Preparation tips for my first purchase

22 Replies

Hello, I am looking to start my real estate journey, and am estimating I will have all my "ducks in a row" within 8 months to a year from now. That being said my goal is to take advantage of an fha loan (and 203k if applicable) to purchase a small multifamily which I will then househack.

I am about 50 shows in to the Bigger Pockets Podcast and am absolutely loving all the info. I have been taking all book recommendations and compiling a list and have started working my way through those as well.

My question to the veterans in the industry is, how can I best prepare myself for the road ahead? What kind of funds should I have in a reserve account for unforeseen issues? Is there a good source to look for small multifamily homes (specifically in the Seattle - Tacoma area or outlying areas)? 

Thank you for an and all input!

I personally did not have success with the FHA 203k process, I highly recommend if you go that route to vet the lender that they have completed multiple 203k loans and have a good results. Getting docs ready is a good start, you can check with most lenders on a docs required list and check the boxes as you have them all ready, 2 years tax returns, 2 months bank statements, 2 months pay stubs, and more. @Samuel Fletcher Hardy could be a good connection for the Seattle area. 

@Jason Delgado Alonzo congrats on diving in and taking step to owning real estate. If you haven't already connected with 1-2 lenders, start now. Good ones should be able to help prepare you for qualification requirements. Reserves will depend on the property size and condition, but I'd suggest you have at least 2-3 months of operating expenses held, even more if you expect a new roof, siding, etc. That's why I say it really depends. 

Regarding management, if you're not familiar with local landlord-tenant laws and plan to own within the city limits of Seattle, I strongly encourage you to hire a professional until you get a handle on things. If you insist to go at it alone, check out the Rental Housing Association of WA and join it. If anything, to have access to their awesome lease docs.

Not sure what part of town you work but you'll find better opportunities in S. King, Pierce and Kitsap. A good source for deals are agents working the multifamily space or contacting local property management firms to see if they have any potentials owners looking to sell. Best wishes on your journey!

Depending on the property size, type, location; having at least 6 months in reserve would be good, and If you are buying a multiplex be ready for the surprises. Like Branson said join RHAWA. 

The biggest thing that I tell people who want to buy is start saving as much money as you can now. People plan for the down payment, but forget about closing costs, inspections, insurance, furnishing the house, movers, etc. 

It was already mentioned, but go ahead and start talking to lenders. Have them check out your credit and make sure there aren't any surprises. They can give you a good idea of what kind of cash you should have available when you get to "go time."

If you have any outstanding debt, start trying to pay that down now. Make sure you are making on time payments, don't acquire any new large loans or max out credit cards, etc. Also, if you have a stable job you will want to keep it or get one. Switching jobs regularly or switching industries can freak out underwriters and cause issues. 

@Jason Delgado Alonzo

The first thing I would make sure happens is that you have a strategy in place to ensure the maximum efficiency of your returns. Ideally, you would want to build this out like you would your stock portfolio (what do you like, what don't you like, what are the market conditions going to be for the next year or so?). I see many people invest without a strategy and it takes them so much longer to adapt to market changes. I also would encourage you to view homes outside of your backyard, you have to keep your mind open to where you see the opportunity for both appreciation in home value and in rent.

Yes - good credit is going to be extremely important, and as credit repair work takes time you'll want to know about any issues there as soon as possible.

Narrow your criteria. Explore different neighborhoods. Shadow an active investor for the day. Find a good deal calculator (Fell free to PM me and I'll send you mine!) and rehab estimator. Read a lot and save even more. Best of luck and reach out anytime if you'd like to chat on the phone or grab a coffee. We're always happy to share what we know!

Originally posted by @David Robinson :

I personally did not have success with the FHA 203k process, I highly recommend if you go that route to vet the lender that they have completed multiple 203k loans and have a good results. Getting docs ready is a good start, you can check with most lenders on a docs required list and check the boxes as you have them all ready, 2 years tax returns, 2 months bank statements, 2 months pay stubs, and more. @Samuel Fletcher Hardy could be a good connection for the Seattle area. 

 David,

I appreciate the response and input. If you don't mind I would like to hear a bit about the issues you experienced during your FHA/203K deal. I have heard that I should vet all parties involved and make sure they are well versed in these loans, however I have found minimal information as to how these deals can go awry.

Thank you again for the insight!

Originally posted by @Brandon Vukelich :

@Jason Delgado Alonzo congrats on diving in and taking step to owning real estate. If you haven't already connected with 1-2 lenders, start now. Good ones should be able to help prepare you for qualification requirements. Reserves will depend on the property size and condition, but I'd suggest you have at least 2-3 months of operating expenses held, even more if you expect a new roof, siding, etc. That's why I say it really depends. 

