My First Investment Property, Part 2: Identify the Property

While finding your own deal through marketing, driving for dollars, etc. works for a lot of people, that’s not the route my wife and I went. When we started looking for my first mutli-family, we had not yet found Bigger Pockets. We were both (and still are) working a full-time jobs completely unrelated to real estate, and we did not know about other ways of finding a deal. Here’s how we went about it:

Find a good agent.

The first time we looked for a multi-family house was three years before we actually bought one. My wife and I were ready to move out of our condo into a bigger house, and, though I had not yet heard the term, I thought house-hacking would be a smart move. We ended up finding a single family REO for ourselves, but in the process, found the realtor we have been working with ever since.  Even though we now know about other ways of finding deals, we still use this agent. Here’s why we like him:

1. 1. Like all agents can, he gave us access to the MLS, setting us up with email alerts whenever properties that matched our criteria entered the market or dropped in price. Since we were not interested in doing our own marketing, this was a good route for us.
2. 2. He was responsive. If we sent him a list of properties, he would have viewings lined up for us within a couple days. This went on for a long time before we ever made a purchase. Since I did not have a system in place for analyzing properties yet, I asked to see a lot of places that never would have made the cut the second time around.
3. 3. He had a good knowledge of not only the market, but of structural aspects of houses. He talked us out of a few places, pointing out flaws in construction, location, or the asking price. He clearly wanted us to have a good experience buying our house. He was not interested in getting his commission check as soon as he could.
4. 4. He referred us to equally responsive and knowledgeable certified home inspectors and mortgage originators. You can certainly do your own research and find people, but an agent who is very active will have a lot of connections that you can take advantage of.

Go to a few open houses or request showings with seller’s agents. Get a feel for how interested they are in finding the right fit vs. selling as much as they can. Without signing an exclusivity contract, ask that the agent bring you to a couple other houses, find an agent who seems to understand your needs, and is invested your success, not just the commission check. That’s the realtor who has a long-term approach, and you can send a lot more commissions to. You’ll also benefit from having a realtor in the offer stage, but that is a different segment.

Visit the properties that make sense on paper.

When we first started looking, we did not understand the numbers (see part 1) well enough. We looked at a lot of places that we should have known just from the MLS listing wouldn’t work. While there was a chance we could find something others had overlooked on those places, that’s not what happened . . . and we brought my poor realtor to a lot of places that were never going to work. As we got a better handle on the numbers, we narrowed the search. We visited at least 50 houses before getting an offer accepted on the first one. The second time around, we visited four. You have to get a feel for your numbers and your market, and target the ones that have a chance of working. It is true that every property has a price that works, but if you need to get the property at 40% under the asking price to make the numbers work, it’s probably not worth going to as a first-time investor.

Once you are there, ask questions. Sometimes the listing agents told us exactly how motivated a seller was, or accidentally gave us a compelling reason to stay away from the deal. Almost every tenant we met exposed misinformation in the listing. One unit was supposed to be renting for $1500, but was actually $1150 (typo, the agent said when we asked him about it).  One "unit" we saw was a tiny storage space with about 10 fire safety violations. There probably would be a way to make it legal, but I was not interested in being the one to find out how expensive that would end up being. 

One unit was supposed to be rented at $1100, but it turned out the tenant was living for free in exchange for recently having done major renovation work for the owner. We spoke with him for a few minutes, and he expressed his concern about the sale. It was clear he was expecting to live for free for quite a while longer, and he was under the impression that the seller was breaking their agreement. On the right property, that might be a headache worth putting up with, but when I was still looking for my first investment property, that uncertainty was an easy reason to move on.

How much do you want to do to get your first property up and running? We wanted to avoid as many problems as we could, like tenants who were paying less than advertised (or not at all), evidence of structural issues like crooked doors or stairs, severely sagging floors, and  rotting support beams (or a "unit" that would take a five-figure renovation just to be insurable).  If you are ready for a challenge on your first house, there is nothing wrong with taking those on, and doing some major work on them, but because we were new to the field and working full-time jobs, we was not interested in taking anything that needed a lot of work.

Finally, we found the one.  It was a terribly outdated mid-century house (with the original appliances in one of the units). The wallpaper was atrocious in every room. Paint was chipping and the drywall had been gouged in a few spots. Large bay windows in both units were cracked, tiles were coming up in one of the kitchens, and the baseboards were falling off the wall. IT WAS PERFECT. It had all the right things wrong with it, because it was a structurally sound house with a lot of cosmetic and updating needs that we could predict (HA! Every seasoned investor knows there are surprises in every house, but we’ll get there in the last segment of this series).

As we continued the showing, we also discovered that the owner-occupants had installed a gorgeous new kitchen in the basement no more than five years before (hence the outdated stuff in their kitchen). There was enough unused square footage in the walk-out basement with two modes of egress to turn it into a two-bedroom apartment. A quick call to zoning confirmed it could be a legal third unit. We had found a property that was not being used to it's potential, and the asking price now looked like a bargain. We were ready to make an offer.

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Coming up, Part 3: Get to Closing.