When to purchase 1st Property

Question

Hey BP World,

I've recently started my journey down the road of Real Estate Investing, currently educating myself on the basics and the local market. My Question is how long did it take before you felt comfortable to purchase your 1st property? My goal is to close my 1st deal in the first half of 2016.

Thanks in advance for your feedback

David Faulkner · Answer

Timeline and process varies for everyone, but here is what IMO you need before buying your first RE investment:

1) Learn personal finance and how to manage your money well. If you mismanage your money and buy property, you will still mismanage your money, just on a larger scale and with financial leverage. The opposite is also true.

2) Save money to invest ... this should happen automatically once you master 1. How much money? I'm old school, so for me it would be enough to put 20% down on the mortgage you would qualify for based on your income and credit (or the home price range you are looking in if smaller) + plus emergency fund to cover 6 months expenses (including your new mortgage but minus the rent you now pay) ... in SoCal, this is a LOT of cash. Another trick is to figure out what your mortgage payment and expenses would be after you buy, subtract out your rent, and autotransfer the difference from checking to savings every month on the 1st ... this helps save money, validates that you can afford what you'd like to buy, and show you the effect it would have on you financially. If you can save even more, all the better.

3) Decide what sort of strategy you want for REI. Fix & Flip? House Hacking? Vacation rentals (hint: you are already near Disneyland)? Out of state rentals? Then educate yourself and learn how to "run the numbers" to determine if an investment will be profitable under the strategy you choose. You can do this in parallel with step 2, but complete 2 & 3 before proceeding to 4.

4) Identify the types of properties and areas that are suitable for your strategy and start intimately familiarizing yourself with that market. Drive the streets, look for "For Sale" signs, search Zillow, Redfin, realtor.com, etc., go to open houses, network with re agents & investors in the market.

5) Write a bunch of offers and find a good deal. Get prequalified from a lender for a mortgage and verify your price range. In doing #4 above, and "running the numbers" on a bunch of properties, you will begin to recognize what a good deal, market price, and a rip off looks like. Don't be afraid to put in a bunch of offers (I recommend going through the listing agent) and consider "cosmetic fixers" that have good bones but are dated, dirty, smell bad, are aesthetically challenged, etc. ... for me, getting a good deal on listed properties was a look at 1000, put in 100 offers, close on 1 type of thing. Stick to your guns, don't give up if you do not find a deal right away, and do not accept a deal if it does not meet your investment criteria. On the other hand, if you do find a deal, be prepared to move quickly ... good deals don't sit around on the market for long.

Various people follow different methods, and may take longer or shorter to get through the process, but above is a summary of mine. You are close to where I live, so feel free to reach out direct if you like.

Jeff B. · Answer

Rental income is taxed on Schedule E.  Each month as part of collecting rents and updating the books, I transfer X dollars to a savings account (ie get it out of the checking account).  Come April 15, the savings account contains my tax payment for Sch E.

Now what the heck is X?  The real answer lies in your 1040 tax bracket (your W2 income + Sch E) = Adjusted Gross Income.  For your first year, try 30% of rents and after taxes are paid, you'll have a better number to use.

Dexter Wallace · Answer

Thank you guys for all the feedback, theres so many avenues you can take when getting started. I appreciate the advice and hope to connect with you all through out this process. Good Luck to all of you guys.

Grant Berthold · Answer

My wife and I studied the local market for about 6 months before purchasing our first property. I'm glad we didn't wait any longer than we did: I think the temptation for "analysis paralysis" would have gotten too strong if we kept looking. At some point you need to pull the trigger. Even as we were negotiating, I kept thinking "Are we making the right choice??", "Should we pull out and wait for something better??". But after multiple mistakes and probably fixing up the property too much, we now have a property that cashflows about $400/mon after all expenses.  So as long as you've done your research and there's wiggle room in the cash flow, I'd say go for it. Doing an actual deal taught me a 100x more than I learned from reading books, listening to podcasts, etc... Good luck!! :)

Jack Butala · Answer

@Dexter Wallace

Buy a super small property for cash as soon as possible and sell it for slightly more to get your feet wet.  This will get the jitters out and bring the confidence up.  Good Luck...

Warren Bright · Answer

It's an exciting process, getting ready to purchase your first piece of property!

For me I have known that I wanted to get into property, so the past 3 years I have been saving like there is no tomorrow. It has got to the stage where I have enough to purchase an apartment and have been researching for the past 5 months on what and where to buy etc.. In those 5 months I have been looking at different ways in which I can renovate as well as reading as many blog posts and listening to as many podcasts as i can get my hand on.

I feel happy with the amount of knowledge that I have in purchasing mr first flat.

All the best.

Polar Prutaseranee · Answer

About six months for me. From thinking about it to actually getting a property under contract.

Warren Doller · Answer

Hi @Dexter Wallace

It's cool to see another local on BP. I'm just starting out, but hope to get my first property under contract before the end of the year. I've been actively talking with other investors, reading, and using BP's resources for a couple months. I think your timeline is sound.

I've been getting financially prepared to purchase property for the last couple years, but only recently found a strategy that could work for me. What kind of investment is appealing to you? What areas are you looking at?

Jeff Sheraton · Answer

I started off with rental properties.  I felt comfortable fairly quickly, it helped having a very experienced investor (my dad) partnering with me.

The main aspect of the deal that made me feel comfortable was the amount of rent I planned on collecting compared to the relative monthly costs of owning the home.  I thought the purchase price seemed reasonable.  I figured that if it cash flowed no matter if it was a good deal or just an average deal I would be okay.  I definitely learned a lot after the first deal, you will get better and better with each deal.

When to purchase 1st Property

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