Regarding management, if you're not familiar with local landlord-tenant laws and plan to own within the city limits of Seattle, I strongly encourage you to hire a professional until you get a handle on things. If you insist to go at it alone, check out the Rental Housing Association of WA and join it. If anything, to have access to their awesome lease docs.

Not sure what part of town you work but you'll find better opportunities in S. King, Pierce and Kitsap. A good source for deals are agents working the multifamily space or contacting local property management firms to see if they have any potentials owners looking to sell. Best wishes on your journey!

 Thank You Brandon!

I originally was thinking about managing the tenants solo but I had overlooked the complexity of landlord-tenant laws and now that I am thinking about it I will definitely get some help with that, at least until I learn the ropes! 

I work all over the S. King county and Pierce county as I currently do outside sales full time. I am open as far as where I purchase. I am very unfamiliar with the different local markets and know I have a lot to learn in that regard.


I was compiling a list of agents however I had not even thought of going straight to management firms! That is an awesome idea!!

I really appreciate the insight Brandon!

Originally posted by @Cassi Justiz :

The biggest thing that I tell people who want to buy is start saving as much money as you can now. People plan for the down payment, but forget about closing costs, inspections, insurance, furnishing the house, movers, etc. 

It was already mentioned, but go ahead and start talking to lenders. Have them check out your credit and make sure there aren't any surprises. They can give you a good idea of what kind of cash you should have available when you get to "go time."

If you have any outstanding debt, start trying to pay that down now. Make sure you are making on time payments, don't acquire any new large loans or max out credit cards, etc. Also, if you have a stable job you will want to keep it or get one. Switching jobs regularly or switching industries can freak out underwriters and cause issues. 

Cassi I appreciate the input!

I definitely plan to get with some local lenders to get my "ducks in a row"!  

I do have a question regarding this however, will the lenders want to run my credit a year in advance? and if so will this negatively effect me when I am actually prepared to purchase?

Thank you again for the info!

 

Originally posted by Account Closed, 

The first thing I would make sure happens is that you have a strategy in place to ensure the maximum efficiency of your returns. Ideally, you would want to build this out like you would your stock portfolio (what do you like, what don't you like, what are the market conditions going to be for the next year or so?). I see many people invest without a strategy and it takes them so much longer to adapt to market changes. I also would encourage you to view homes outside of your backyard, you have to keep your mind open to where you see the opportunity for both appreciation in home value and in rent.

 Solomon that is great advice!

I have always been a believer that if you fail to plan than you plan to fail! Though I have much to learn before I am dead set on any one strategy. Though I would like to see a plentiful rental portfolio in my future!

Originally posted by @Michael Haas :

Yes - good credit is going to be extremely important, and as credit repair work takes time you'll want to know about any issues there as soon as possible.

Narrow your criteria. Explore different neighborhoods. Shadow an active investor for the day. Find a good deal calculator (Fell free to PM me and I'll send you mine!) and rehab estimator. Read a lot and save even more. Best of luck and reach out anytime if you'd like to chat on the phone or grab a coffee. We're always happy to share what we know!

 Michael I not only appreciate the input but the hospitality, sir! 

I actually would like to ask you a follow up question and will message you directly!

@Jason Delgado Alonzo I started out being preapproved for the 203k loan, found the house,found an approved fha 203k contractor, decided on the rehab project, and after all that time, like 25 days into the process , a week before closing I was told that the lender couldn't do the rehab portion only the purchase. I ended up keeping the house and using a lot of sweat equity, cash, credit cards and time. We lived in it for 2 years and created about 80k in equity,and a rental, but more rehab would have been done and quicker completion if the 203k would have gone through. It felt like the lender just didn't know enough about 203k or they would have known earlier in the process that it wasnt going to work.

@David Robinson@Jason Delgado Alonzo - although its a great program, the 203k loan should always be a last resort. If you're able to finance the renovation in other ways (cash, friends and family loan, credit cards with 0% interest for 18 months, sweat equity) you'll usually get a better deal on the rehab, have an easier time getting your offer accepted, and have less headaches.

There are two problems with the 203k loan in the Seattle-Tacoma market, and hot markets around the country:

1. Contractors are busy. They know that you're locked into using one contractor for everything, and that you have to make a very quick decision on who to go with (by picking a contractor and approving a bid before closing). Because of this, and because of the additional hassle and paperwork the contractor has to go through in working with the bank, most will bid a 203k job higher than they would for the exact same job paid for by the homeowner in cash. 

