Things to know when purchasing first rental property

7 Replies

Hi,

I’m 18 years old and very interested in purchasing my first rental property. Are there things that you wished you had known when buying your first rental property that could be beneficial to me? Or are there just some basic things that are not really talked about that should be talked about.

@Dayton Rowe

Lots to learn before I had invested in my 1st property. 
1- read RE books. Decide which strategy you want to pursue. I think that’s going to be #1 for sure. You should read at least 10 books. You will quickly find out based on your personality which RE strategy you want to use 1st. 
2- Start connecting with like minded people so you can ask questions and learn. BP community is awesome place. 

Well, depends on how much you know. You are going to need 20-25% down to buy a rental property. You are going to need income to qualify for that loan... enough to be able to pay the mortgage in the event the property sits empty. You are going to need cash reserves in place for the same reason that you can show the bank. If you are going to rent the property, you are going to need some other reserves to cover repair expenses... like "what if the AC blows up and you need to spend $4,000 to fix it?". You are best setting up a corporate structure of some sort... LLC or Sub S to be able to maximize tax deductions. You are probably going to net $300 - $500 a month on the property if you buy it right... so thats $3600 to $6,000 a year you will make - before any repair expenses or other overhead. You will need an accountant to file your taxes, you will need to be able to resource repair people when things break... which they will. Its a lot to start out. Starting out at 18 is a tall order. If you have support its possible...if you don't, you may want to consider another avenue to make money in real estate until you are more on your feet. Wholesaling comes to mind - where you market and find deals that you can sell to other more established buyers. You can make $10,000 a deal there, without hardly any cash required, you never own the property, and get paid by the title company when your buyer closes on your property.

Wish you all the best!

Randy

I work with wholesalers, but don't do it myself, but the short version is this: you are basically a marketing operation... advertising by one way or another (snipe signs, online, direct mail, phone calls, "whatever") to find people looking to sell their properties. You are frequently dealing with somewhat desperate people in bad situations... divorces, deaths, probate, etc. but in the end your objective is to get the property under contract to buy at a price that lets you sell it to someone where they will still think it's a good deal, and have a profit built in for you. You then take that contract to other BUYERS and say, "I have this great deal on a property for X dollars which includes your profit. Presuming your buyer jumps at the deal, you do an assignment - which is a one page document that goes to the title company that gives the new buyer the right to transact your deal. That assignment also directs the title company to give you whatever your profit is at the time of closing. I did one last week where I paid the wholesaler at closing $10,000. Bought a property that has a Zillow value of $114,000 for $44,000 - which included their $10,000. I would do that every day of the week! And if it was you doing the selling, you would be making $10,000 every time we did the deal. You never own the property... you are just the "man in the middle" of the deal... so doesn't require the high capital costs of having to buy the property. But you do usually have to put some good faith money up to write the contract... but could be as little as $100-$1,000, which if you don't get the property sold you would forfeit to the seller... so you do have "some" skin in the game.

The challenge for the wholesaler is mostly finding the deals that the seller will sell with enough margin to make it a good deal for the buyer... which is where the highly motivated sellers comes into play. We bought another one where the seller was about to lose their home to foreclosure, but had $70,000 in equity in their property mostly though market appreciation.. so they could have sold it themselves through a realtor (and probably kept more), but ended up going through a wholesaler, so we picked up the property for less and ended up with $50-60k in equity in our column for when we sell it down the line. So that is sort of the flow of things with wholesaling. Lots is written on the internet about it, and there are a lot of variations of how it goes down... but the gist is what I have written.

Randy 

@Dayton Rowe

I'd go the becoming a real estate agent route over wholesaling personally. I get 2 cold calls per week from wholesalers and only own a handful of properties, so competition seems to be there.

Things that I’d wish I’d learned first: deal analysis with strong focus on repair costs and timing.

I wish I would have house hacked the crap out of my first purchase. Multifamily with lots of bedrooms and rented out extra bedrooms in my unit or by the bedroom everywhere.

Also don't waste your time with a lousy real estate agent that can't understand your needs. Dont sign anything until you know they don't suck or are putting in an offer. I had an agent once who was selling me good school districts when my girlfriend and I weren't married and kids weren't even a thought yet.


@Dayton Rowe If you are looking to buy and hold I recommend buying in the best area you can afford where the cash flow numbers work for you. In the long haul tenant quality is what keeps landlord operating costs lower and keeping operating costs lower is less stress for you and will lead to a better performing property numbers wise. Paper numbers more closely match real life numbers the better the area you are in.

I recommend you build a strong foundational understanding of real estate investing.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by @Brandon Turneror The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control your finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by @Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the biggerpockets podcasts. This will help clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. Biggerpockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up.

5. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.