conventional" strategy and started buying 2 homes a year. He was able to quit his job after 5 years and does work that he enjoys.