The 203k also requires that you pick on general contractor to manage the whole process, and you cannot buy materials, manage or hire subcontractors directly, or contribute sweat equity to the rehab. This is fine if you want someone to handle 100% of the renovation for you, but many investors (myself included) hire subs directly, use cheap handymen for less expensive tasks, and put in sweat equity on nights and weekends to bring their rehab costs down, especially on their first couple deals. 

2. The market is competitive. Because you're required to get a approved bid before closing, 203k loans usually take 40-60 days to close (or sometimes more!), while conventionally financed transactions close in 30 days and cash offers close in 3-14 days. The same fixers that you're offering on with your 203k will be getting conventional and cash offers with better terms that the seller is more likely to accept. 

PS: Nowadays I have no problem paying a contractor for 100% of a project because I have more money than time, but I think there's a TON of value in doing some things yourself or doing some GCing on your first few projects. On my first 3 rentals getting involved myself saved me well over $100,000, improving my cost basis, cashflow, and allowing me to grow my rental portfolio much more quickly. 

@David Robinson & @Michael Haas

Wow! David that can make for a very stressful situation, and that alone has me leaning away from a 203k... But Michael everything you just said resonates immensely with me. I can see how this could be a huge pitfall and would easily sacrifice my chances of scoring a good deal. I may have to find a way to raise more capital or extend my timeline to make sure I can afford renovations without the 203K loan. 

I did not realise there were such heavy restrictions on the rehab process when using this financing, and was hoping to GC for myself along with as you mentioned doing much of the minor and or cosmetic work in house (myself and inexpensive laborers).

@Jason Delgado Alonzo - unfortunately since the bank is paying for the renovation you'll need to play by their rules- which means all work done by license, bonded contractor. They don't want you to try your hand at home renovation or GCing if they're the one footing the bill. 

If you need to do the 203k, one way to get around this is to limit scope - you can usually put sweat equity into your basement if you get a 203k loan to remodel your first floor, as you're not not working on the same "project" or in the same "space" as the remodel that the bank is financing. This is just based on my personal experience though and I'm an Realtor, not a lender, so definitely consult with a skilled 203k lender for the specifics here!

Thank you again @David Robinson for the kind words! 
I looks like you are in good hands with the advice you are getting. Also don't forget you can do talk to the banks as well to get there input. We can all give you the guidelines of what they will say but they can give you the details specific to that individual lender.
Also if you ever find yourself across the water in Kitsap reach out!

@Jason Delgado Alonzo can’t go wrong with house hacking in your early days. Continue to educate but also take action with inexpensive ways to market- signs, cold call, door knock, letters, etc. you’ll learn more in one deal than you will in a few books.

@Jason Delgado Alonzo Mindset. The answer is mindset, and get your feet wet in your endeavors. Don't kill yourself with analysis paralysis, of "everything to take care of". Just be aware that things might go wrong and build up a back up plan. Ask 5 lenders of the pluses and minuses of these types of loans are, and get 5 different answers. My recommendation is that you also look at cash flow, both before you get into a deal or hypothetically after you purchase considering all costs involved. And then start an action plan. Have conversations, start on the process, if 1 lender doesn't work out, find another one. Stunt just think it, do it.

@Jason Delgado Alonzo I know you have been a lot of advice and I can honestly said I have not read all the replies. SO maybe this has been mentioned.  If you are waiting upto a year would you consider buying a single family home first. 

I learned so much from my first house. It will give you a chance to possibly fail but learn from it. You could still house hack. Just and idea.

@Michael Haas That makes sense. As I reach out to lenders I will find out their specific requirements attached to the 203k loan.

@Samuel Fletcher Hardy I will do so if I ever venture out that way, Thank you!

@Ken Nyczaj I totally agree. I am a hands on learner for sure. My main reason for waiting so long is to get my funding in order. 

@Steve Milford That is a fantastic idea! I will be adding that to my questions for lenders. And as far as cashflow, that is my main objective. I would like to at least cover monthly expenses with the revenue from the rentals. If I can make more that's fantastic. 

@Dee Brock I am not opposed to house hacking a single family home at all, although I am not sure it would change my situation much as far as timeline. What benefits would you say this would have over a small multi family?

@Jason Delgado Alonzo You said you were waiting 8mo to a year to get your ducks in a row. I find myself finding some of the best houses avail out there are foreclosures and the only people who can bid on them first are owner occupied loans. I just thought if you are going to wait a year find a good house that you can learn all the tricks and house hack. Then in one year you can rent that out and get a multi family. Multi family homes are hard to find right now. I have heard of ppl waiting 1 year AND then start looking. Then it takes them a year to find one which is 2 years later. Just a thought